Why is separate disclosure of cash flows from financing activities important?

To predict claims on future cash flows by fund providers

The separate disclosure of cash flows from financing activities in a cash flow statement is important primarily to predict and assess the claims that fund providers, including both owners and creditors, may have on the company's future cash flows. This information is valuable for stakeholders, such as investors, creditors, and analysts, as it allows them to understand how the company is managing its financial structure and the extent to which it relies on external sources of financing. Financing activities involve transactions that lead to changes in the size and composition of owners' capital (such as issuing shares) and borrowings (such as loans and debentures). These activities reflect the company's interactions with its investors and creditors and influence its capital structure. The disclosure of cash flows from financing activities helps stakeholders evaluate the financial risk associated with a company's capital and borrowing decisions. By understanding the company's financing sources, they can assess the company's ability to meet its obligations, including repayment of loans and dividends to shareholders.