Ascertainment of Cash Flow from Financing Activities Video Lecture | Study Accountancy Class 12 - Commerce | Best Video for Commerce

in this video we're going to talk about
how to calculate cash flows from
financing activities when you're putting
together a statement of cash flows so
cash flows from financing activities are
basically the net cash that is provided
or used up by debt holders and equity
holders and so when we talk about debt
holders we're talking about when you
borrow money or when you repay money so
that's going to end up in this financing
section but not just the dealings with
your creditors but also your equity
holders as well so if you issue stock or
if you pay dividends to your
shareholders those activities are going
to end up in this financing section as
well so if we think about the layout of
our statement of cash flows just a quick
review we start with our operating
section right we've got the net income
at the top we make the adjustments to
get net operating cash flow and then we
have the investing section where we talk
about things like the sale of fixed
assets or investments and then now we've
got this financing section right so
we're dealing with with creditors with
equity holders those kind of
transactions and I just want to know one
caveat here is that even though we're
talking about things with debt holders
and borrowing and repaying debt we do
not account for anything having to do
with interest expense in the financing
section of the statement of cash flows
okay so if we had a change in interest
payable for example that would actually
be categorized under the operating
section now I know that's a little
counterintuitive so I just wanted to
make sure you didn't see the word debt
and think that interest would be going
down here right so this is just going to
be how much we borrow and how much we
repay so let's walk through an example
it'll make a little bit easier for you
to understand maybe so let's say that
we've got a company called uncle Tito's
icecream and uncle Tito raises $20,000
with a stock issuance and we'll just say
that we'll assume this is common stock
so common equity there are no preferred
shares that uncle Tito's just common
shares so it raises 20,000 from the
stock issuance and then uncle Tito's
pays a $500 dividend back to the common
shareholders at some point during the
year and then in addition to that uncle
Tito's pays off
$12,000 worth of debt
and sometimes when you pay off bonds
it's it's just in our way of saying as
say that you redeemed the bonds so you
say that uncle Tito redeemed twelve
thousand dollars worth of bonds so now
let's put together this financing
section of the statement of cash flows
and see how it would look so we've got
this issuance of stock right so this
issuance of common stock and now we need
to account for that
well it's twenty thousand dollars that
was raised right so you basically gave
out shares of stock and you got cash in
return so this is a source of cash so
it's going to be a positive twenty
thousand dollars but this dividend on
the other hand you're paying that back
to your shareholders you're saying hey
look we had a great year or what you
know we're deciding give you five
hundred dollars that's going to be a
cash outflow so we're going to put it in
parentheses to indicate that this is a
negative number it's a cash outflow for
the company now the $12,000 of bonds
that we pay off makes sense that that's
also going to be a cash outflow right
we're paying off debt that's going to be
a use of cash so we have a negative
twelve thousand so now all we do to get
the net cash here we just total these
amounts right here okay so we've got the
negative twelve thousand five hundred
plus twenty thousand dollars so this is
going to come out to seventy-five
hundred dollars and it's a positive
number so what does that mean that means
that the net effect of all the financing
activities we did here during the year
or during the quarter it was that we
generated seventy five hundred dollars
worth of cash now let's say let's just
assume that this had actually been a
negative number then this part right
here would say net cash used by
financing active