The movement of cash & cash equivalents or inflow and outflow of cash is known as Cash Flow. Cash inflows are the transactions that result in an increase in cash & cash equivalents, whereas cash outflows are the transactions that result in a reduction in cash & cash equivalents. Hence, a statement showing flows of cash & cash equivalent during a specified time period is known as a Cash Flow Statement. One can prepare a cash flow statement if the two comparative balance sheets of a company are given. The transactions of a cash flow statement are categorised into three activities; namely, Cash flow from Operating Activities, Cash flow from Investing Activities, and Cash flow from Financing Activities. The Institute of Chartered Accountants in India has issued Accounting Standard AS – 3 revised for the preparation of cash flow statements. Besides, with the introduction of the Companies Act 2013, the preparation of a Cash Flow Statement is now mandatory for every type of company except OPC (One Person Company) [Section 2(40)].
What are Financing Activities?
The activities that bring a change in the capital and borrowings of a company are covered under Financing Activities. Cash Flow from Financing Activities helps the lenders of funds in estimating their claims on cash flows in the future. It is calculated by analysing the change in Equity and Preference Share Capital, Debentures, and other short-term and long-term borrowings. The activities under financing activities include:
- Cash receipts from issue of shares; i.e., equity shares, preference shares, or both.
- Cash receipts from issue of debentures, loans, bonds, and other short-term borrowings. Example, Cash Credit and Bank Overdraft.
- Cash repayment of loans including bonds, current maturity of debentures, etc.
- Buy-back of equity shares, redemption of preference shares.
- Cash payment of interest on short-term or long-term loans and debenture, and cash payment of dividend, interim dividend, and dividend tax on shares.
Note:
Financing Activities will not include Issue of Bonus Shares, Conversion of Debentures into Shares, and Issue of Share Capital, Debenture against purchase of fixed assets, as they do not involve cash.
Format of Cash Flow from Financing Activities:
Illustration 1:
From the following Extract of Balance as on 31st March 2021 of a company, calculate Cash Flow from Financing Activities:
Additional Information:
1. Interim Dividend on Equity Shares at the end of the current year was paid @ 10%.
2. Dividend on Preference Shares was paid.
3. Preference Shares were redeemed at a premium of 6% on 31st March 2021.
4. New Shares and Debentures were issued on the last date of the current year.
Solution:
Illustration 2:
Compute Cash Flow from Financing Activities from the following information:
Additional Information:
1. Dividend Paid ₹40,000
2. Interest on Cash Credit Paid ₹15,000
3. Interest on Debentures Paid ₹50,000
4. Issue of Bonus Shares to shareholders at par in the ratio of 1 share for 6 shares held during the year.
Solution:
*Issue of Bonus Shares =
= 1,00,000