What is the difference between investing and financing activities?

2. Nature of financing activities

Financing activities are business activities that involve issuing and paying off debt, issuing preferred and common stock, paying cash dividends, and acquiring treasury stock.

In other words, in general financing activities involve obtaining funds to start and operate a business. Such activities reflect the relationship between the company and its lenders (e.g. bank) and owners (e.g., shareholders). For instance, issuing bonds and repaying the debt is a financing activity that involves creditors while paying cash dividends is a financing activity that involves owners.

Cash flows from financing activities are usually reported in the third section of the statement of cash flows. Typical financing cash flows are presented below.

Cash inflows from financing activities:

  • Issuing notes payable
  • Issuing bonds
  • Issuing preferred and common stock

Cash outflows from financing activities:

  • Repaying debt (i.e., principal)*
  • Paying cash dividends**
  • Buying treasury stock

(*) Interest expense payments on debt are reported as an operating activity because interest expense involves income determination.

(**) Paying cash dividends is not an operating activity because cash dividends do not represent an expense. Cash dividends reduce retained earnings and thus represent a financing activity.

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