One of those three groups cash flows are presented on the statement of cash flows is ‘Financing activities’. The ‘in’ and ‘out’ flows are both presented using the direct method, which we’ll cover later on in more detail, but for now, just keep it in mind. So, which cash movements are presented under financing activities and what should you look out for?

When the meaning of ‘operating’ and ‘investing’ is more clear, ‘financing’ is something that is sometimes confused with ‘investing’. I have encountered in practice that the ‘proceeds from share issuing’ are presented under ‘Investing’ rather than under ‘Financing’ activities.

What should help someone in classifying those flows is a simple rule. If the company itself uses its resources to acquire something and consequently sells this something, it’s investing. However, if a company first off receives money from someone in the form of proceeds from shares, bonds or loans, it’s financing. All this is done from one perspective – the company’s one. So as a company, if it gives someone its resources, the company is investing it’s assets to acquire new ones. If someone is giving money to the company, they are yes investing, but the company gets financing from investors. It’s really this simple. For an example as a result, loans granted by the company are under ‘Investing activities’ and borrowings granted to the company are under ‘Financing activities’.

There is of course a catch with the flows under ‘Financing activities’. There always is one, if you ask me. The outflows from ‘Dividends paid’ are sometimes under this group on the statement and sometimes under
‘Operating activities’. The thought process behind this is as follows: if a company is presenting the cash flows from dividends paid as a part of operating activities, it shows that the company is able to pay to the owners from the cash generated from everyday business activities and not loans or something else. So in a nutshell, if the net cash flows from operating activities are still positive after adding the outflows from dividends, it should be shown there. That’s the general rule.

In short, the financing activities are the ones where company first receives money and then pays it back in the form of repayment of loans or bonds etc.