The
Definition Of

Classification of cash flows

The statement of cash flows classifies cash receipts and cash payments as operating, investing, and financing activities. Transactions and other events characteristic of each kind of activity are as follows.

  1. Operating activities include the cash effects of transactions that create revenues and expenses. They thus enter into the determination of net income.
  2. Investing activities include (a) acquiring and disposing of investments and property, plant, and equipment, and (b) lending money and collecting the loans.
  3. Financing activities include (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.

The operating activities category is the most important. It shows the cash provided by company operations. This source of cash is generally considered to be the best measure of a company’s ability to generate sufficient cash to continue as a going concern.

Share it:

More from this Section

  • Dividend
    A dividend is a corporation’s distribution of cash or stock to its stock holders on a pro rata (proportional) basis. Investors are very interested...
  • Bank reconciliation
    Bank reconciliation is the process of comparing the bank’s balance of an account with the company’s balance and explaining any differences to make them agree.
  • Enterprise resource planning (ERP) systems
    Enterprise resource planning (ERP) systems are typically used by manufacturing companies with more than 500 employees and $500 million in sales.
  • Publicly held corporation
    Publicly held corporation is a corporation that may have thousands of stockholders and whose stock is regularly traded on a national securities exchange...
  • Bond certificate
    Bond certificate is a legal document that indicates the name of the issuer, the face value of the bonds, and such other data as the contractual...
  • Long-range planning
    Long-range planning is a formalized process of selecting strategies to achieve long-term goals and developing policies and plans to implement the strategies.
  • First-in, first-out (FIFO)
    First-in, first-out (FIFO) method is an inventory costing method that assumes that the costs of the earliest goods purchased are the first to be recognized as cost of goods sold.