Three Types of Cash Flow Activities (2024)

Learning Objective

  1. Describe the three categories of cash flows.

Question: What are the three types of cash flows presented on the statement of cash flows?

Answer: Cash flows are classified as operating, investing, or financing activities on the statement of cash flows, depending on the nature of the transaction. Each of these three classifications is defined as follows.

  • Operating activitiesA section of the statement of cash flows that includes cash activities related to net income, such as cash receipts from sales revenue and cash payments for merchandise. include cash activities related to net income. For example, cash generated from the sale of goods (revenue) and cash paid for merchandise (expense) are operating activities because revenues and expenses are included in net income.
  • Investing activitiesA section of the statement of cash flows that includes cash activities related to noncurrent assets, such as cash receipts from the sale of equipment and cash payments for the purchase of long-term investments. include cash activities related to noncurrent assets. Noncurrent assets include (1) long-term investments; (2) property, plant, and equipment; and (3) the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. (Note that interest received from loans is included in operating activities.)
  • Financing activitiesA section of the statement of cash flows that includes cash activities related to noncurrent liabilities and owners’ equity, such as cash receipts from the issuance of bonds and cash payments for the repurchase of common stock. include cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and owners’ equity items include (1) the principal amount of long-term debt, (2) stock sales and repurchases, and (3) dividend payments. (Note that interest paid on long-term debt is included in operating activities.)

Figure 12.1 "Examples of Cash Flows from Operating, Investing, and Financing Activities" shows examples of cash flow activities that generate cash or require cash outflows within a period. Figure 12.2 "Examples of Cash Flow Activity by Category" presents a more comprehensive list of examples of items typically included in operating, investing, and financing sections of the statement of cash flows.

Figure 12.2 Examples of Cash Flow Activity by Category

Three Types of Cash Flow Activities (1)

*Receipts of cash for dividends from investments and for interest on loans made to other entities are included in operating activities since both items relate to net income. Likewise, payments of cash for interest on loans with a bank or on bonds issued are also included in operating activities because these items also relate to net income.

Question: Which section of the statement of cash flows is regarded by most financial experts to be most important?

Answer: The operating activities section of the statement of cash flows is generally regarded as the most important section since it provides cash flow information related to the daily operations of the business. This section answers the question, “how much cash did we generate from the daily activities of our core business?” Owners, creditors, and managers are most interested in cash flow generated from daily activities rather than from a one-time issuance of stock or a one-time sale of land. The operating activities section allows stakeholders to assess the ongoing viability of the company. We discuss how to use cash flow information to evaluate organizations later in the chapter.

Business in Action 12.2

Cash Activity at Home Depot and Lowe’s

The Home Depot. Inc., and Lowe’s Companies, Inc., are large home improvement retail companies with stores throughout North America. A review of the statements of cash flows for both companies reveals the following cash activity. Positive amounts are cash inflows, and negative amounts are cash outflows.

Three Types of Cash Flow Activities (2)

Amounts are in millions.

This information shows both companies generated significant amounts of cash from daily operating activities; $4,600,000,000 for The Home Depot and $3,900,000,000 for Lowe’s. It is interesting to note both companies spent significant amounts of cash to acquire property and equipment and long-term investments as reflected in the negative investing activities amounts. For both companies, a significant amount of cash outflows from financing activities were for the repurchase of common stock. Apparently, both companies chose to return cash to owners by repurchasing stock.

Source: The Home Depot Inc., “2010 Annual Report,” http://www.homedepot.com; Lowe’s Companies Inc., “2010 Annual Report,” http://www.lowes.com.

Key Takeaway

  • The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash activities related to net income. Investing activities include cash activities related to noncurrent assets. Financing activities include cash activities related to noncurrent liabilities and owners’ equity.

Review Problem 12.2

Identify whether each of the following items would appear in the operating, investing, or financing activities section of the statement of cash flows. Explain your answer for each item.

  1. Cash payments for purchases of merchandise
  2. Cash receipts from sale of common stock
  3. Cash payments for equipment
  4. Cash receipts from sales of goods
  5. Cash dividends paid to shareholders
  6. Cash payments to employees
  7. Cash payments to lenders for interest on loans
  8. Cash receipts from collection of principal for loans made to other entities
  9. Cash receipts from issuance of bonds
  10. Cash receipts from collection of interest on loans made to other entities

Solution to Review Problem 12.2

  1. It would appear as operating activity because merchandise activity impacts net income as an expense (merchandise costs ultimately flow through cost of goods sold on the income statement).
  2. It would appear as financing activity because sale of common stock impacts owners’ equity.
  3. It would appear as investing activity because purchase of equipment impacts noncurrent assets.
  4. It would appear as operating activity because sales activity impacts net income as revenue.
  5. It would appear as financing activity because dividend payments impact owners’ equity.
  6. It would appear as operating activity because employee payroll activity impacts net income as an expense.
  7. It would appear as operating activity because interest payments impact net income as an expense.
  8. It would appear as investing activity because principal collections impact noncurrent assets.
  9. It would appear as financing activity because bond issuance activity impacts noncurrent liabilities.
  10. It would appear as operating activity because interest received impacts net income as revenue.
Three Types of Cash Flow Activities (2024)

FAQs

Three Types of Cash Flow Activities? ›

The cash flow statement is broken down into three categories: Operating activities, investment activities, and financing activities.

What are the 3 types of cash flows? ›

There are three cash flow types that companies should track and analyze to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. All three are included on a company's cash flow statement.

What are the three cash flow activities? ›

The main components of the CFS are cash from three areas: Operating activities, investing activities, and financing activities.

What are the 3 types of cash uses on the cash flow statement? ›

The three categories of cash flows are operating activities, investing activities, and financing activities.

What are the 3 basic multiple cash flow patterns? ›

There are three basic patterns of cash flow- Single amount, Annuity, Mixed stream.

What are the three activities of accounting? ›

Three major accounting activities are identifying, recording, and communicating. provide examples of both. Opportunities in accounting are abundant but can generally be categorized into financial, managerial, taxation, and other accounting related jobs.

What are the 3 sources and uses of cash as shown of the statement of cashflows? ›

The statement of cash flows is divided into three groups, each examining a different source of and use for cash: cash from operating activities, cash from investing activities and cash from financing activities.

What are the three categories of the cash flow statement quizlet? ›

The three categories of the statement of cash flows are operating activities, investing activities, and financing activities.

What are the different types of cash flow statement methods? ›

There are two ways to prepare a cash flow statement: the direct method and the indirect method:
  • Direct method – Operating cash flows are presented as a list of ingoing and outgoing cash flows. ...
  • Indirect method – The indirect method presents operating cash flows as a reconciliation from profit to cash flow.

Top Articles
Latest Posts
Article information

Author: Annamae Dooley

Last Updated:

Views: 5955

Rating: 4.4 / 5 (45 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Annamae Dooley

Birthday: 2001-07-26

Address: 9687 Tambra Meadow, Bradleyhaven, TN 53219

Phone: +9316045904039

Job: Future Coordinator

Hobby: Archery, Couponing, Poi, Kite flying, Knitting, Rappelling, Baseball

Introduction: My name is Annamae Dooley, I am a witty, quaint, lovely, clever, rich, sparkling, powerful person who loves writing and wants to share my knowledge and understanding with you.