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Chapter 10 — CASH FLOW FROM FINANCING ACTIVITIES
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CASH FLOW FROM FINANCING ACTIVITIES

CASH FLOW FROM FINANCING ACTIVITIES

CASH FLOW FROM FINANCING ACTIVITIES

Cash Flow from Financing activities is the easiest cash flow to understand. It is one of the documents comprising a company's financial statements. The line item contains the sum total of the changes that a company experienced during a designated reporting period that were caused by transactions with owners or lenders to either:

  • Provide long-term funds to the company; or

  • Return those funds to the owners or lenders.

If the company is a not-for-profit, then you would also include in this line item all contributions from donors where the funds are to be used only for long-term purposes.

Basically, it involves activities related to:

  • Issuing or repurchasing stock

  • Issuing or repaying debt and

  • Dividend payments

Items that may be included in the financing activities line item are:

  • Sale of stock (positive cash flow)

  • Repurchase of company stock (negative cash flow)

  • Issuance of debt, such as bonds (positive cash flow)

  • Repayment of debt (negative cash flow)

  • Payment of dividends (negative cash flow)

  • Donor contributions restricted to long-term use (positive cash flow)

When a company pays dividends, pays off debts, or repurchases shares, that causes negative cash flow, but those activities are often considered a wise use of cash. On the other side, when a company issues more stock or adds more debt, its cash flow from investing activities would increase.

In general, a very high positive number is often a red flag because it could mean that the company is taking in lots of cash from outside sources and it is unable to make enough operating cash flow to sustain its business.

The cash flows from financing activities line item is one of the more important items on the statement of cash flows, for it can represent a substantial source or use of cash that significantly offsets any positive or negative amounts of cash flow generated from operations. On the other hand, a smaller organization that has no debt and pays no dividends may find that it has no financing activities in a reporting period, and so does not need to include this line item in its statement of cash flows.

You should delve into the reasons for a large positive or negative balance in the cash flows from financing activities, since it can, for example, denote the need for a large loan to support ongoing negative cash flows from operations. Thus, large amounts in this line item can be considered a trigger for a more detailed investigation.

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