 The statement of cash flows is divided into three categories, operating activities, investing activities and financing activities. This video will focus on financing activities section. Financing activities relate to transactions affecting cash inflows and outflows for long term liabilities and equity. These areas are sometimes called debt financing and equity financing, and they are the two ways businesses can finance their long term assets. In order to prepare a statement of cash flows, we need some financial information. Specifically, we need a current year's income statement, a comparative balance sheet and some additional financial data. A comparative balance sheet is just a balance sheet that compares two years of data. So let's use the example of APU's Quickie Mart. Here's the income statement we will reference. Here's the comparative balance sheet and you can see the years 2015 and 2016. And finally, some additional financial data. Many assignments you might encounter will provide this information to you, but I will show you how to calculate that information in case you run into a problem that doesn't present all the pertinent financial data needed. The items highlighted in red are those related to long term liabilities and equity. So a partial statement of cash flows is shown here. The financing activity section is shown directly after the investing activity section. I've identified a couple of items that will go into this section. The first item I've identified is some information about the issuance of common stock. The issuance of common stock for $2,600 is added in the financing activity section because cash is being received in exchange for stock. The next item is a dividend payment of $100. Since cash is being paid for dividends, $100 is deducted in the financing activity section. And actually, that's it for this section, but let me explain why the other long term liability item isn't listed here. We issued bonds in exchange for property, plant and equipment. I've shown the journal entry here so that you can see the cash account is not involved. In fact, this is called a non-cash investing in financing transaction. And there's a separate video that explains how these are reported on the statement of cash flows. Finally, you may encounter questions in which you're not given all of the information that you'll need with the additional financial data. When this happens, I strongly encourage you to write out the T-accounts with the data that you do know and then start solving for what you weren't given. Here I've listed the beginning and ending balances related to common stock. So I can solve for the missing amounts and determine that the total stock issuance was $2,600. Another common example that you might encounter, you may encounter a question in which either net income or dividends are not provided. However, if we know one of these amounts, we can figure out the other. In our example, we know that net income is $6,100. So dividends must be $100 to make the retained earnings account balance. Finally, here's what the statement of cash flows looks like after completing the operating investing and financing activity section. You can see that we have positive net cash flow from financing activities of $2,500. Investors and creditors don't really have expectations about this section, other than growth companies tend to have positive cash flows while more mature businesses generally have negative cash flows from investing activities. This is because the growth companies need cash to grow while mature businesses pay out cash in the form of dividends or in liability reduction. So please watch the video completing the statement of cash flows in direct method to see how all of this information is brought together.