Financing activities involve long-term liabilities, stockholders' equity (or owner's equity) , and changes to short-term borrowings. Financing activities are reported in its own section of the financial statement known as the statement of cash flows (SCF) or cash flow statement.
Examples of financing activities that involve long-term liabilities include the issuance or redemption of bonds. An increase in bonds payable is reported as a positive amount in the financing activities section of the SCF. The positive amount signifies a source of cash, or that cash was provided by issuing additional bonds. A decrease in bonds payable will be reported as a negative amount in the financing activities section of the cash flow statement. A negative amount connotes that cash was used to repurchase or redeem the corporation's bonds.
Examples of financing activities involving stockholders' equity include the issuance of common stock or preferred stock. Increases in these stock accounts will be reported as positive amounts in the financing activities section of the SCF. Positive amounts communicate that cash was provided by issuing more shares of stock—a source of cash. Examples of uses of cash (which are reported as negative amounts) in the financing activities section of the cash flow statement include a corporation's purchase of its own stock, and dividends declared and paid on its stock. (The increase in retained earnings resulting from the corporation's net income is reported in the operating activities section of the SCF.)
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