Notes on Cash from Financial and Investing Activities | Grade 12 > Principles of Accounting > Statement of Changes in Financial Position | KULLABS.COM

• Note
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### 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

• 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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