Financing ActivitiesFinancing activities are transactions or business events that affect long-term liabilities and equity.

In other words, financing activities are transactions with creditors or investors used to fund either

company operations or expansions. These transactions are the third set of cash activities

displayed on the statement of cash flows.

Financing activities show how a company funds its operations and expansions externally. Internal

financing is not included. For example, a company that pays for its own plant expansion doesn’t

need financing. Thus, no financing activities exist because equity and liability accounts are

unchanged by the expansion.

Both investors and creditors are interested to see how efficiently a business can use its existing

cash to fund operations and how effectively it can raise capital for upcoming projects. In a way,

the financing activities section of the cash flow statement indicates how liquid a company is.

Example

Financing activities include both cash inflows and outflows from creditors and investors.

Cash inflows from creditors usually consist of new loans issued to the company, while

cash outflows from creditors include loan and interest payments. Issuances of bonds

and bond payments are also consisted financing activities.

Cash inflows from investors occur from newly issued stock or contributions from

partners; whereas, cash outflows from investors consist of dividends and owner

distributions.

Not all financing activities affect cash, however. Some projects are financed directly.

Take a company building a new building for example. If the building is completely

financed by a mortgage, the cash account is never changed. The liability account is

increased and the building account is increased.