Is receiving cash from common stock a financing activity?

Cash flow from financing activities refers to the inflow and the outflow of cash from the financing activities of the company like change in capital from the issuance of securities like equity shares, preference shares, issuing debt, debentures, and from the redemption of securities or repayment of a long term or short term debt, payment of dividend or interest on securities.

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• List of Items included in Cash Flow from Financing Activities
• How to Calculate Cash flow from Financing Activities?
• Cash flow from Financing Activities Example
• Apple Example
• Amazon Example
• JPMorgan Bank Example
• What Analyst should know?
• Cash Flow from Financing Activities Video
• Recommended Articles
• Is common stock part of financing activity?
• Is common stock operating financing or investing?
• What type of activity is issuance of common stock for cash?
• Is cash paid to stockholders a financing activity?

It is the last of the three parts of the cash flow statement that shows the cash inflows and outflows from finance in an accounting year; Financing activities include cash inflows that are generated from getting funds like inflows from receipts from the issue of shares, receipts from a loan taken, etc. and cash outflows that are incurred while repaying such funds such as redemption of securities, payment of dividend, loan & interest repayment, etc.

In a nutshell, we can say that cash flow from financing activities reports the issuance and repurchase of the company’s bonds and stock and the payment of dividends. It reports the capital structure transactions. Items are found in the balance sheet’s long-term capital section and the statement of retained earnings.The statement of retained earnings is the financial record that reconciles the retained earnings fluctuation caused by the net income and dividend payout. It also shows the opening balance and closing balance of the retained earnings.read more

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For eg:
Source: Cash Flow From Financing Activities (wallstreetmojo.com)

List of Items included 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)
• The 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 at the end of the king.

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

Let us look at how this section of the cash flow statementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more is prepared. Understanding the preparation method will help us evaluate what all and were all to look into so that one can read the fine prints in this section.

How to Calculate Cash flow from Financing Activities?

Let’s assume that Mr. X has started a new business and has planned that he will prepare his financial statementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more like income statement, balance sheet, and cash-flow statement at the end of the month.

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

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 calculate 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.

Also, assume that the Common dividends declaredDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.read more – $17,000

Calculate Cash Flow from Financing. 

To prepare the cash flow from Financing, we need to look at the Balance Sheet itemsAssets such as cash, inventories, accounts receivable, investments, prepaid expenses, and fixed assets; liabilities such as long-term debt, short-term debt, Accounts payable, and so on are all included in the balance sheet.read more that include Debt and Equity. Besides, we 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 note that we do not make the changes in retained earningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more as retained earnings are 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 Financing Activities Formula = $10,000 – $20,000 – $7,000 = $17,000

Apple Example

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

source: Apple 10K

This article is another major component of cash spending, and investors look at it in detail. It is indicative of the kind of financing activity undertaken by the company in a particular area. In FY15, Apple incorporation spent $20,484 million in financing activities. A 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 the company has been paying a dividend of over $11000 million each year. Investors who don’t wait for capital appreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more 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 the company has been generating steady returns. The company is generating ample cash and is using the same to buy back stocks. Over the last three years, the average repurchase amount has been over $35,000 million.
• The third most interesting thing from the above statement is that the company has been taking long-term debts. It might be one of the ways the company is financing its activities. However, as an Apple incorporation, which is sitting on a pile of cash, it would be interesting to question why such an entity will take on more long-term debt. It can be either a business decision or is it because borrowing rates have been at an all-time low, and the cost of financing through equity is not feasible. Also, note that the company, on the one hand, is repurchasing shares, and hence taking more money from the equity marketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).read more can be counterproductive.

Amazon Example

Let’s now look at another company’s cash flow from operationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more and see what it speaks about the company. It is the case of an e-commerce venture Amazon Inc. The company, for years, didn’t generate accounting profitAccounting profit is the net income available after deducting all explicit costs and expenses from total revenue, and it is calculated in accordance with generally accepted accounting principles (GAAP). Operating expenses, labour, transportation, and sales expenses are common examples of these costs.read more, but investors kept putting money into the company on the backdrop of the sound business proposition and huge cash generated from operations.

source: Amazon 10K

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

• Cash outflows were majorly related to repayments of long-term debt, capital leaseA capital lease is a legal agreement of any business equipment or property equivalent or sale of an asset by one party (lesser) to another (lessee). The lesser agrees to transfer the ownership rights to the lessee once the lease period is completed, and it is generally non-cancellable and long-term in nature.read more obligation, and financial lease obligation.
• Proceeds from Long-term financingLong term financing means financing by loan or borrowing for a term of more than one year by way of issuing equity shares, by the form of debt financing, by long term loans, leases or bonds, done for usually extensive projects financing and expansion of the company.read more have continuously been positive and very high. It is indicative of the fact that the company has continuously been borrowing long-term debt.
• Repayments of long-term financing show a huge cash outflow. It is indicative of the fact that the company has been extensively paying off its long term debtLong-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company's balance sheet as the non-current liability.read more. If we see the two in conjunction, one can see that the company has been taking a stable long-term debt position and is paying an 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.

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. It will give us good coverage of how companies classify different functions under ‘cash flow from financing activities.’

source: JPMorgan 10K

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

• The bank has been buying many federal funds for the last three years. It is more because of how the economy is shaping up. The government is mopping up funds and issuing new debt in the market. Banks are picking up this debt, and hence fund outflow as many federal funds are being purchased.
• The economy has turned a circle, and banks can pay steady dividends. The quantum of the dividend has been steadily increasing over the last five years. It is indicative that banks are now out of turmoil, which they faced in 2008-2009.

What Analyst should know?

Until now, we have seen three companies in three different industries and how cash means different things 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 crucial to understand that the statement should not be singled out and seen. They should always be seen in conjunction with other statements and management discussion & analysis.

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

Conclusion

Investors used to look into the income statement and balance sheet for clues about the company’s situation. However, over the years, investors have now also started looking at each of these statements alongside the conjunction of cash flow statements. This 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 can see that cash flow from financing activities is a great indicator of the core financing activity of the company.

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

Cash Flow from Financing Activities Video

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This has been a guide to Cash Flow from Financing Activities, formula, and its calculations. Here we also discuss cash flow from financing activities, examples of Apple, JPMorgan, and Amazon.

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