Alright, now let's do the financing activities section of the cash flow statement. So for financing activities, we're gonna be focused on changes in long term liabilities and equity. Alright. So remember when we talked about the indirect method or the direct method, that was only for operating activities, financing is its own beast, just like investing. Okay, so let's think about some of the main cash inflows and outflows from financing activities. So when we talk about inflows, that means we're getting cash. So that could be uh selling bonds or notes payable, right? If we if we sign a note payable and get a loan from from the bank, um the next cash inflow would be issuing equity, right? If we issue equity, that means we're gonna get cash and give out common stock, something like that. And finally, the last cash inflow that you'll probably run into is selling Treasury stock. Right? If we have some Treasury stock and we sell it. Well, that's going to end up as a cash inflow in our financing section. About cash outflows. Well, it's gonna be similar except the opposite. If we repay bonds or notes payable. Those are gonna be cash outflows when we pay off the principal. And I'm gonna say, I want to write that in here, we're talking about the principal, not the interest interest falls into uh it didn't fit there. So I'm gonna put np for notes payable. And I'm gonna say principal. Right? Remember when we're dealing with the interest, expense and the interest paid, that goes into the operating section, when we're dealing with the principal amount, that's when we're dealing with the financing section, like in this segment here. So repaying bonds and notes payable, that's going to be outflows of cash. Well, what about when we pay dividends when we pay dividends to our stockholders? That is also going to be a cash outflow, right? If we pay cash dividends, well, that's gonna be a cash outflow. And if we purchase Treasury stock, these are gonna be the main cash inflows and outflows that you're gonna see. I put T stock there for Treasury stock. Okay. Just like we did with the investing section, we're gonna have to be familiar with a few T accounts when we deal with the financing section. So let's go ahead and deal with the retained earnings account and dividends payable. Now, I want to make a note here about dividends payable because if you think about dividends payable, they are a current liability. Right? But when we're talking about the operating section of the cash flow statement, we are dealing with operating current liabilities, dividends, payable is not an operating current liability. This has to deal with the financing activity of paying dividends. Okay, so you want to be very careful when you see dividends payable and you're doing your operating section of your cash flow that you leave the dividends as part of the financing activities. Because dividends is related to the stockholders and its financing activity, not a operating activity. So let's think about these two T accounts here with the retained earnings, it's going to have some sort of beginning balance right? It's gonna have some sort of beginning balance as a credit right? Because it's an equity account. And what increases the begin the retained earnings is when we have net income, our net income is going to increase our retained earnings and dividends, decreasing retained earnings. Right? You guys should be experts with that by now. We deal with retained earnings all the time. So that's how our retained earnings account is gonna flow. Beginning balance plus the net income minus the dividends gets us to the ending balance. So notice these dividends right here. This is important. Right? The dividends here and these are the dividends. I want to make a note here. These are dividends declared. Right? Remember when we when we talked about dividends and depth, we talked about declaring the dividends on the dividend on the declaration date and then we pay the dividends on the payment date. Right? So when we're thinking of the cash flow statement, what do you think? We're we're focused on the declaring of dividends or the paying of dividends, the paying of dividends. Right. And that comes out of the dividends payable account. So if you guys want to have a refresher on the dividends, I suggest going back to that stockholders equity section and reviewing that dividends lesson. Okay, so let's finish up dividends payable here. So this is a liability account that would have some sort of credit balance um to start and then we would have our dividends declared. We would declare some dividends. That would increase the balance of the dividends payable. And how do we get rid of the balance well by paying those dividends? Right. So we would pay dividends and that would be the amount that we want for our cash flow statement. Right? This is the financing activity, the paying of dividends. That's the financing activity right there. So notice they can give you information about the retained earnings accounts, the dividends declared, and you would have to figure out what the actual payment of dividends was in cash. Okay. So we've seen similar examples when we're dealing with the investing section, where you would have to back into the career, check them out for the cash flow. All right, so you're gonna want to be familiar with the retained earnings and dividends payable account to figure out the amount of dividends paid in cash. Cool. Alright. Let's go into an in depth example about the financing activities
2
example
Financing Activities
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Alright. So on this page we have some financial information for abc company. We've got, we start here with the comparative balance sheet that shows balances for 2018 and 2017. And remember when we're dealing with the financing activities, we're gonna want to focus on our long term liabilities, Our long term liabilities and our stockholders equity. Right? So in this case we're gonna have bonds payable, we're gonna have common stock and retained earnings are important accounts that we're gonna be dealing with here. Okay? So why don't we go ahead and check what the changes were in these accounts and if there were changes we can expect there were some cash flows related to it. So bonds payable, we're 20,000 last year and they went up to 130,000. So that was an increase of 100 and 10,000 in our bonds payable account. Right? It increased by 110,000. So that's a sign that we had some inflow of cash. Right? We we put out more bonds payable and we in flowed cash by taking on this liability. How about common stock? Common stock also increased here by 20,000. It was 60,000 last year. And now it's 80,000. So it increased by 20,000. We would expect there would be some sort of inflow of cash. We issued some stock to increase our cash