Financing Activities - Online Tutor, Practice Problems & Exam Prep

Financing activities in the cash flow statement focus on changes in long-term liabilities and equity. Key cash inflows include issuing bonds, obtaining loans, issuing equity, and selling treasury stock. Cash outflows consist of repaying bonds, paying dividends, and purchasing treasury stock. It's essential to differentiate between dividends declared and dividends paid, as only the latter affects cash flow. Understanding retained earnings and dividends payable accounts is crucial for calculating cash dividends paid. This knowledge is vital for accurate financial reporting and analysis.

Financing Activities Summary

Alright, now let's do the financing activities section of the cash flow statement. So for financing activities, we're going to be focused on changes in Long Term Liabilities and Equity. All right? So remember when we talked about the indirect method or the direct method that was only for operating activities. Financing is its own beast just like investing. Okay? So let's think about some of the main cash inflows and outflows from financing activities.

So when we talk about inflows, that means we're getting cash. That could be selling bonds or notes payable, right, if we sign a note payable and get a loan from the bank. The next cash inflow would be issuing equity. Right? If we issue equity, that means we're gonna get cash and give out common stock, something like that. And finally, the last cash inflow that you'll probably run into is selling treasury stock. Right? If we have some treasury stock and we sell it, well, that's going to end up as a cash inflow in our financing section.

About cash outflows? Well, it's going to be similar, except the opposite. If we repay bonds or notes payable, those are going to be cash outflows when we pay off the principal. I'm going to say, I want to write that in here. We're talking about the principal, not the interest. Interest falls into, it didn't fit there. So I'm going to put NP for notes payable and I'm going to say principal, right? Remember, when we're dealing with the interest expense and the interest paid that goes into the operating section, we're dealing with the principal amount, that's when we're dealing with the financing section like in this segment here. So repaying bonds or notes payable, that's going to be outflows of cash.

Well, what about when we pay dividends? When we pay dividends to our stockholders, that is also going to be a cash outflow, right? If we pay cash dividends, well, that's going to be a cash outflow, and if we purchase treasury stock, these are going to be the main cash inflows and outflows that you're going to see. I put T stock there for treasury stock. Okay.

Just like we did with the investing section, we're going to have to be familiar with a few T accounts when we deal with the financing section. So let's go ahead and deal with the retained earnings account and dividends payable. Now I want to make a note here about dividends payable because if you think about dividends payable, they are a current liability, right? But when we were talking about the operating section of the cash flow statement, we're dealing with operating current liabilities. Dividends payable is not an operating current liability. This has to do with the financing activity of paying dividends, okay? So you want to be very careful when you see dividends payable and you're doing your operating section of your cash flow, that you leave the dividends as part of the financing activities because that dividend is related to the stockholders and it's a financing activity, not an operating activity.

So let's think about these 2 T accounts here. With the retained earnings, it's gonna have some sort of beginning balance, right? It's gonna have some sort of beginning balance as a credit, right, because it's an equity account, and what increases the beginning retained earnings is when we have net income. Our net income is gonna increase our retained earnings and dividends decrease our retained earnings, right? You guys should be experts with that by now. We deal with retained earnings all the time. So that's how our retained earnings account is going to flow. Beginning balance, plus the net income, minus the dividends, gets us to the ending balance. So notice these dividends right here, this is important, right? The dividends here.

And these are the dividends I want to make a note here, these are dividends declared, right? Remember when we talked about dividends in-depth, we talked about declaring the dividends on the declaration date and then we pay the dividends on the payment date, right? So when we're thinking of the cash flow statement, what do you think we're focused on? The declaring of dividends or the paying of dividends? The paying of dividends, right? And that comes out of the dividends payable account. So if you guys want to have a refresher on the dividends, I suggest going back to that stockholders' equity section and reviewing that dividends lesson, okay?

So let's finish up dividends payable here. So this is a liability account that would have some sort of credit balance to start, and then we would have our dividends declared. We would declare some dividends that would increase the balance of the dividends payable. And how do we get rid of the balance? Well, by paying those dividends, right? So we would pay dividends and that would be the amount that we want for our cash flow statement, right? This is the financing activity. The paying of dividends, that's the financing activity right there. So notice, they can give you information about the retained earnings accounts, the dividends declared, and you would have to figure out what the actual payment of dividends was in cash.

Okay? So we've seen similar examples when we were dealing with the investing section, where you would have to back into the correct amount for the cash flow. Right? So you're going to want to be familiar with the retained earnings and dividends payable account to figure out the amount of dividends paid in cash. Cool? Alright, let's go into an in-depth example about the financing activities.

