Cash Flow From Financing Activities | Examples | Formulas

cash-flow-from-financing-apple

source: ycharts.com

Cash Flow From Financing Activities – In a nut shell, we can say that cash flow from financing activities reports the issuance and repurchase of the company’s own bonds and stock and the payment of dividends. It reports the capital structure transactions. Items are found in the long-term capital section of the balance sheet and the statement of retained earnings

In this article, we discuss Cash flow from Financing Activities in detail

Items in Cash Flow from Financing Activities?

Common items included in the cash flow from Financing activities are as follows –

  • Cash dividend paid (cash outflow)
  • Increases in short-term borrowings (cash inflows)
  • Decrease in short-term borrowings (cash outflow)
  • Long-term borrowings (cash inflows)
  • Repayment of long-term borrowings  (cash outflow)
  • Share sales (cash inflows)
  • Share repurchases (cash outflow)

It is of the view for many investors that cash in the end if the king.

If a company has surplus cash than it can be assumed that company is operating in the so-called safe zone. If a company is consistently generating more cash than the cash used, it will come out in form of dividend payments, share buybacks, reduction in debt or case of acquisition to grow the company inorganically. All of these are perceived as good points to create good stockholder value.

Let us have a look at how this section of the cash flow statement is prepared. Understanding the preparation method will help us evaluate what all and where all to look into, so that one can read the fine prints in this section.

Preparing Cash flow from Financing Activities


Let’s assume that Mr. X starts a new business and has planned that at the end of the month he will prepare his financial statements like income statement, balance sheet and cash-flow statement.

1st month: There was no revenue in the first month and no such operating expense hence income statement will result in net income to be zero. In cash flow from financing activities, the cash would increase by $2000 dollars as that is Mr. X investment in the business.

Cash from Financing activities (end of the first month)
Investment by Mr. X (Owner)  $ 2,000

if you are new to accounting, you can also look at the finance for non finance tutorials.

Cash flow from Financing Activities – Example


Let’s take an example to prepare Cash Flow from Financing activities when Balance Sheet Items are provided.

Below is a balance sheet of an XYZ company with 2006 and 2007 data.

cash-flow-from-financing-example

Also, assume that the Common dividends declared – $17,000

Calculate Cash Flow from Financing. 

In order to prepare the cash flow from Financing, we need to look the Balance Sheet items that include the Debt and Equity. In addition, we also need to include the cash dividends paid as cash outflows here.

  • Bonds – the company raises bonds and results in the cash inflow of $40,000 – $30,000 = $10,000
  • Common Stock – Change in common stock balance =  $80,000 – $100,000  = – $20,000
  • Please do note that we do not take the changes in retained earnings as retained earning is linked to the Net Income from the income statement. It is not a part of financing activities.
  • Cash Dividends Paid = – Dividends + increase in dividends payable =  -17,000 + $10,000 = -$7,000

Cash Flow from Finance Activities Formula = $10,000 – $20,000 – $7,000 = $17,000

Cash Flow from Financing Activities – Apple


Now let us take an example of an organization and see how detailed cash flow from financing activities can help us in determining information about the company.

cash-flow-from-financing-apple-sec

source: Apple 10K

This is another major component of cash spending and investor looks at it in details. It is indicative of kind of financing activity which has been undertaken by the company in a particular area. In FY15, Apple incorporation spent $20,484 million in financing activities. Few observations from the above cash flow from financing activity parts are:

  • The company has been a steady dividend payer. In the last three years company has been paying dividend of over $11000 million each year. Investors who don’t wait for capital appreciation can earn money from the steady dividend paid by the company every year.
  • One more important factor to see is the repurchase of shares. The repurchasing of shares is indicative of the fact that company has been generating steady returns. The company is generating ample cash and is using the same to buy-back stocks. The average repurchase amount over the last 3 years has been well over $35,000 million.
  • Third most interesting thing one can see from the above statement that company has been taking long-term debts. This might be one of the ways company is financing its activities. However, as an Apple incorporation which is overall sitting on a pile of cash, it would be interesting to question why such an entity will take in more long-term debt. It can be either a business decision or is it because of the fact that borrowing rates have been at all-time low and cost of financing through equity is not feasible. Also, note that the company, on one hand, is repurchasing shares and hence taking more money from equity market can be counterproductive.

Cash flow From Financing Activities – Amazon Example


Let’s now have a look at another company’s cash flow from operations and see what it speaks about the company. This is the case of an e-commerce venture Amazon Inc. The company for years didn’t generate accounting profit but investors kept putting money into the company on the backdrop of sound business proposition and huge cash generated from operations.

amazon-cash-flow-from-financing

source: Amazon 10K

The above image is a historical representation of the cash flow from financing activities of Amazon.  We note the following about Amazon’s Cash Flow from Financing activities –

  • Cash outflows were majorly related to repayments of long-term debt, capital lease obligation and financial lease obligation
  • Proceeds from Long-term financing has been constantly positive and very high. This is indicative of the fact that company has been constantly borrowing long-term debt.
  • Repayments of long-term financing show a huge cash outflow. This is indicative of the fact that the company has been extensively paying off it long term debt. If we see the two in conjunction one can see that company has been taking a constant long term debt position and is paying the equal amount back to banks as part of its debt-repayment schedule (in 2014). Investors can explore this option in more detail to see whether the company is financing its debt by taking more debt.

Cash Flow from Financing – JPMorgan Bank Example


Till now we have seen one product and one Service Company. Now let us have a look at one of the banking majors. This will give us a good coverage of how companies classify different functions under ‘cash flow from financing activities’.

cash-flow-from-financing-jpmorgan

source: JPMorgan 10K

Since this entity is a bank, lot of line items will be completely different from what it is for others. There are many line items which are only applicable to banks or companies in financial services. Few observations from the above statements is:

  • The bank has been buying lots of federal funds for the last three years. This is more because of how the economy is shaping up. The government is mopping up funds and issuing fresh debt in the market. This debt is being picked up by banks and hence fund outflow as lots of federal funds are being purchased.
  • The quantum of the dividend has been steadily increasing over the last 5 years. This is indicative of the fact that banks are now out of turmoil which they faced in 2008-2009. The economy has definitely turned a circle and banks are able to payout steady dividend.

 

Cash Flow from Financing Activities – What Analyst should know?


Till now we have seen three different companies in three different industries and how cash means different for them.

For a product company cash is the king, for the service company it is a way to run a business and for a bank, it is all about cash!

These three companies have different things to offer in the cash flow from financing activities part of the cash flow statement. However, it is important and imperative to understand the statement should not be singled out and seen. They should always be seen in conjuncture and combination of other statements and management discussion & analysis.

Also, note that cash flow for financing trends could be identified and extrapolated to estimate the funding requirements of the company in future, (also look at – how to forecast financial statements?)

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Conclusion


Investor’s earlier use to look into income statement and balance sheet for clues about the situation of the company. However, over the years investors have now also started looking at each one of these statements alongside conjunction of cash flow statements. This actually helps in getting the whole picture and also helps in taking a much more calculated investment decision. As we have seen throughout the article we are able to see that cash flow from financing activities is a great indicator of core financing activity of the company.

If the company has surplus cash than it can be assumed that company is operating in the so-called safe zone. If a company is consistently generating more cash than the cash used, it will come out in form of dividend payments, share buybacks, reduction in debt or case of acquisition to grow the company inorganically. All of these are perceived as good points to create good stockholder value.

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