Note on Cash from Financial and Investing Activities

  • Note
  • Things to remember

Cash Flow from Financing Activities

Financing activities refers to those activities which are responsible for the change in the size and composition of the owner’s capital and borrowed capital of the enterprise. Financing activities section is where the sources of funds generated from them are shown. Payment of cash dividend to shareholders and repayment of debt, both are financing activities.

Cash flow from the financing activities is calculated by analysing the liabilities side of balance sheet. Some of the major financing activities and their effects on cash flow stream are shown below:

Financing activities

Cash inflow

Cash outflow

Equity shares

Preference shares

Share premium

Long term loan

Debentures

Dividend paid

Issue of equity shares

Issue of pref. shares

Increase in share premium

Increase in loan

Issue of debentures

-

-

Redemption of pref. shares

-

Payment of loan

Redemption of debentures

Cash/ Interim dividend paid

Format for Cash Flow from Financing Activities

Particulars

Amount

Issue of shares at par or at premium or at discount

Borrowing of bank loan & debenture at par/ premium/ discount

Redemption of preference shares & debentures at par/ premium/ discount

Payment of interim dividend (if any)

Payment of dividend (last year’s provision of dividend)

Net cash flows from (used by) financing activities

xxx

xxx

(xxx)

(xxx)

(xxx)

xxx/(xxx)

Notes:

  • When the cash flow from financing activities is positive, it is called net cash flow from financing activities. But, if the result is negative, it is called net cash used by financing activities.
  • Redemption amount = Decrease in face value + Premium on redemption (or – Discount on redemption)


Illustration:

Calculate Cash flow from financing activities.

Particulars

2014

2015

Equity share capital

Preference share capital

Debenture

Bank loan

Dividend paid

2,00,000

80,000

0

1,50,000

10,000

3,50,000

1,30,000

70,000

2,00,000

20,000

Solution:

Cash Flow from Financing Activities

Particulars

Amount

Issue of share capital

Collection of bank loan

Issue of preference share capital

Issue of debentures

Payment of dividend

Net cash flows from financing activities

1,50,000

50,000

50,000

70,000

(10,000)

3,10,000

Cash Flow from Investing Activities

Investing activities include purchase and sales of non-current assets such as land and building, plant and machinery, furniture and fixture, etc. Investing activities are also related to lending money and the purchase or sale of investments and securities.

In other words, investing activities explain the overall changes in cash position between two balance sheets which occur while buying or selling of non-current assets. The cash inflows and outflows that are related to investing activities are presented below:

Cash inflows: Sale of fixed assets, the sale of long term investment, loan repayment received, interest and dividend received.

Cash outflows: Purchase of fixed assets, additional investment, a loan given, etc.

Format for Cash Flow from Investing Activities

Particulars

Amount

Purchase of fixed assets

Additional investment

Sales of fixed assets

Sales of investment

Long term loan given

Loan repayment received

Interest/ dividend received from investment (if not included in operating activities)

Net cash flows from (used by) investing activities

(xxx)

(xxx)

xxx

xxx

(xxx)

xxx

xxx

xxx/ (xxx)

Working notes:

  • If the cash flow from investing activities comes out to be positive, it is called net cash flows from investing activities. But, if the result comes out to be negative, such as in parenthesis, then it is called net cash used by investing activities.
  • Dividend received and interest received can be both included under either operating activities or investing activities. Generally, though, banks and financial institutions always put them under operating activities.
  • When there is no depreciation given on fixed assets, such as investment, the value of purchase or sale is determined by preparing the following account.

Fixed assets a/c (without depreciation)
Dr. Cr.

Particulars

Rs.

Particulars

Rs.

To Balance b/d (openingbal.)

To Cash (purchase)

To P/L a/c (gain on sale)

xxx

xxx

xxx

By Cash (sales)

By P/L a/c (loss on sale)

By balance c/d (closingbal.)

xxx

xxx

xxx

xxx

xxx

Alternatively,

  • Purchase of fixed assets = Closing balance – Opening balance = Net increase
  • Sales of fixed assets = Opening balance – Closing balance = Net decrease


Dr. Fixed assets a/c (net) Cr.

Particulars

Rs.

Particulars

Rs.

To Balance b/d

To Cash (purchase)

To P/L a/c (gain on sale)

xxx

xxx

xxx

By depreciation (dep. for the year)

By Cash (sales)

By P/L a/c (loss on sale)

By balance c/d

xxx

xxx

xxx

xxx

xxx

xxx

Note: If there is depreciation on fixed assets, the depreciation is debited in Profit & Loss account, but accumulated depreciation account is not shown on the balance sheet.

Alternatively,

  • Purchase of fixed assets = Closing balance – Opening balance + Depreciation = Net increase+ Depreciation
  • Sales of fixed assets = Opening balance – Closing balance – Depreciation = Net increase –Depreciation


Dr. Fixed assets a/c (gross) Cr.

Particulars

Rs.

Particulars

Rs.

To Balance b/d

To Cash (purchase)

To P/L a/c (gain on sale)

xxx

xxx

xxx

By accumulated depreciation a/c
(Acc. Dep. of sold or decreased part)

By Cash (sales)

By P/L a/c (loss on sale)

By balance c/d

xxx

xxx

xxx

xxx

xxx

xxx


Dr. Accumulated depreciation a/c Cr.

Particulars

Rs.

Particulars

Rs.

To fixed assets a/c

To Acc. Dep. of sold/ decreased part

To balance c/d

xxx

xxx

xxx

By balance b/d

By adjusted P/L a/c

Bal. figure (dep. for the year)

xxx

xxx

xxx

xxx

xxx

Note: If accumulated depreciation account is given on the balance sheet, only the accumulated depreciation of the sold part is credited in the assets account and then the depreciation for the year is to be credited to accumulated depreciation account.

Alternatively,

  • Purchase of fixed assets = Closing balance – Opening balance + Cost of goods sold = Net increase + Cost of goods sold
  • Sales of fixed assets = Opening balance + Purchases – Closing balance

Illustration:

Year

1994

1995

Land & building

Furniture

Plant & machinery

Investment

Rs. 1,00,000

50,000

30,000

25,000

Rs. 2,20,000

45,000

95,000

16,000

Additional information:

  • Furniture costing Rs. 25,000 was sold for Rs. 20,000.
  • Depreciation on Plant & machinery was Rs. 8,000.
  • Investment was sold at a profit of Rs. 10,000.

Required: Cash flow from investing activities.

Solution:

Cash Flow from Investing activities

Particulars

Amount

Purchase of land & building

Purchase of Plant & machinery

Sales of furniture

Sales of investment

Net cash flows from (used by) investing activities

(1,20,000)

(73,000)

20,000

26,000

(1,47,000)

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu

  1. Financing activities refer to those activities which are responsible for the change in the size and composition of the owner’s capital and borrowed capital of the enterprise.
  2.  Financing activities section is where the sources of fund, generated from them are shown. 
  3. Cash flow from the financing activities is calculated by analysing the liabilities side of Balance sheet.
  4. Cash flow statement is prepared by combining all the cash flows i.e. cash flows from operating activities, investing activities and financing activities

 

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