Cash from Financial and Investing Activities

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:

Format for Cash Flow from Financing Activities

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.

Solution:

Cash Flow from Financing Activities

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

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.

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.

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.

Dr. Accumulated depreciation a/c Cr.

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:

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

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