Financing activities involve long-term liabilities and shares of stock, which allow companies to raise capital or repay investors, according to Investopedia and accounting expert Harold Averkamp. Companies report a statement of cash flows, which records the amount of money flowing in and out due to these financing activities.
Financial activities like long-term liabilities include selling or buying bonds, according to Averkamp. Issuing bonds generates a source of cash for companies, which translates into a positive amount in the SCF. Buying or redeeming bonds results in a negative amount because the company is spending money to repurchase bonds or to pay interest on the bond. This attracts investors because the company is reducing its debt, states Investopedia. A company creates greater positive cash flows by selling additional bonds, says Averkamp.
Another important financing activity involves stockholders’ or owner’s equity. Companies can sell their stock – another source of income – and create a positive amount in the SCF, states Averkamp. These stocks include common and preferred stocks, which provide dividends to stockholders. Negative numbers in this section of the company’s SCF means the company is spending cash to make dividend payments, states Investopedia. The company also can create a negative amount by repurchasing its own stock. Cash flow from financing activities determines the company’s financial strength.