The three classifications on the statement of cash flows are cash flows from
operation, investing, financing
1. Operating activities: This classification records the cash inflows and outflows that arise from the primary activities of the business. These activities include the collection of cash from sales, payment to suppliers, salaries of employees, interest paid or received, and taxes paid or received. The operating activities provide insights into the company’s profitability and cash generation ability.
2. Investing activities: This classification records the cash inflows and outflows related to the acquisition and disposal of long-term assets, such as property, plant, and equipment, and investments. Cash inflows from investment activities occur when the company sells an asset or receives dividend or interest income from its investment. Cash outflows from investing activities occur when the company purchases an asset or invests in a long-term security.
3. Financing activities: This classification records the cash inflows and outflows that arise from the company’s financing activities, such as issuance or repayment of debt, sale or repurchase of equity, and payment of dividends. These activities show how the company funds its growth and how it manages its debt and equity capital structure.
By analyzing the statement of cash flows, investors and other stakeholders can evaluate a company’s ability to generate cash internally, invest in new opportunities, and finance its operations.
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