Cash Flow From Financing Activities (Formula & Example) | Calculation


hello everyone hi welcome to the channel
of Wallstreetmojo friends today we are going to learn a tutorial on cash flow from the financing activity so a cash flow statement is divided into three
parts cash flow from investing operating activities and financing activities so
we are going to learn a piece of cash flow statement that is
the cash flow from financing activities formulas and some calculations too late
to the same let me show you how things have been recorded in cash flow
statement for financing activities as you can see over here there’s a net
change in the long term debt short term debt some of the items which are there
which gives us the final cash flow from the financing activities
now let’s discuss hidden in a in a really good fashion in nutshell you know
we can say that cash flow from the financing activity reports any sort of
issuance or repurchases of a company’s own bonds and stocks and the payments or dividend it reports the capital structure transactions items are found
in the long term capital sections of the balance sheets and the statement of the
retain earnings so let’s begin cash flow from the financing activity common items
included in the cash flow from the financing activities are like first cash
dividend that have been paid that is a cash outflow I’ll write over here CF
and then you have increase in the in the short term borrowings that is a short
term borrowing increase then that is basically the cash inflow the third
thing that is the decrease in the short term borrowing STB I just write over here that is a cash outflow the 4th thing that is a long term borrowings so LTB long term borrowings that will be your cash inflow then repayment of long term
borrowings so repayment of long term borrowings that is again again your cash
outflow the 6th one is your share sales which is your cash inflow and the
share repurchases I’ll just write SR and that will be a cash outflow so it is of
the view for the many investor that cash in the end if the king so if a company
has surplus cash then it can be assumed that company is operating in the
so-called safe zone so if a company is consistently generating more cash than
the cash use it will come out in the form of the car dividend payments share
buybacks reduction in debts or the case of the acquisition to grow the company
in organically all of this are perceived as a good points to create a good
stockholders value let us have a look at how the section of the cash in cash flow
statement is repaired understanding the preparation method will help us to
evaluate what all and where all to look into so that one can read the fine
prints in this section now let’s see how the calculating of the cash flow from
the financing activity is done let’s assume that there’s a there’s that
there’s mr. X he starts a new business he and he has plan at the end of the
month that he would prepare a financial statement like a income statement a
balance sheet and CFS so the first month you can say there was there
was no revenue in the first month and no such operating expense
hence income statement will result in net income to be 0 so in cash flow of
the financing activity cash would be increased by $2000 as
that is mr. X investments in the business so the cash flow from the
financing activity will show that you know there is investment by mr. X who is
the owner of 2000 right so if you are new to accounting you also can look into finance so for the non finance tutorials then the cash
flow from the financing activity let’s understand the example let’s take an
example to calculate the cash flow from the financing activity
now let’s take an example to calculate the cash flow from the financing
activities when the balance sheet items are provided now as you can see below is
the balance sheet of XYZ company for 2006 and 2007 you can see couple of
details right here the current liabilities and all the non current
liabilities are shareholders equity which is leading to the cash flow from
the financing activity this other things so also assume that over here the common dividend that has been declared is we’ll be saying that the common dividend
that has been declared is $17,000 now based on this calculate the cash flow
from the financing activity so in order to prepare the cash flow from the
financing activity we need to look at the balance sheet item that includes the
debt and the equity so in addition we also need to include the cash division
paid and as the cash outflows here as you can see the bonds the company
raises over here 22 to 30000 so the bond the first and the
foremost thing is the bonds so we can say that the increases 30000-20000 that is 10000 2nd that is uh you can say
common stock decide CS as you can see in the common stock there is
a decrease so that you change in the common stock balance sheet is 80000 – 1 lakh and that will give us 20000 negative please do
note they know that we do not take the changes in retained earnings because as
retain earning is linked to the net income from the income system it is not
part of the financing activity then the next thing that we are going to discuss
as the cash dividend that has been paid CDP dividend the cash dividend paid is
what it is your dividend plus any increase in your dividend and division
tables so basically that’s going to be 17000 right – 17000 + 10000 that will give us 7000 in
negative so the cash flow from the financing activity is going to be 10,000-20,000 – your 7000 that
will give us 37800 is some problem so no because we have
nested signs the negative it’s it’s gonna give us negative answers so it’s
going to be 10000 that is as above less 20000 and less 7000
which will give us our cash flow from the financing activity as – 17000 now we’ll discuss an example of Apple calculating the
cash flow from the financing activities of Apple now let’s take an example for
the organization and see how detailed cash flow from the financing activities
can help us in determining information about the company as you can see over
here there’s a proceeds from the issue and and so on and so forth all the
detail that have been taken and the cash using in the financing activity that
is given which in the negative this is another major component of the
cash-spending an investor looks at in detail because it is indicated with the
kind of difference in the activity which has been undertaken by the company in a
particular area so in financially a 15 apple incorporation spend closer to 20
484 or 483 million in the financing activities a few observation from the
about cash flow from the financing activities apart are the company has
been the steady in as a part of the dividend pair okay and that was over 11000 as you can see payment for the dividends
it is quite steady 11126 11561 and 12150 each an investor who do not
don’t wait for the capital appreciation can earn money from the state he steady
dividend paid by the company every or one morning one important factor to see
is the repurchase of the shares that has happened as you can see the repurchasing
of this year is indicated the fact that the company has been generating steady
returns the company’s generating ample cash and using the same to buy back the
stocks so the average repurchase over the last 3 years has been 35000 or million so as you can see 730 543 and 495 3rd most interesting thing that one can see from
the above statement that the company has been taking long term debts well
well you can say that in that particular scenario this this might be one of the
way company is financing its activity is very important I mean however as an
apple incorporation which is overall sitting on a pile of cash it would be
interesting to question why such an entity will take in more long-term debt
it can be the business decisions or it can be because of the fact that borrowing
rates happen at all-time low and the cost of the financing through equity is not
feasible for them also we know that you know the company on one hand is
repurchasing the share over here and hence taking more money from the equity
market can be counterproductive so based on this we can make a final
conclusion that investors earlier used to look into income statement and
balance sheet for the clues about the situation in the company however over
the years investors have now also started looking at each one of them
statement along side consumptions of the cash flow statement so this actually
helps in getting the whole picture and also helps in taking much more
calculated investment decisions so as we have seen throughout the tutorial we are
able to see the cash flows from the financing activity it is a great indicator of
the core financing activity the company so if the company has surplus cash then
it can be assumed that the company is operating in so called called safe zone
and if a company is consistently generating more cash than the cash used
it will come out in the form of dividend payments share buybacks and a reduction
in deaths cash and in case of the acquisition to grow company in
organically so all of this are perceived as a good points to create a good
stockholders value

Paul Whisler

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