Volume 5 Issue 2007

The Statement of Cash Flows reports the sources and uses of cash for the period, as separated into three major classifications: 

Investing activities include the purchase of property and equipment or the proceeds from their disposition, and also certain transactions involving investments in securities or other non-operating assets. 

Financing activities include debt borrowings and repayments, as well as the contribution and withdrawal of equity capital. 

Operating activities include all transactions and other events that are the result of delivering or producing goods for sale and providing services.

Operations include the cash effects of essentially all items identified in the Income Statement, such as sales, costs of sales, operating expenses, and extraordinary items.

Cash inflows from operating activities include cash receipts from the sale of goods or services and from interest and dividend income. Cash outflows for operating activities include cash payments for the purchase of inventory, wages and benefits to employees, to government taxing bodies, as interest to lending institutions, and to various other suppliers.

Investing Activities include lending money and collecting on those loans, acquiring and selling investment securities, and acquiring and selling productive assets such as land and equipment.

Cash inflows from investing activities include principal repayments from borrowers, proceeds from sales of loans and receipts from sales of assets such as investment securities or property and equipment. Cash outflows for investing activities include loans made, loans purchased, and payments to acquire assets such as investment securities or property and equipment.

Financing Activities include obtaining resources from owners, providing owners with a return on (of) their investment, obtaining resources from lenders, and repaying amounts borrowed. Interest on borrowings, however, is an operating activity.

Cash inflows from financing activities include proceeds from the issuance of the company’s stock and from long- and short-term borrowings. Cash outflows for financing activities include payment of dividends, cash paid to reacquire the company’s stock, and repayment of amounts borrowed.

The so-called “indirect method” is favored by most companies. However, an alternative format, the “direct method” is also acceptable. Under that approach, the Cash Provided by (Used for) Operating Activities section will list each major source or use of cash which corresponds to major captions in the income statement. For example, corresponding to sales will be the cash flow statement caption “Cash Collected from Customers”; corresponding to cost of sales will be “Cash Paid to Suppliers”; etc. If the direct method is used, the cash flow statement (or a supplementary schedule) will present the reconciliation between net income and cash from operations.