Financing Activities

All right, so on this page, we have some financial information for ABC Company. We start here with the comparative balance sheet that shows balances for 2018 and 2017, and remember, when we're dealing with the financing activities, we're going to want to focus on our long-term liabilities and our stockholders' equity, right? So in this case, we are going to have bonds payable, we are going to have common stock, and retained earnings are important accounts that we are going to be dealing with here. Okay? So why don't we go ahead and check what the changes were in these accounts and if there were changes, we can expect there were some cash flows related to it. So, bonds payable were 20,000 last year, and they went up to 130,000. So, that was an increase of 110,000 in our bonds payable account, right? It increased by 110,000, so that's a sign that we had some inflow of cash, right? We put out more bonds payable and inflow cash by taking on this liability. How about common stock? Common stock also increased here by 20,000. It was 60,000 last year, and now it's 80,000, so it increased by 20,000 we would expect there would be some sort of inflow of cash, we issued some stock to increase our cash there. And how about retained earnings? Why would retained earnings matter here? Because of dividends, right? We would have some sort of dividend account that would be affecting our retained earnings. So, it was 48,000 last year, and it went up to 164,000, that increase was 116,000 was the increase in our retained earnings but we would expect that to have some net income in it as well as dividends paid. Cool? So I don't think we're going to see anything important on our income statement related to financing activities because all we're worried about is those principal amounts of our long-term liabilities, such as repayment or sale of new bonds or long-term liabilities, as well as our equity transactions. And those equity transactions aren't going to show up here on the income statement. So let's go ahead and go to our example where we are going to be given some additional information related to this, related to this question. So we're looking for cash provided by financing activities using the financial information on the previous page as well as this additional information. So the company sold equipment with a book value of 7,000, cost 8,000 less accumulated depreciation for 4,000 in cash. That sounds like an investing activity, right? We're dealing with investing activities there because that's the sale of a long-term asset that has nothing to do with financing activities. The company issued 110,000 of long-term bonds, so that sounds important to us, right? They issued 110,000 for long-term bonds and used the proceeds to purchase land. So the proceeds to purchase land would be investing, but we don't really care about that. We're focused on this financing activity where we issued long-term bonds. The company purchased new equipment totaling 145,000. That's not important either, right? That is an investing activity. The company issued common stock for 20,000 cash. That is important, right? We're talking about common stock, so we do have a financing activity here. And how about the last one? The company declared and paid a 29,000 cash dividend. So when we are paying dividends, that is also a financing activity. So it sounds like we've got a few financing activities here, we can also double-check when we look at the changes in those accounts to make sure that we've dealt with everything. So first, we had the issuance of long-term bonds. So issued bonds and that's an inflow of cash, right? We had an inflow of 110,000 because we issued bonds and we got cash now and we'll repay that principal at a later date. We also issued common stock, so if we issued common stock that means we received cash as well. So I'll put issued CS, that's going to be 20,000 of cash inflow, and the company declared and paid a dividend of 29,000. So if we declared a dividend and paid, we paid dividends, well, that's going to decrease our cash, right? That's an outflow of cash 29,000, and what's that kind of come out to? That's everything we see here. It's 110, plus the 20 -29,000. We had an inflow of a 101,000 from financing activities. So that was notice it's positive, so that was an inflow of cash of 101,000. Now let's double-check that each of those accounts has been accounted for. We had a 110,000 increase in our bonds account, and that's because we issued these bonds, right? So notice our bonds account increased by 110,000, and that's directly related to what we saw on our cash flow statement, so that looks good. How about our common stock? It says we issued common stock for 20,000, and that's exactly what we saw for the common stock as well, right? We saw an increase of 20,000, so that checks out. But what about retained earnings? Retained earnings increased by 116 Let's go ahead and make a T account for retained earnings. So I'm going to make a T account right here on the side for retained earnings and remember, we're going to have some beginning balances as credit, then we're going to increase it with our net income. We're going to pay dividends that will decrease our retained earnings and that'll get us to our ending balance in retained earnings. Cool? So let's go up and let's see what these balances were, the beginning and ending balance. It says retained earnings beginning balance is 48,000 and it went up to 164,000. So let's go ahead and put those in here. 48,000, and it went up to 164,000. Cool? So those are our beginning and ending balances. How about net income? That'll come from the income statement, right? So if we look on the income statement, it tells us net income was 145,000. Right here, 145,000. So we can put that into our T account right here, 145,000, and it told us that there was 29,000 in dividends. So that should totally work out here. Let's go ahead and make sure that all our numbers work out, just to be 100% sure that everything is done. 48,000 plus 145,000 minus the 29,000 in dividends gets us to the ending balance of 164,000. So it looks like we've accounted for everything. We looked at all our long-term liability accounts, all our equity accounts, and we've accounted for all the changes in those accounts, and that ends us with this financing activity increase of 101,000 dollars. So now that we've dealt with the operating activities, investing activities, and financing activities, you can put it all together to make a cash flow statement, right? We would find the change from operating activities, the change from investing activities, and the change from financing activities and that will be the total change in cash during the period. Cool? All right, let's pause here and do some practice.

