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.
- Operating activities include the cash effects of transactions that create revenues and expenses. They thus enter into the determination of net income.
- Investing activities include (a) acquiring and disposing of investments and property, plant, and equipment, and (b) lending money and collecting the loans.
- 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.
More from this Section
- Acid-test (quick) ratio
Acid-test (quick) ratio is a measure of a company’s immediate short-term liquidity; computed by dividing the sum of cash, short-term investments...
- Current assets
Current assets are that a company expects to convert to cash or use up within one year. For most businesses the cutoff for classification as current assets is one year from...
- Internal rate of return (IRR)
Internal rate of return (IRR) is the interest rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows.
- Cash dividend
A cash dividend is a pro rate distribution of cash to stockholders. For a corporation to pay a cash dividend, it must have:
- Direct labor
The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is called direct labor.
- Parent company & Subsidiary (affiliated) company
A company that owns more than 50% of the common stock of another entity is known as the patent company. The entity whose stock the parent company...
- Owner’s equity statement
Owner’s equity statement is a financial statement that summarizes the changes in owner’s equity for a specific period of time. The time period is the same as that covered...