Borrowing money from a bank is a financing activity on the statement of cash flows.

Accounting

Understand the Cash Flow from Financing Activities Section of the CFS

Inhaltsverzeichnis Show

What is Cash Flow from Financing Activities?
Cash Flow from Financing Section
Cash Flow from Financing Line Items
Interest Expense and Cash from Financing
Cash Flow from Financing Activities Formula
Cash from Financing Formula
Cash Flow from Financing — CFS Final Step
Is borrowing money from a bank financing activity?
Is borrowing money on the statement of cash flows?
What type of activity is borrowing from a bank?
What are financing activities on a cash flow statement?

What is Cash Flow from Financing Activities?

Cash Flow from Financing Activities tracks the net change in cash related to raising capital (e.g. equity, debt), share repurchases, dividends, and repayment of debt.

In This Article

What is the definition of cash flow from financing activities?
What are the steps to calculating the cash flow from financing activities section?
Which specific line items appear in the cash from financing section?
Should interest expense be accounted for in the cash flow from financing section?

Table of Contents

Cash Flow from Financing Section
Cash Flow from Financing Line Items
Interest Expense and Cash from Financing
Cash Flow from Financing Activities Formula
Cash from Financing Formula
Cash Flow from Financing — CFS Final Step

Cash Flow from Financing Section

The cash flow statement, which tracks the net change in cash during a specific period, is split into three sections:

Cash Flow from Operating Activities (CFO): Net income from the income statement is adjusted for non-cash expenses and changes in net working capital (NWC).
Cash Flow from Investing Activities (CFI): The cash impact from the purchase of non-current assets, namely PP&E (i.e. CapEx).
Cash Flow from Financing Activities (CFF): The net cash impact of raising capital from equity/debt issuances, net of cash used for share buybacks, and debt repayments — with the outflow from the payout of dividends to shareholders also taken into account.

Cash Flow from Financing Line Items

Cash from Financing	Definition
Debt Issuances	Raising external financing by borrowing funds from lenders, with the obligation to pay interest throughout the holding period and the full principal at the end of the lending term
Equity Issuances	Raising external financing by issuing shares (i.e. pieces of ownership) in exchange to equity investors in the market, who become partial owners post-investment
Share Buybacks	Repurchasing shares that were previously issued and trading in the open market to reduce the total number of shares in circulation (and the net dilution)
Debt Repayment	As part of the loan agreement, the borrower must repay the full debt principal (i.e. the original amount) on the date of maturity
Dividends	Issuing recurring or one-time cash payments to equity shareholders as a form of compensation (i.e. the return of capital)

Interest Expense and Cash from Financing

One common misconception is that interest expense — since it is related to debt financing — appears in the cash from financing section.

However, interest expense is already accounted for on the income statement and affects net income, the starting line item of the cash flow statement.

Cash Flow from Financing Activities Formula

The formula for calculating the cash from financing section is as follows:

Cash from Financing Formula
Cash from Financing = Debt Issuances + Equity Issuances + (Share Buybacks) + (Debt Repayment) + (Dividends)

Note that the parentheses signify that the item is an outflow of cash (i.e. a negative number).

By contrast, debt and equity issuances are shown as positive inflows of cash, since the company is raising capital (i.e. cash proceeds).

Debt Issuances → Cash Inflow
Equity Issuance → Cash Inflow
Share Buybacks → Cash Outflow
Debt Repayment → Cash Outflow
Dividends → Cash Outflow

Cash Flow from Financing — CFS Final Step

To wrap up, the cash flow from financing is the third and final section of the cash flow statement.

The cash from financing amount is added to the prior two sections — the cash from operating activities and the cash from investing activities — to arrive at the “Net Change in Cash” line item.

The net change in cash for the period is added to the beginning cash balance to calculate the ending cash balance, which flows in as the cash & cash equivalents line item on the balance sheet.

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Is borrowing money from a bank financing activity?

If a company borrows money, this is a financing activity. There are some inflows from financing activities including borrowing money or selling common stock. Outflows from financing activities include paying the principal part of debt (a loan payment), buying back your own stock or paying a dividend to investors.

Is borrowing money on the statement of cash flows?

When a company receives a loan, it records the principal amount as a cash inflow on the financing activities section of its cash flow statement. This reflects that the business brought in this amount of money in the given time period, which increases the company's cash flow.

What type of activity is borrowing from a bank?

Sources of cash provided by financing activities include: Borrowing money on a short-term basis and/or long-term notes basis from a bank or other lenders. Issuing bonds payable.

What are financing activities on a cash flow statement?

The financing activity in the cash flow statement focuses on how a firm raises capital and pays it back to investors through capital markets. These activities also include paying cash dividends, adding or changing loans, or issuing and selling more stock.