## Financing Activities (AS 3)

Definition: Activities that result in changes in the size and composition of the owners' capital and borrowings of the enterprise.

### Cash Inflows from Financing Activities

Proceeds from issuing shares or other equity instruments
Proceeds from issuing debentures, preference shares, bonds
Proceeds from loans/borrowings taken

### Cash Outflows from Financing Activities

Buyback of shares
Redemption of debentures, preference shares, bonds
Repayment of loans/borrowings
Interest paid on debentures, loans, bonds (cost of raising borrowed funds) — for non-financial entities
Dividend paid on shares issued — for non-financial entities

### Key Principle

> The cost of raising funds (interest on borrowings, dividend on shares) is classified under Financing for non-financial entities.

### Issue of Shares: Universal Rule

> Issue of shares is always Financing for ALL entities (both financial and non-financial institutions). It can never be Operating.

Worked example

### Example 1

Debenture issue and redemption: XYZ Ltd issues 12% debentures raising ₹50L → Inflow – Financing. At year end pays interest ₹6L → Outflow – Financing. After 5 years redeems debentures ₹50L → Outflow – Financing.

### Example 2

Equity issue and dividend: Company issues equity shares for ₹30L → Inflow – Financing. Pays equity dividend ₹3L → Outflow – Financing.

### Example 3

Bank loan: Takes term loan of ₹20L from bank → Inflow – Financing. Pays EMI of ₹2L (₹1.5L principal + ₹0.5L interest) → Principal ₹1.5L is Outflow – Financing; Interest ₹0.5L is also Outflow – Financing (for non-financial entity).

⚠️ Common exam mistakes

Classifying interest paid as Operating for non-financial entities — it is Financing (cost of borrowed capital).
Classifying dividend paid as Operating for non-financial entities — it is Financing.
Treating preference dividend as Operating because preference shares look 'debt-like' — dividend paid on any shares is Financing.

Bare-Act text Para 6 – Definitions · AS 3 – Cash Flow Statements · click to expand

Financing activities are activities that result in changes in the size and composition of the owners' capital (including preference share capital in the case of a company) and borrowings of the enterprise.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

AS 3 – Financing Activities: Definition and Examples

Worked example

⚠️ Common exam mistakes