Question

Explain the major Cash Inflows and outflows from financing activities.

Answer 1

Financing activities are those activities that are related to capital or long term funds of an enterprise. These activities results in the change in the capital and borrowed funds.

As per the AS3, the major cash inflows from financing activities are as follows:

a. Cash proceeds from issue of shares and other similar instruments.

b. Cash proceeds from issue of debentures, loans, notes, bonds, and other short and long-term borrowings.

As per the AS3, the major cash outflows from financing activities are as follows:

a. Cash repayments of the amount borrowed in form of debentures, loans, notes bonds, and other short and long-term borrowings.

b. Buy-back of shares and debentures.

c. Interest paid on debentures, loans, and advances.

d. Dividend paid to the preference shareholders and equity shareholders.

An important point that must be noted is that the purchase and sale of securities, interest paid or received and dividend received is treated as cash flow from operating activities for an investment company. But dividend paid is treated as cash flow from financing activities.

Direct Method Cash Flow Statement
	Particulars		Amount Rs	Amount Rs
	Net Cash Flow from Investing Activities		**	**
	Cash Flow from Financing Activities
	Proceeds from Issue of Shares		**
	Proceeds from Issue of Debentures and Other Long-term Borrowings		**
		Less: Repayment of Debentures and Other Long-term Borrowings	**
		Less: Redemption of Preference Shares	**
		Less: Interest Paid	**
		Less: Dividend Paid	**
	Net Cash flow from Financing Activities		**	**
	Net Increase (or Decrease in Cash and Cash Equivalents (A+B+C)			**
	Cash and Cash Equivalents at the beginning (Cash in Hand, Cash at Bank, Marketable Securities, Short-term Deposits)			**
	Cash and Cash Equivalent at the end			**

Indirect Method
Cash Flow Statement
Particulars		Amount Rs	Amount Rs
Net Cash Flow from Investing Activities		**	**
Cash Flow from Financing Activities
Proceeds from Issue of shares		**
Proceeds from Issue of Debentures and other Long-term Borrowings		**
	Less: Repayment of Debentures and other Long-term Borrowings	**
	Less: Redemption of preference Share	**
	Less: Interest paid	**
	Less: Dividend paid	**
Net Cash Flow from Financing Activities		**	**
Net Increase (or Decrease in Cash and Cash Equivalents (A+B+C)			**
Cash and Cash Equivalents at the beginning (Cash in Hand, Cash at Bank, Marketable Securities, Short-term Deposits)			**
Cash and Cash Equivalents at the end			**

Note: Preparation of Cash Flow Statement using Direct Method has been excluded from the prescribed syllabus. The format is given since the question has not specified the method explicitly. Students can refer to the direct method for the knowledge purpose.