Introduction
Understanding cash flows from financing activities is crucial for businesses to assess their financial health and make informed decisions. The Generally Accepted Accounting Principles (GAAP) provide a framework for reporting these cash flows accurately and transparently. In this article, we delve into the computation of cash flows from financing activities based on the given information.
Purchase of Investments
The purchase of investments for $250 is considered a cash outflow from financing activities. This indicates that the company has invested in external entities, such as stocks or bonds, as part of its financing strategy.
Dividends Paid
Dividends paid amounting to $1,200 represent a cash outflow from financing activities. This indicates that the company has distributed a portion of its profits to its shareholders.
Interest Paid
Interest paid, totaling $400, is not considered a cash flow from financing activities under GAAP. Instead, it is categorized as a cash flow from operating activities as it relates to the company's day-to-day operations.
Additional Borrowing from Bank
The additional borrowing of $2,800 from a bank is a cash inflow from financing activities. This signifies that the company has secured external funding to support its operations or growth initiatives.
Computation of Cash Flows from Financing Activities
To calculate the net cash flows from financing activities, we sum up all the cash inflows and deduct the cash outflows. In this case, the cash inflow from additional borrowing ($2,800) is added to the cash outflows from the purchase of investments ($250) and dividends paid ($1,200). Therefore, the net cash flows from financing activities would be $2,350 ($2,800 - $250 - $1,200).
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