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Cash Flow Statement | Financing Activities | Shares and Debentures

Arjun EP

Published on: June 20, 2021

Preparation of Cash Flow Statement

There are two methods to prepare cash flow statement; they are:

(1) Direct method

(2) Indirect method

Both methods have three activities; they are:

(a) Operating activities

(b) Investing activities

Keep in Mind (KIM)

Only operating activities are the difference between direct methods and indirect methods.

Investing activities and financing activities are the same in both methods.

Financing Activities in Cash Flow Statement | Cash Flow Statement

It is based on non-current liabilities or long-term liabilities (liabilities side of balance sheet)

Issue of equity shares, preference shares and debentures; redemption of preference share and debentures; repayment of secured loan and unsecured loan; dividend paid etc are part of investing activities.

An increase in shares and debentures means the issue of shares and debentures.

It is a cash inflow.

Decrease in preference share and debentures mean the redemption of preference shares and debentures.

It is a cash outflow.

Issue of equity shares and premium (common stocks and additional paid in capital)

Issue of preference shares and premium (preferred stocks and additional paid in capital)

Issue of debentures and premium (bonds and additional paid in capital)

Discount on redemption of debentures

A secured and unsecured loan

Bank loan

Dividend paid

Cash flow Statement

Direct Method

CASH FROM FINANCING ACTIVITIES		Amount	Amount
	Cash inflow:
	Issue of equity shares (common stocks)		xxxx
	Issue of preference shares (preferred stocks)		xxxx
	Issue of debentures (bonds)		xxxx
	Long term loan taken		xxxx
	Increase in share premium (additional paid in capital)		xxxx
	Cash outflow:
	Redemption of preference shares		(xxx)
	Redemption of debentures or bonds with premium		(xxx)
	Long term loan repaid		(xxx)
	Dividend paid		(xxx)
Net cash from financing activities (C)			± xxxx

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 3A

The following extracted balances are taken from ABC Company Ltd

Particulars	31 Dec 2020	31 Dec 2021
Equity shares capital (common stocks)	9,00,000	12,00,000
Share premium (additional paid in capital)	90,000	1,20,000
9% Debentures (9% Bonds)	3,00,000	1,50,000
10% Preference shares capital (preferred stocks)	4,00,000	3,00,000
Dividend paid		1,20,000

Required: Cash from financing activities

[Answer: ($40,000)

SOLUTION:

Cash flow Statement

Direct Method

Particulars		Amount	Amount
CASH FROM FINANCING ACTIVITIES
	Cash inflow:
	Issue of equity shares (common stocks)		3,00,000
	Increase in share premium (additional paid in capital)		30,000
	Cash outflow:
	Redemption of debentures (bonds)		(1,50,000)
	Redemption of preference shares (preferred stocks)		(1,00,000)
	Dividend paid		(1,20,000)
Net cash from financing activities (C)			(40,000)

Keep in Mind (KIM)

Equity shares never decrease viz cannot redeem.

Increased equity shares mean the issue of shares viz cash inflow.

Increased in share premium means cash inflow.

Increase preference shares mean the issue of shares viz cash inflow.

Increase debentures mean the issue of shares viz cash inflow.

Decreased in preference shares means the redemption of share viz cash outflow.

Decreased in debentures means the redemption of debentures viz cash outflow.

Premium on redemption of debentures means capital loss viz cash outflow.

Dividend paid is always cash outflow.

Debentures are issued by a limited company; bonds are issued by the government.

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 3B

The following extracted balances are taken from ABC Company Ltd

Particulars	31 Dec 2020	31 Dec 2021
Equity shares capital (common stocks)	9,00,000	12,00,000
Share premium (additional paid in capital)	90,000	1,20,000
9% Debentures (bonds)	3,00,000	1,50,000
10% Preference shares capital (preferred stocks)	4,00,000	3,00,000
Retained earnings	6,00,000	7,80,000

Additional information:

(a) Net profit for the year was $300,000. (b) Debentures redeemed at 10% premium.

Required: Cash from financing activities

[Answer: ($55,000)

SOLUTION:

Given and working note:

Retained Earnings Account

Particulars	Amount	Particulars	Amount
To Bank (dividend paid, b/f)	120,000	By Beginning balance	600,000
To Ending balance	780,000	By P&L or IS (NIAT)	300,000
	900,000		900,000

Now,

Cash flow Statement

Direct Method

Particulars		Amount	Amount
CASH FROM FINANCING ACTIVITIES
	Cash inflow:
	Issue of equity shares (common stocks)		3,00,000
	Increase in share premium (additional paid in capital)		30,000
	Cash outflow:
	Redemption of debentures (bonds)		(1,50,000)
	Premium on redemption of debentures		(15,000)
	Redemption of preference shares (preferred stocks)		(1,00,000)
	Dividend paid		(1,20,000)
Net cash from financing activities (C)			(55,000)

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PROBLEMS AND ANSWERS OF CASH FLOW STATEMENT

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 3A

Following is the extracted information from MN Company Ltd:

Details	Year 2020	Year 2021
Equity shares capital (common stocks)	500,000	800,000
Share premium (additional paid in capital)	60,000	90,000
5% Preference shares (preferred stocks)	300,000	500,000
6% Debentures (bonds)	300,000	200,000
Long-term loan	150,000	70,000
Dividend paid during the year	–	50,000

Required: Net cash from financing activities

[Answer: Inflow = $300,000]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 3B

Following is the extracted information from ASD Company Ltd:

Details	Year 2020	Year 2021
Equity shares capital (common stocks)	600,000	800,000
8% Preference shares (preferred stocks)	200,000	200,000
5% Debentures (bonds)	300,000	150,000
Retained earnings	70,000	90,000
Net profit during the year	–	50,000