Raising Equity / Capital

When a company raises equity, unlike when it raises debt, it is reported in the Cash Flow Statement as a cash inflow, and nothing ever shows up in the Income Statement. There is no interest expense incurred because the company is selling part of itself to outsiders. The process of raising equity sometimes is much complicated than raising debt.

For example, a group of investors initially owns 50% of the company. The company increases its equity by bringing in new investors. Shareholdings of the existing group thereafter will be decreased (or diluted). They may not be happy about this and might fight back if the company wants to increase its equity. They might also start making other demands on the company, such as certain financial targets or other “special favors.”

As business of our organic food store is very promising, we decide to pump $10,000 cash into the company with our own savings. As we pumped in 10,000 to the company, we have to record this transaction in the Cash flows from financing activities section.

Cash Flow StatementYear 1Year 2
Cash flows from operating activities
Net Income28,804.0051,034.00
(Gains) / Losses on disposal of quoted shares0.00(1,000.00)
Changes in working capital
(Increase)/Decrease in Inventory0.00(22,000.00)
(Increase)/Decrease in Accounts Receivable0.00(45,000.00)
(Increase)/Decrease in Prepaid Expenses0.00(16,000.00)
Increase/(Decrease) in Accounts Payable0.004,000.00
Increase/(Decrease) in Deferred Revenue0.0011,500.00
Net cash from operating activities28,804.00(11,466.00)
Cash flows from investing activities
Capital Expenditures0.00(18,000.00)
Acquisition of quoted shares0.00(10,000.00)
Disposal of quoted shares0.0011,000.00
Net cash from investing activities0.00(17,000.00)
Cash flows from financing activities
Proceeds from bank borrowings0.0050,000.00
Repayment of bank borrowings0.00(5,000.00)
Shares Issuance0.0010,000.00
Net Cash from financing activities0.0055,000.00
Net Change in Cash28,804.0026,534.00

We must also reflect the transaction in our Balance Sheet as the new fund $10,000 will increase our Equity.

Balance SheetYear 1Year 2Explanation
Current Assets
Accounts Receivable0.0045,000.00
Prepaid Expenses0.0016,000.00
Short-Term Investments0.000.00
Total Current Assets30,000.00139,534.00
Long Term Assets
Property, plant and equipment0.0012,000.00
Total Long Term Assets0.0012,000.00
Total Assets30,000.00151,534.00
Liabilities & Equity
Current Liabilities
Accounts Payable0.004,000.00
Deferred Revenue0.0011,500.00
Total Current Liabilities0.0015,500.00
Long Term Liabilities
Total Long Term Liabilities0.0045,000.00
Toal Liabilities0.0060,500.00
Equity30,000.0091,034.00We also have to change the formula of calculating equity:

[Year 2 Equity] = [Year 1 Equity] + [Net Income] + [Shares Issuance]

91,034.00 = 30,000.00 + 51,034.00 + 10,000.00
Total Liabilities & Equity30,000.00151,534.00

Impact of Raising Equity to the Financial Statements in a Glance

Impact of Raising Equity to the Financial Statements in a Glance

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