06 Apr Financing Activities
What are Financing Activities?
Definition: The financing activities of a firm refer to matters pertaining to its long-term and short-term liabilities. The term includes the raising of funds by issuing equity capital and borrowings in the form of bank loans and bond issues.
What does the term Financing Activities mean?
Each of the transactions listed below is a financing activity:
- A company may require long-term funds to finance its expansion plans. It could decide to issue bonds to investors to pay for setting up a new factory or expanding into an overseas market.
- A company could increase its capital by issuing shares. New stock could be issued through an initial public offering (IPO). Another option is to issues shares to institutional investors.
- Financing activities are not restricted to raising funds. Even the repayment of a loan is considered to be a financing activity.
- A company may decide to repurchase its stock. This will involve a financing activity as will the payment of a dividend.
However, it is important to remember that certain types of activities involving the use of funds are not termed as financing activities. For example, when a firm utilizes its internal resources to buy new equipment, the transaction does not fall within the scope of a financing activity.
Example of Financing Activities
The following are examples of financing activities of Jerome Construction Corporation (JCC):
- JCC issues stock of a total value of $15,000,000.
- Loans of a value of $3,000,000 are repaid by JCC.
- JCC raises $1,000,000 through a bond issue.
- JCC pays a dividend of $750,000 to its shareholders.
A transaction that involves the raising or repaying of money by a company is referred to as a financing activity. The transfer of funds could take place between the company and its investors, creditors, bankers, or other external parties. Business organizations use financing activities to meet their fund requirements and to manage their operational activities.