Explain the major Cash Inflows and outflows from financing activities.
Financing activities relate to long-term funds or capital of an enterprise. As per AS-3, these activities result in changes in the size and composition of the owners' capital (including preference share capital) and borrowings of the enterprise. Separate disclosure of cash flows from financing activities is important as it helps predict claims on future cash flows by providers of funds.
The major Cash Inflows from financing activities include: Cash proceeds from issuing shares (equity or preference), and Cash proceeds from issuing debentures, loans, bonds and other short-term/long-term borrowings. These represent funds raised by the enterprise from various sources.
The major Cash Outflows from financing activities include: Cash repayments of amounts borrowed, Interest paid on debentures and long-term loans and advances, and Dividends paid on equity and preference capital. Additionally, redemption of preference shares, buy back of own equity shares, and redemption of debentures and payment of long-term debts are also outflows.
It is important to note that a transaction may include cash flows classified differently. For example, when instalment paid for a fixed asset acquired on deferred payment basis includes both interest and loan, the interest element is classified under financing activities while the loan element is classified under investing activities.
Explanation
The answer is derived from section 6.5.3 of the textbook which defines financing activities and lists the specific inflows and outflows. The context clearly distinguishes between cash inflows (proceeds from shares, debentures, loans) and outflows (repayments, interest paid, dividends paid). The textbook also provides the important clarification about transactions having mixed classifications, such as deferred payment instalments where interest goes under financing and principal under investing activities.