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? ›

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 3 types of cash flows by activities? ›

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.

Which are the 3 main activities of a cash flow statement? ›

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

What are the three 3 main components of cash flow? ›

A company's cash flow is the figure that appears in the cash flow statement as net cash flow (different company statements may use a different term). The three main components of a cash flow statement are cash flow from operations, cash flow from investing, and cash flow from financing.

What are the 3 basic multiple cash flow patterns? ›

There are three basic patterns of cash flow- Single amount, Annuity, Mixed stream. 1. Single amount- Single amount cash flow is a standalone, individual, wherein value occurs at one point in time.

What are the main types of cash flow? ›

3 types of cash flow
  • Operating cash flow.
  • Investing cash flow.
  • Financing cash flow.
Jul 12, 2023

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 is the cash flow from activities? ›

Cash flow from operating activities (CFO) indicates the amount of money a company brings in from its ongoing, regular business activities, such as manufacturing and selling goods or providing a service to customers. It is the first section depicted on a company's cash flow statement.

What are the three sections of cash flows and what do they involve? ›

The three sections are operating, inventing, and financing. The phrase “Oops I forget” is helpful to remember the three section. The “O” in oops represents operating, the “I” represents investing, and the “f” in forget represents financing.

What is an example of a cash flow? ›

What is a cash flow example? Examples of cash flow include: receiving payments from customers for goods or services, paying employees' wages, investing in new equipment or property, taking out a loan, and receiving dividends from investments.

What is as 3 cash flow analysis? ›

The Standard deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.

How many types of cash flow transactions are there? ›

Companies should track and analyse three types of cash flows to establish the liquidity and solvency of their business: cash flow from operating flow, cash flow from investments, and flow from finance tasks. A company's cash flow statement includes all three.

Which of the following is one of the 3 primary segments of a cash flow statement? ›

A cash flow statement consists of three sections: cash from operating activities, cash from investing activities and cash from financing activities. There are two methods for cash flow statement preparation: direct and indirect.

What are the four examples of cash flow related to operating activities? ›

Working Capital

Inventories, accounts receivable (AR), tax assets, accrued revenue, and deferred revenue are common examples of assets for which a change in value is reflected in cash flow from operating activities.

What are examples of operating activities? ›

Operating activities examples include:
  • Receipt of cash from sales.
  • Collection of accounts receivable.
  • Receipt or payment of interest.
  • Payment for materials and supplies.
  • Payment of salaries.
  • Payment of principal and interest for operating leases. ...
  • Payment of taxes, fines, and license costs.
Apr 11, 2023

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