The sale of stock and the sale of bonds are reported as financing activities. Are payments of dividends to shareholders and payments of interest to bondholders also reported as financing activities? Explain.
Solution
The payment of cash dividends to shareholders is classified as a financing activity.
FINANCING ACTIVITIES include transactions between the company and its owners and creditors. That is, they include the sale or buyback of stocks or bonds issued by the company and dividend payments by the company to its shareholders.
In general, changes involving noncurrent liabilities and stockholders\' equity are reported in the financing activities section.
Note the difference between investing and financing activities in the context of the purchase and sale of stocks and bonds. When you buy or sell the stock or bond issued by someone else, it is considered an investing activity. When you issue (sell) or buy back stock or bonds that you had issued, it is considered part of a financing activity.
Cash inflows from financing activities arise when the company issues stock or borrows (by issuing a bond or by signing a note, or otherwise).
Cash outflows from financing activities arise when the company buys back its own stock or bonds, repays loans, or pays dividends to shareholders.
Note that dividends paid to shareholders are considered to be part of financing activities, but interest paid to bondholders is included only as an operating activity. Furthermore, as noted earlier, both dividend and interest revenues received by the company are included in cash flows from operating activities section.
NONCASH INVESTING AND FINANCING ACTIVITIES include noncash transactions that effect both noncurrent assets and noncurrent liabilities or owners\' equity.
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The sale of stock and the sale of bonds are reported as financing acti.docx
1. The sale of stock and the sale of bonds are reported as financing activities. Are payments of
dividends to shareholders and payments of interest to bondholders also reported as financing
activities? Explain.
Solution
The payment of cash dividends to shareholders is classified as a financing activity.
FINANCING ACTIVITIES include transactions between the company and its owners and
creditors. That is, they include the sale or buyback of stocks or bonds issued by the company and
dividend payments by the company to its shareholders.
In general, changes involving noncurrent liabilities and stockholders' equity are reported in the
financing activities section.
Note the difference between investing and financing activities in the context of the purchase and
sale of stocks and bonds. When you buy or sell the stock or bond issued by someone else, it is
considered an investing activity. When you issue (sell) or buy back stock or bonds that you had
issued, it is considered part of a financing activity.
Cash inflows from financing activities arise when the company issues stock or borrows (by
issuing a bond or by signing a note, or otherwise).
Cash outflows from financing activities arise when the company buys back its own stock or
bonds, repays loans, or pays dividends to shareholders.
Note that dividends paid to shareholders are considered to be part of financing activities, but
interest paid to bondholders is included only as an operating activity. Furthermore, as noted
earlier, both dividend and interest revenues received by the company are included in cash flows
from operating activities section.
NONCASH INVESTING AND FINANCING ACTIVITIES include noncash transactions that
effect both noncurrent assets and noncurrent liabilities or owners' equity.
