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

  • Cash-basis accounting
    Cash-basis accounting is an alternative to the accrual basis refers to an accounting basis in which companies record revenue when they receive cash and an expense...
  • Declining-balance
    Declining-balance method is a depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual...
  • Materials quantity variance
    Materials quantity variance is the difference between the actual quantity times the standard price and the standard quantity times the standard price for materials.
  • Direct materials budget
    The direct materials budget shows both the quantity and cost of direct materials to be purchased. The quantities of direct materials are derived from the following formula.
  • Activity-based costing (ABC)
    Activity-based costing (ABC) is a method of allocating overhead based on each product’s use of activities in making the product.
  • Time ticket
    The time ticket is a document that indicates the employee, the hours worked, the account and job to be charged, and the total labor cost.
  • Manipulation or falsification of accounts
    By manipulation or falsification of accounts we mean to say that the accounts are prepared in such a way as to show more profits or less