LOS A requires us to:
compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items.
There are basically three important components of cash flow statements, i.e. cash flow from operations, cash flow from investing, and cash flows from financing. All the items that form a part of these three components mainly come from two sources i.e. the income statement and changes in balance sheet accounts.
1. Cash Flow from Operations (CFO)
Cash flow from operations shows the inflow and outflow of cash for the day-to-day activities of the firm. These result from the flow of cash from the transactions that affect a firm’s net income.
Major inflows that form a part of the cash from operations are:
a. Collections from customers,
b. Receipts of interest and dividend,
c. Sale of trading securities,
d. Increase in liability,
e. Decrease in assets, etc.
Some of the important outflows forming a part of the cash from operations are:
a. Cash paid for purchases, expenses, and employees,
b. Purchase of trading securities,
c. Payment of interest and taxes,
d. Decrease in liabilities,
e. Increase in assets, etc.
2. Cash from Investing Activities
These are the cash inflows and outflows resulting from the purchase and sale of long-term assets and other investments. Long-term assets include all the non-current assets such as property, plant, and equipment, intangibles, etc. Investments include both long-term and short-term investments in form of equity and debt (these, however, do not include the cash equivalents and held for trading securities).
Thus major items included in the inflow of cash from investing activities are:
a. Sale of fixed assets,
b. Sale proceeds from debt and equity investments,
c. The principal received on loans and advances made, etc.
And, some of the items included in the outflow of cash from investing activities are:
a. Purchase of non-current assets,
b. Purchase of debt and equity investments,
c. Loans advanced to others, etc.
3. Cash Flow from Financing Activities
These include the inflow and outflow of cash for the purpose of obtaining and repaying the capital to the shareholders or creditors.
Some examples of inflow of cash due to financing activities are:
a. Proceeds from issue of shares,
b. Proceeds (principal portion) of debt issued,
c. Proceeds from issue of bonds, debentures, etc.
Some examples of outflow of cash due to financing activities are:
a. Principal repayment of the debt,
b. Repurchase of stocks in the market,
c. Dividend payments to stockholders, etc.