The statement of cash flows, sometimes referred to as the cash flow statement, is classified by activity to provide more detail to help users to assess the ability of a business to generate cash flow from a particular activity. The classification of cash flows is based on the commercial substance of the transaction rather than its legal form.
The classification of cash flows is carried out by identifying the cash flow with one of three business activities.
- Operating activities cash flow
- Investing activities cash flow
- Financing activities cash flow
Statement of Cash Flows Operating Activities
Cash flows from operating activities are cash flows which are generated by the main revenue producing activities of the business, usually cash receipts from the sale of goods and services.
The operating activities cash flow is a key indicator that the trading activities of the business can generate sufficient cash to keep the business operational, repay loans to lenders, and pay dividends to shareholders. It also forms part of the calculation of free cash flow which is used by analysts to assess the business.
Further details on cash flows from operating activities can be found in our operating cash flow from trading tutorial.
Statement of Cash Flows Investing Activities
Cash flows from investing activities are normally identified by whether or not they result in a change to long term assets (fixed assets). For example, the purchase of equipment results in a cash flow out of the business and an increase in the amount of equipment (long term assets) held by the business. The cash flow would be regarded as an investing activities cash flow.
Further details on this type of cash flow can be found in our cash flow from investing activities tutorial.
Statement of Cash Flows Financing Activities
Cash flows from financing activities can be identified by whether or not they result in a change in either equity or borrowings of the business. For example, the issue of new shares changes the equity of the business, and the cash proceeds from the new issue would be classified as a cash flow from financing activities. Likewise, the repayment of a loan results in a change in the borrowings of the business and the repayment would again be classified as a financing activities cash flow.
Further details on this type of cash flow can be found in our cash flow from financing activities tutorial.
Classification of Cash flows Download
The classification of cash flows diagram used in this article is available for download in PDF format by following the link below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.