Question

What does the cash flows from financing activities section tell investors and creditors? Why is this section important?

Answer 1

Answer:

The cash flows from financing activities section tell investors and creditors the flows of cash between firm and its owners and investors. This section focuses on how a firm raises capital and pays it back to investors. The financing activities include:

• Receiving cash from issue of shares and using cash to repurchase shares
• Receiving cash from issuing debts and using cash to retire debts
• Cash used to pay dividends
• Proceeds from employee exercising stock options

The section is important because since:

This section shows how is the company funding its business. If business required additional funds to support/expand operations the company accesses the capital market to raise funds through issuance of debt or equity. The choice between debt or equity is guided by factors like target capital structure, cost of capital, existing financial health of the company.