Cash Flow from Financing Activities is the net amount of funding a company generates in a given time period. Finance activities include the issuance and repayment of equity Equity In finance and accounting, equity is the value attributable to a business. Book value of equity is the difference between assets and liabilities , payment of dividends Dividend A dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. , issuance and repayment of debt, Long Term Debt Long Term Debt (LTD) is any amount of outstanding debt a company holds that has a maturity of 12 months or longer. It is classified as a non-current liability on the company’s balance sheet. The time to maturity for LTD can range anywhere from 12 months to 30+ years and the types of debt can include bonds, mortgages and capital lease obligations. Companies that require capital will raise money by issuing debt or equity, and this will be reflected in the cash flow statement Cash Flow Statement? A cash flow Statement contains information on how much cash a company generated and used during a given period. .
What’s Included in Cash Flow from Financing Activities?
It’s important for accountants, financial analysts, and investors to understand what makes up this section of the cash flow statement and what financing activities include. Since this is the section of the statement of cash flows that indicates how a company funds its operations, it generally includes changes in all accounts related to debt and equity.
- Issuance of equity
- Repayment of equity
- Payment of dividends
- Issuance of debt
- Repayment of debt
- Capital/finance lease payments
Example of Cash Flow from Financing Activities
Below is an example from Amazon’s 2017 annual report and form 10-k 10-K Form 10-K is a detailed annual report that is required to be submitted to the U.S. Securities and Exchange Commission (SEC). The filing provides a comprehensive summary of a company’s performance for the year. It is more detailed than the annual report that is sent to shareholders . In the bottom area of the statement, you will see the cash inflow and outflow related to financing.
- Inflow: proceeds from issuing long-term debt
- Outflow: repayment of long-term debt
- Outflow: principal repayments of capital lease Capital Lease vs Operating Lease The difference between a capital lease vs operating lease – A capital lease (or finance lease) is treated like an asset on a company’s obligations
- Outflow: principal repayments of finance lease obligations
As you can see above, Amazon had a net outflow of cash in two of the three years, and most of it was related to capital lease obligations. In 2017, there was a large inflow of cash related to issuing long-term debt. This debt was most likely required to keep the total cash balance steady on a year-over-year ( YoY YoY (Year over Year) YoY stands for Year installment loans Montana over Year and is a type of financial analysis used for comparing time series data. It is useful for measuring growth and detecting trends. ) basis since a lot of money was spent on investing activities Cash Flow from Investing Activities Cash Flow from Investing Activities is the section of a company’s cash flow statement that displays how much money has been used in (or in 2017.
Capital Structure of a Business
Companies typically use a combination of debt and equity to fund their business and try to optimize their Weighted Average Cost of Capital (WACC) WACC WACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. to be as low as possible. Whatever capital structure Capital Structure Capital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm’s capital structure a company thinks is appropriate, the impact of the financing decisions will flow through the cash flow statement.