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Classification of Cash Flows:

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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:

  1. Operating activities

  2. Investing activities

  3. 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:

  • Making and collecting loans.

  • Acquiring and disposal of investments and productive long-lived assets.

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

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

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

Financing Activities

     Cash inflows:
          From sale of equity securities.
          From issuance of debt (bonds and notes).

          To stockholders as dividend.
          To redeem long-term debt or reacquire capital stock    

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.

More study material from this to

More study material from this topic:

Definition, Explanation and Purpose of the Statement of Cash Flows
Classification of Cash Flows
Format and Sections of Statement of Cash Flows
Steps in Preparing Statement of Cash Flows
Statement of Cash Flows - Direct Method
Statement of Cash Flows - Indirect Method
Direct versus Indirect Method of Cash Flows



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