Chapter 11: Reporting and Interpreting Cash Flows from Financing Activities Flashcards
Reporting Cash Flows from Financing Activities
Key Points:
Association: Financing activities involve generating capital from creditors and owners, reflecting changes in current liabilities (short-term debt and current portion of long-term debt) and non-current liabilities and shareholders’ equity accounts.
Typical Activities:
Proceeds from Debt Issuance: Cash received from borrowing from banks and financial institutions, as well as issuing long-term debt (notes) to the public.
Principal Payments: Outflows associated with debt repayment, including periodic principal repayment and interest payments; listed as cash flows used in financing activities.
Proceeds from Share Issuance: Cash received from selling shares to investors; excludes shares issued for non-cash transactions (e.g., employee benefits).
Share Repurchase: Outflows for repurchasing the company’s own shares from shareholders.
Interest and Dividends: Cash flows from interest and dividends received and paid; classification can vary between operating, investing, and financing activities.
Classification consistency is crucial for understanding the company’s financial activities over time.
Importance of Reviewing Debt and Shareholders’ Equity Accounts
Key Points:
Review Approach: To compute cash flows from financing activities, analyze changes in debt and shareholders’ equity accounts from the statement of financial position.
Analysis (National Beverage Example):
Changes in long-term debt, share capital, and retained earnings noted with an F in Exhibit 11.3 are reviewed for National Beverage, aiding in understanding the company’s financing activities and capital structure changes
Financial activites effect on cash flow
Short- and Long-Term Debt in Financing Activities
Key Points:
Definition: Additional borrowing or principal repayments on borrowings from banks constitute financing cash flows.
Determination: Analyzing the long-term debt account reveals the appropriate amounts for borrowing or repayment activities.
Example (National Beverage): National Beverage repaid $2,755 in principal on long-term debt in 2021.
Share Capital and Retained Earnings in Financing Activities
Key Points:
Share Capital: Changes in share capital stem from issuing shares for cash to shareholders or repurchasing outstanding shares for cash. The details are typically listed in the financing activities section.
Example (National Beverage): National Beverage issued shares for $9,390 in fiscal year 2021.
Retained Earnings: Increase with reported net earnings and decrease when dividends are declared and paid to shareholders.
Example (National Beverage): National Beverage reported net earnings of $174,146 and paid $279,876 in dividends during fiscal year 2021.
Dividends Payable: Dividends are usually paid quarterly, within weeks from the declaration, and are listed in the financing activities section once paid.
These activities reflect significant decisions and financial health, impacting the company’s capital structure and investor relations.
Interpreting Cash Flows from Financing Activities
Key Points:
Sources of Long-Term Financing:
- Internally generated funds (cash from operating activities)
- Issuance of shares
- Long-term borrowing
Capital Structure Impact:
Capital structure: Balance of debt and equity.
Financing sources influence a company’s risk and return characteristics.
Statement of Cash Flows Significance:
Reflects how management chooses to fund growth.
Analyzed by analysts to assess a business’s capital structure and growth potential.
Understanding financing decisions is crucial for evaluating a company’s stability, expansion strategies, and potential for sustainable growth
