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The
statement of cash flows classifies cash receipts and
cash payments by operating, investing, and financing
activities. Transactions and other events
characteristics of each kind of activity are as
follows:
-
Operating activities
-
Investing activities
-
Financing activities
These
business activities are briefly explained below:
Operating Activities:
Operating activities involve the cash effects of
transactions that enter into the determination of
net income, such as cash receipts from sales of
goods and services and cash payments to suppliers
and employees for acquisitions of inventory and
expenses.
Investing Activities:
Investing activities generally involve long-term
assets and include:
Financing Activities:
Financing activities liability and stockholders;
equity items and include:
-
Obtaining cash from creditors and repaying the
amounts borrowed.
-
Obtaining capital from owners and providing them
with a return, and return of, their investment.
Examples of Typical Cash Receipts and Payments of a
Business Enterprise
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Operating Activities
Cash inflows:
From sale of goods and services
From returns on loans
(interest) and on equity securities
(dividend)
Cash outflows:
To suppliers for
inventory
To employees for service
To government for taxes
To lenders for interest
To others for expenses |
Income
Statement Items |
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Investing Activities
Cash inflows:
From sale of property, plant, and
equipment.
From sale of debt or equity securities
of other entities.
From collection of principal on loans to
other entities.
Cash outflows:
To purchase property,
plant, and equipment.
To purchase debt or
equity securities of other entities.
To make loans to
entities. |
Generally
Long-term Asset Items |
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Financing Activities
Cash inflows:
From sale of equity
securities.
From issuance of debt
(bonds and notes).
Outflows:
To stockholders as
dividend.
To redeem long-term debt
or reacquire capital stock
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Generally
Long-term Liability and Equity Items |
Some
cash flows relating to investing or financing
activities are classified as operating activities.
For example, receipts of investment income (interest
and dividends) and payments of interest to lenders
are classified as investing or financing activities.
Conversely, some cash flows relating to operating
activities are classified as investing and financing
activities. For example, the cash received from the
sale of property, plant, and equipment at a gain,
although reported in the income statement, is
classified as an investing activity, and the effects
of the related gain would not be included in the net
cash flow from operating activities. Likewise a gain
or loss on the payment of debt would generally be
part of the cash outflow to the repayment of the
amount borrowed, and therefore it is a financing
activity.
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