Operating, Financing, and Investing Activities

Purpose of statement of cash flows

Explains cash inflows and outflows to show changes in cash balance

Requirement under GAAP

Required whenever an income statement is presented

Cash definition

Coins currencies bank deposits checks drafts

Cash equivalents definition

Short-term highly liquid investments with maturities ≤90 days

Examples of cash equivalents

Treasury bills commercial paper money market funds

Three categories of cash flows

Operating activities investing activities financing activities

Operating activities

Day-to-day core business functions like sales payments for inventory salaries rent taxes

Investing activities

Acquisition and disposal of long-term assets like equipment land patents

Financing activities

Borrowing repaying debt issuing stock repurchasing stock paying dividends

Operating cash flow importance

Seen as indicator of ability to prosper and generate cash

Investing cash flow trend

Healthy growth companies usually show negative investing cash flows due to expansion

Financing cash flow trend

Net inflow when borrowing or issuing stock net outflow when repaying debt or paying dividends

Noncash investing/financing transactions

Must be disclosed in notes or a schedule but not in main cash flow statement

Examples of noncash disclosures

Issue stock for land sign note payable for building acquisition

Omissions from cash flows

Stock dividends and stock splits are excluded entirely

Key takeaway

Cash flows are classified as operating investing or financing with noncash activities disclosed separately