Financing activities are those activities of a firm that change the equity capital and borrowing structure of the firm and result in changes in the size and composition of the contributed equity and borrowings of the entity.  Financing cash flow (FCF) is the cash flow that results from obtaining, servicing and redeeming sources of finance arising from transactions with the providers of funded debt and shareholders.  It is reflected in the changes in the company’s short-term borrowings, long-term debt and owners’ equity.

Increases in the balances for short-term and long-term borrowings (bank loans, notes and bonds) and paid-in capital accounts (outstanding capital stock and paid-in surplus) on the balance sheet result in a cash inflow.  Conversely, cash flow decreases when there is a decrease in the account balances due to loans being paid off, bond retirement or stock redemption.  Dividends and capital distributions paid to shareholders represent cash outflows, they reduce owners’ equity are paid out of net income.  They should be classified separately and are usually included in financing cash flows.

Cash Flows from Finance Activities – Direct Method (Illustration)
Proceeds from the Issuance of common Stock xxx
Proceeds from the Issuance of Long-Term Debt xxx
Principal Payments under Capital Lease Obligations (xxx)
Dividends Paid (xxx)
Net Cash used in Financing Activities xxx

Some transactions do not have a direct effect on cash, although they have an effect on assets or liabilities.  A purchase of land on a long-term mortgage with no down payment, for example, does not affect the cash balance.  Major investing and financing activities that do not directly affect cash are summarized in a schedule that accompanies the statement of cash flows or in an attachment in narrative form.

Whereas under US GAAP dividends paid must be classified as financing cash flows, under IFRS interest and dividends paid can be classified either as operating or financing cash flows.

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