Which of the following is a cash flow from financing activities?

• A. The prepayment of a year's worth of rent
• B. Sale of a piece of land no longer used in retail
• C. Payment of dividends
• D. Payment of interest

The exchange of land worth $110,000 for 50,000 shares of common stock in the company would be an:

• A. Operating Activity
• B. Investing Activity
• C. Financing Activity
• D. None of the Above

Turkey Company is preparing its Statement of Cash Flows and gathered the following information: 

1. Since the previous year:the cash account increased by $35,000, land increased by $40,000, Equipment decreased by $15,000, Accumulated Depreciation – Equipment increased by $6,000, Retained Earnings increased by $340,000, and Bonds Payable increased by $100,000, 

2. Depreciation expense for Equipment totaled $16,000. 

3. Equipment with a purchase price of $15,000 was sold for a $2,000 gain. 

4. Turkey loaned $24,000 to Potatoes Company signing a long-term note receivable. 

5. Net income was $420,000. 

6. Turkey issued 100,000 shares of $5 par value common stock. The additional paid-in capital from this transaction was $300,000. 

What is Turkey Company's net cash flow from financing activities?

Alright. Let's see how you guys did with this in-depth practice problem. Turkey company is preparing its statement of cash flows and gathered the following information. So notice we're focused on financing activities here, right? We're focused on the financing activities, so you can expect that there's going to be extraneous information. Since the previous year the cash account increased by 35,000, land increased by 40,000, equipment decreased by 15,000, dollars Accumulated depreciation 6,000 Retained earnings increased by 340,000 Bonds payable increased by 100,000 A lot of information there. But notice, the cash account increase, well that's going to be the total increase from operating, investing, and financing. That's not going to help us for just the financing activities. Land is not related to our financing activities, neither is equipment, neither is accumulated depreciation. Retained earnings, yes that's an equity account, so that might be helpful. So we'll leave that there and bonds payable that should definitely be included as well. Depreciation expense totaled 16,000. That's extraneous information, right? That's related to investing activities or operating activities if we're doing the indirect method. For financing, we don't care about depreciation expense. Equipment with a purchase price was sold for 2,000. Well, we don't care about equipment sales. That's an investing activity as well. Turkey loaned 24,000 to potatoes company signing a long term note receivable. Well, note receivable, that is again an investment, right? This is a long term asset, so this has nothing to do with us either when we talk about long term note receivable. So a lot of this was extraneous information related to investing activities, not financing activities. Let's keep going. Net income was 420,000 Now that could be important when we're dealing with our retained earnings account. Because notice that it told us about retained earnings, it told us about net income, but it didn't tell us anything about dividends. We could expect that dividends would be a part of our financing activities. So we might have to back into dividends there. And finally, Turkey issued a 100,000 shares of $5 par value common stock, additional paid in capital from this transaction was 300,000. Dollars So here we go, that one sounds important as well, right? That sounds like a financing activity. We issued shares of stock. So let's go ahead and start with bonds payable. We'll start with our long term liability of bonds payable and notice that it doesn't mention any other thing about bonds payable. It just says that the account increased by 100,000. So for this account to increase by 100,000, we would have had to issue new bonds payable to receive some cash, right? So we would have received cash of 100,000 and we would have had bonds payable of 100,000 that would increase the account by 100,000. So this cash right here, this cash of 100,000 that is an inflow of cash from financing activities, right? For the bonds payable account to increase. So that one's easy enough, let's move on to our equity accounts. Accounts. Let's do our retained earnings. For this one, I think it'll be easier to have a T account. So let's make a T account for retained earnings and let's think about the things that can affect retained earnings. We're gonna have our beginning balance and then it increases by our net income and it decreases when we pay dividends, right? And this is probably what we're looking for here is this payment of dividends that gets us to our ending balance. So we should be feel pretty comfortable with that T account. Beginning balance plus net income minus dividends gets us to our ending balance. So let's see what information they gave us. They told us the retained earnings increased by 340,000. So for it to increase by 340,000, we can use the easy numbers, right? We can start with 0 and go to 340,000. That shows an increase of 340,000 in the account. Notice they didn't give us beginning or ending balances, so we have to imply those numbers and it's easiest to do it with 0 and 340,000. You could use any two numbers as long as the difference is 340,000. Now these are the easiest ones. So it also told us net income was 420,000 here, right? So we can plug that into our T account and all that's left is to find what the dividends were, right? Because if we started at 0, the net income increased it by 420,000. Well, dividends had to decrease the account, right? So if we started with 0, we added 420,000 and then we subtracted the dividends which were x. It got us to our ending balance of 340,000, right? So if we add x to both sides, subtract 340,000 from both sides, it'll get us to our amount of dividends paid and it'll be 80,000, right? Our dividends were 80,000 paid. So that's going to be right here dividends paid 80,000. And since it doesn't say anything about dividends payable account, we don't have to do a dividends payable, we can just assume that this 80,000 was paid out already, okay? They would to give us additional information about dividends payable if we were going to find a difference between the declared dividends and the paid dividends. Okay? So in this example, 80,000 will be the dividends paid. Last but not least, we have the issuance of common stock. So what happens when we issue common stock? Well, we're going to have our par value and we're going to have a pick. So remember when we issue common stock, we make a journal entry that looks like this. We're gonna have cash, we're gonna have an inflow of cash, and then we're gonna increase our common stock account by the par value, and we're gonna increase the APIC account, for any additional paid in capital above par value. So in this situation, they told us that APIC was 300,000, right? We can figure out what the par value is because they told us it was $5 par value for a 100,000 shares. So the par value is going to equal a 100,000 shares times $5 per share. Well, that's going to be 500,000. So now that we know the common stock, par value was 500,000, there was additional paid in capital of 300,000. What we know that the cash inflow from selling these stock was going to be 800,000. Notice how they had us back into it. This is pretty tricky. They're having you really feel comfortable with the journal entries that you've been making all throughout the course to back into these cash amounts. Okay? So now we've worked with all the information they've given us, we found all of the financing cash flows. Okay, so there's going to be the inflow of cash from the bonds payable, the inflow of cash from the issuance of bonds and the outflow of cash from the dividends. So let's add those all up underneath here. So we'll have issued bonds payable and that means we have increased our liability, so we increase our cash here. We received cash now. We issued common stock and we saw that that was an 800,000 inflow. And then we paid dividends, and that was an outflow of 80,000. So if we add all of these up, 100,000 +800,000 minus 80,000 that comes out to 820,000 financing activity inflow. Okay? So this was inflows from financing activities 820,000. Cool? All right. That's it for this one. Let's move on to the next video.

