Basics of Cash Flows Statement

Basics of Cash Flows

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 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 generally involve long-term assets and include:
•             Making and collecting loans.
•             Acquiring and disposal of investments and productive long-lived assets.

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

             
Note: These are generally 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.

             
Note: Generally Long-term Asset Items

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

 Note: Generally Long-term Liability and Equity Items