CHAPTER 5: CASH FLOW STATEMENT: FINANCING ACTIVITY

LEARNING OUTCOMES:

THE LAST ACTIVITY OF CASH FLOW STATEMENT IS 

FINANCING ACTIVITY.

ITEMS INCLUDED IN THE ACTIVITY ARE 

DISCUSSED WITH EXAMPLES.

HELLO ANALYSTS,

READ THE MEANING AND CALCULATION OF CASH FLOW FROM FINANCING ACTIVITY  ITEMS, WATCHING TWO ILLUSTRATIVE VIDEOS AND WITH WORKING  EXAMPLES TO GET THE CLARITY OF THE ACTIVITY.

Cash Flow from Financing Activities:

FINANCING ACTIVITIES OF AN ENTERPRISE ARE THOSE ACTIVITIES WHICH RESULT IN CHANGE IN THE SIZE AND COMPOSITION OF OWNERS' CAPITAL AND BORROWINGS OF THE ENTERPRISE.

Calculation of Cash Flow from Financing Activities:

CASH INFLOWS: 
1.Proceeds from issue of share capital (both Equity and Preference Shares)
2.Proceeds from long term borrowings (e.g. Debentures, Bonds, Long Term Loan from Bank, X % deposits)
3. Securities premium premium ( Premium on issue of Shares or Debentures)
4. Proceeds from Bank Overdraft Raised 

CASH OUTFLOWS:
5. Redemption of Debentures or Preference Shares (including Premium on Redemption)
6. Repayment of Long Term Loan from Bank / X % deposits
7. Buyback of Equity Shares
8. Dividend paid (both Final Dividend and Interim Dividend)
9. Interest on Long term Borrowings paid( e.g. Interest on Debentures ,Long term Loan from Bank, X% deposits)
10. Dividend tax paid 

Net cash from (/used in) financing activities


WATCH THE TWO ILLUSTRATIVE VIDEOS BY CLICKING ON THE LINK BELOW:

CALCULATION AND TREATMENT OF INTEREST ON LONG TERM LOANS PART 1

CALCULATION AND TREATMENT OF INTEREST ON LONG TERM LOANS PART 2

EXAMPLE: 1

From the following information, Calculate Cash Flows from Financing Activities. Show your workings clearly.
                                                               April 1 2019          march 31st 2020
Equity share capital                                  1000000                    1200000
Long term loans                                          200000                      250000

During the year the company repaid a loan of 100000.

Ans. 250000

SOLUTION

Calculation of Cash Flows from Financing Activities:

Particulars                                                                     Amount (₹)

Proceeds from issue of equity share capital                  200000

Proceeds from long term loans raised                           150000

Repayment of long term loans                                       (100000)

Net cash inflow from Financing Activities                     250000

Working Notes :

                                             Long term Loans Account

Particulars                             Amount(₹)  Particular                                 Amount (₹)

To Bank A/c (loan repaid)       100000     By Balance b/d                            200000

 To Balance c/d                         250000      By Bank A/c(new loan raised)   150000

                                                    350000                                                           350000

EXAMPLE 2

Calculate Cash Flows from Investing and Financing Activities:

 Balance sheet of Pioneer limited as on 31st March 2020
Particulars                                        note no.          3 -3- 2020             31-3-2019

I. Equity and Liabilities
1. Shareholder's Funds
(a) Share capital (equity)                                          400000                 500000
(b) Reserves and surplus                        1                550000                  200000
3. Non current liabilities
(a) Long term borrowings( bank loan)                    50000                   100000
4.Current liabilities
(a)Short term borrowings                                       140000                    50000
(b)Trade payables                                                     12000                      5000
(c)Short term provisions                       2                120000                    80000

Total                                                                         1272000                935000
II.Assets
1.Non current assets
(a)Fixed assets
(i)tangible assets                                  3                500000                   500000
(ii)intangible assets                              4                150000                  100000
(a)Non current investments                                  100000                      --
2. Current assets
(a)Inventories                                                          75000                   50000
(b)Trade receivables                                               120000                  80000
(c)Cash and cash equivalents                                327000                205000

Total                                                                       1272000               935000

Notes to accounts:

Particulars                                                            31-3-20                          31-3-19 

1.Reserve and Surplus
Surplus i.e.Balance in Statement of P/L   350000                             200000
2.Short term provisions
Provision for taxation                                120000                               80,000 3.Tangible assets
Equipments                                                230000                               200000
Furniture                                                    270000                                300000
                                                                     500000                                500000
4. Intangible assets
Patents                                                       150000                                100000

During the year, equipment costing 80,000 was purchased. Loss on sale of

equipment 5000. Depreciation of 15,000 and 30,000 charged on equipment and furniture. Dividend paid during the year was 50000.

SOLUTION

Top Tips:

1.     For calculating Cash flow from Investing Activities, we should consider the items of Non Current Assets in the Balance Sheet, and Notes to Accounts and Additional Information related to them.

2.      For calculating cash flow from financing activities, we should consider the items of Shareholders funds and Non-current liabilities in the Balance Sheet, and Notes to Accounts and Additional lnformation related to them. Also, short term borrowings given under the heading ‘current liabilities’ in the Balance Sheet is cash flow from Financing Activities.

Calculation of cash flow from Investing  Activities:

Particular                                                             Amount (₹)

Proceeds from sale of equipment                         30,000

Purchase of new equipment                                 (80000)

Purchase of Non Current Investments               (100000)

Purchase of Patents                                               (50,000)

___________________________________________________

Net cash used in Investing Activities                   (200000)

___________________________________________________

Working Notes:

                                       Equipment Account

Particulars                    Amount(₹)     Particular                    Amount (₹)

To Balance b/d                  200000       By Depreciation             15000

 To Bank A/c (purchase)    80000       By Bank A/c (Sale)

                                                                 (Bal. Fig.)                     30,000

                                                               By Statement of P/L        5,000

                                                               By Balance c/d              230000

                                            280000                                              280000

Calculation of Cash Flow from Financing Activities:

Particular                                                            Amount (₹)

 Buyback of equity shares                                  (100000)

 Repayment of bank loan                                    ( 50,000)

 Payment of dividend                                           (50,000)

 Proceeds from short term borrowings               90,000

Net cash used in Financing Activities      (110000)

Top Tips:

1.     Decrease in equity share capital implies Buyback of equity shares, i e cash flow from financing activities.

 Short term borrowings should not be treated as current liability in cash flow statement. Rather, increase in short term borrowings will be cash inflow from financing activities i.e. proceeds from short term borrowings.