there. And how about retained earnings? Why would retained earnings matter here because of dividends? Right, we would have some sort of dividend account that would be affecting our retained earnings. So it was 48,000 last year and it went up to 164,000. That increase was 116,000 was the increase in our retained earnings. But we would expect that to have some net income in it as well as dividends paid. Cool. So I don't think we're gonna see anything important on our income statement related to financing activities because all we're worried about is those principal amounts of our long term liabilities, such as repayment or sale of new bonds or long term liabilities as well as our equity transactions. And those equity transactions aren't gonna show up here on the income statement. So let's go ahead and go to our example where we're gonna be given some additional information related to this uh related to this question. So we're looking for cash provided by financing activities using the financial information on the previous page, as well as this additional information. So the company sold equipment with a book value of 7000 cost 8000 less accumulated depreciation for 4000 in cash. That sounds like an investing activity. Right? We're dealing with investing activities there because that's the sale of a long term asset. That has nothing to do with financing activities. The company issued 100 10,000 of long term bonds. So that sounds important to us, right? They issued 100 10,000 for long term bonds and use the proceeds to purchase land. So the proceeds to purchase land that would be investing. But we don't really care about that. We're we're focused on this this financing activity where we issued long term bonds. The company purchased new equipment totaling 145,000. That's not important either. Right? That is an investing activity. The company issued common stock for $20,000 cash. That is important. Right? We're talking about common stock. So we do have a financing activity here. And how about the last one the company declared and paid a $29,000 cash dividend. So when we're paying dividends, that is also a financing activity. So it sounds like we've got a few financing activities here. We can also double check when we look at the changes in those accounts to make sure that we've dealt with everything. So first we had the issuance of long term bonds, so issued bonds and that's an inflow of cash, right? We we had an inflow of 100 and 10,000 because we issued bonds and we got cash now and we'll repay that principal at a later date. We also issued common stock. So if we issued common stock, that means we received cash as well. So I put issued C. S. That's gonna be 20,000 of cash inflow. And the company declared and paid a dividend of 29,000. So if we declare the dividend and paid, we paid dividends. Well that's going to decrease our cash, right? That's an outflow of cash cash. 29,000. And what's that kind of come out to? That's everything we see here. It's 100 and 10 plus the 20 minus the 29,000. We had an inflow of 100 and 1000 from financing activities. So that was noticed. It's positive. So that was an inflow of cash of 101,000. Now let's double check that each of those accounts have been accounted for. We had 100 and $10,000 increase in our bonds account. And that's because we issued these bonds. Right? So notice our bonds account increased by 110,000. And that's directly related to what we saw on our cash flow statement. So that looks good. How about our common stock? It says we issued common stock for 20,000. And that's exactly what we saw for the common stock as well. Right. We saw an increase of 20,000. So that checks out. But what about retained earnings, retained earnings increased by 100 16,000. Let's go ahead and make a T. Account for retained earnings. So I'm gonna make a T account right here on the side for retained earnings. And remember we're gonna have some beginning balance as a credit, then we're gonna increase it with our net income, We're gonna pay dividends that will decrease our retained earnings and that will get us to our ending balance and retained earnings. Cool. So let's go up and let's see what these balances were. The beginning and ending balance says retained earnings, beginning balances for 48,000 and it went up to 164,000. So let's go ahead and put those in here 48,000 and it went up to 100 and 64,000. Cool. So those are our beginning and ending balances. How about net income that will come from the income statement? Right? So if we look on the income statement, it tells us net income was 100 and 45,000 right here. 145,000. So we can put that into our T account right here. 145,000. And it told us that there was 29,000 in dividends. So that should totally work out here. Let's go ahead and make sure that all our numbers work out just just to be 100% sure that everything is done. 48,000 plus 145,000 minus the 29,000 and dividends gets us to the ending balance of 100 and 64,000. So it looks like we've accounted for everything. We looked at all our long term liability accounts, all our equity accounts and we've accounted for all the changes in those accounts. And that ends us with this financing activity increase of 101,000. So now that we've dealt with the operating activities, investing activities and financing activities, you can put it all together to make a cash flow statement, right? We would find the change from operation, operating activities change from investing activities, change from financing activities. And that will be the total change in cash during the period. Cool, Alright, let's pause here and do some practice.
3
Problem
Which of the following is a cash flow from financing activities?
A
The prepayment of a year’s worth of rent
B
Sale of a piece of land no longer used in retail
C
Payment of dividends
D
Payment of interest
4
Problem
The exchange of land worth $110,000 for 50,000 shares of common stock in the company would be an:
A
Operating Activity
B
Investing Activity
C
Financing Activity
D
None of the Above
5
Problem
Turkey Company is preparing its Statement of Cash Flows and gathered the following information:
1. Since the previous year:the cash account increased by $35,000, land increased by $40,000, Equipment decreased by $15,000, Accumulated Depreciation – Equipment increased by $6,000, Retained Earnings increased by $340,000, and Bonds Payable increased by $100,000,
2. Depreciation expense for Equipment totaled $16,000.
3. Equipment with a purchase price of $15,000 was sold for a $2,000 gain.
4. Turkey loaned $24,000 to Potatoes Company signing a long-term note receivable.
5. Net income was $420,000.
6. Turkey issued 100,000 shares of $5 par value common stock. The additional paid-in capital from this transaction was $300,000.
What is Turkey Company’s net cash flow from financing activities?