Here’s what students ask on this topic:

What are financing activities in the cash flow statement?

Financing activities in the cash flow statement focus on changes in long-term liabilities and equity. These activities include cash inflows from issuing bonds, obtaining loans, issuing equity, and selling treasury stock. Cash outflows consist of repaying bonds, paying dividends, and purchasing treasury stock. Understanding these activities is crucial for accurate financial reporting and analysis, as they reflect how a company funds its operations and growth through external sources.

How do you differentiate between dividends declared and dividends paid in the cash flow statement?

Dividends declared are the amounts a company announces it will pay to shareholders, while dividends paid are the actual cash outflows to shareholders. In the cash flow statement, only dividends paid are considered, as they represent the actual cash movement. Dividends declared increase the dividends payable account, and when paid, they decrease this account and are recorded as a cash outflow in the financing activities section.

What are the main cash inflows and outflows in financing activities?

Main cash inflows in financing activities include issuing bonds or notes payable, obtaining loans, issuing equity, and selling treasury stock. Cash outflows include repaying bonds or notes payable, paying dividends, and purchasing treasury stock. These transactions reflect how a company raises and uses funds from external sources to support its operations and growth.

Why is it important to understand retained earnings and dividends payable accounts in financing activities?

Understanding retained earnings and dividends payable accounts is crucial for accurately calculating cash dividends paid. Retained earnings reflect the cumulative net income minus dividends declared, while dividends payable represent the declared but unpaid dividends. By analyzing these accounts, you can determine the actual cash outflow for dividends, which is essential for accurate financial reporting in the financing activities section of the cash flow statement.

How do you calculate the amount of cash dividends paid using retained earnings and dividends payable accounts?

To calculate cash dividends paid, start with the beginning balance of retained earnings, add net income, and subtract dividends declared to find the ending balance. Then, examine the dividends payable account, which starts with a beginning balance, increases with dividends declared, and decreases with dividends paid. The difference between the beginning and ending balances of dividends payable, adjusted for dividends declared, gives the cash dividends paid.