Classification of Activities Generating Cash Flows

As illustrated in the figure 4.1 in the section Statement of Cash Flows, a firm’s cash flows are placed in one of three categories: operating, investing, or financing. This section describes each of these categories. Examples of each activity are given in the the Table 4.1 “Summary of Activities Generating Cash Flows”.

Tabel 4.1 – Summary of Activities Generating Cash Flows

Operating Activities

Cash Inflows Cash Outflows
From customers To employees
From interest To suppliers
From dividends For interest
For taxes
All other cash inflows not defined as an investing or financing activity All other cash outflows not defined as an investing or financing activity

Investing Activities

Cash Inflows Cash Outflows
Sale of property, plant, and equipment Purchase of property, plant, and equipment
Collections of loans Making of loans
Sale of investments Acquisition of investments

Financing Activities

Cash Inflows Cash Outflows
Issuing common stock Reacquiring common stock
Obtaining loans Repaying loans
Paying dividends

 

Operating Activities

Operating activities typically involve transactions related to providing goods and services to customers. They reflect the cash flow effects of the typical and recurring transactions that appear on the income statement. Examples of operating cash inflows are receipts from customers and the receipt of interest and dividends from investments. Operating cash outflows include payments to employees and suppliers and payments for interest and taxes.

Investing Activities

Investing activities usually involve cash flows from the acquisition and disposal of noncurrent assets. Cash outflows arise from purchasing (investing in) property,plant, and equipment, making loans, and acquiring investments in other corporations. Cash inflows result from disposing of property, plant, and equipment; collecting loans (other than the interest); and selling investments.

Financing Activities

Financing activities include cash flows from obtaining and repaying financing. Cash inflows result from contributions by owners (issuing stock to shareholders in exchange for cash) and from loans. Cash outflows arise from payments to shareholders (as dividends or payments to repurchase their shares) and the repayment of loans (but not the associated interest).

Figure 4.1 in the section Statement of Cash Flows shows that the net cash provided (or used) in each of the three classifications is summarized in the far right column of the statement. The sum of these amounts equals the change in the cash balance that occurred during the period. This change is added to the cash balance at the beginning of the year to compute the ending cash balance. These beginning and ending cash amounts must, of course, correspond to the cash figures appearing on the balance sheet.

The remainder of this section addresses two additional format issues:

  1. The direct versus the indirect approach to preparing the operating activities
  2. Non-cash investing and financing activities
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