Does Issuing Common Stock Increase Cash Flows?
Original post by Calla Hummel of Demand Media
Issuing common stock does not increase cash flow because the act of issuing simply creates more paper stock certificates or electronic stock files. A company can issue stock and then choose to sell it on the open market. Selling newly issued stock brings cash into the company and therefore increases cash flow.
Cash flow refers to how cold, hard cash -- as opposed to other assets like accounts receivable -- comes into and goes out of a business. Cash flow can be used in a number of ways and is detailed in a company's cash flow statement. The cash flow statement lists exactly what activities generate how much cash and how much cash other activities use.
When a company issues stock, it splits ownership into tiny pieces and distributes them. It can opt to issue more stock later, and every time it issues stock it dilutes -- decreases -- the fraction of ownership that every share of stock has. While stock has monetary value, issuing stock is an administrative action that does not directly create revenue. If anything, issuing stock decreases cash flow because the company has to pay someone to complete the task of issuing stock.
Once a company has new, issued stock, it can decide what to do with it. If the company decides to sell the newly issued stock, the company receives money in exchange for stock, increasing its cash flow. On the cash flow statement, the money from selling stock appears as extra cash from financing activities.
When a company sells issued stock, the sale appears on both the balance sheet and the statement of cash flows. On the balance sheet, the sale appears as "paid-in capital," which is the value of the sale minus par value, which is the minimum that the company can sell stock for and is usually a few cents per share. The total value of the sale also appears in the third section of the cash flow statement -- financing activities -- as positive cash flow.
- Accounting Coach; Cash Flow Statement; Harold Averkamp
- Accounting Coach; Paid-In Capital and Retained Earnings; Harold Averkamp
- Zion's Bank: How to Prepare a Cash Flow Statement
- Qwoter: Advantages of Issuing Stock
About the Author
Calla Hummel is a doctoral student studying contraband in international political economy. She supplements her student stipend by writing about personal finance and working as a consultant, as well as hoping that her investments will pan out.