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The statement of cash flows reports a company’s sources and use of cash. Three sections with specific activities are reported on this statement: operating, investing, and financing. The latter section includes cash flow from financing activities such as borrowing money, issuing stock, and debt repayments, among others. Large companies — often those publicly held — often have the most activity in this section, though smaller businesses may also have them. Companies usually report these activities on a monthly basis.
When reporting cash flow from financing activities, the section is usually the last reported on the statement of cash flows. In most cases, this section has the least amount of activity among the three sections. External stakeholders may also not have as mush interest in these figures when compared to operating or investing activities. Cash flow from financing activities only occurs when a company seeks funds from outside sources for operating the business. Loans and stock are the two primary sources.
Cash inflows represent any payments a company receives from outside sources. Again, the most common activities here are loans received for a specific use and stock issuance when a company goes public or has an additional stock reissuance. Cash flow from financing activities reports these actions as a plus to the company’s cash account for the exact dollar amount received from either source. Only cash inflows during the month received have inclusion on this statement at this time. Repeated cash inflows over several months’ time indicate repeated inclusion in this section.
Outflows reported on the statement of cash flows in the financing section are essentially the opposite of the cash inflow items. For example, cash flows from financing activities include repayments on bank loans, the purchase of stock from current investors, and dividend payments for current stockholders. Most large companies have these payments infrequently; for example, debt repayment may take the form of quarterly balloon payments made to the bank. Purchasing stock — often referred to as treasury stock in accounting — means a company is removing stock from the open market. Dividend payments indicate a company is spending a portion of retained earnings on investor rewards.
Certain items that may carry a similar name to these items in the cash flow from financing activities are not reported here. For example, issuing stock for land is not in the financing section. The company needs to report this — and similar items — in a separate section called significant noncash items. This section is at the very bottom of the statement of cash flows.
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