I. Basics of Cash Flow Reporting
A. Purpose of a Statement of Cash Flows
To report all major cash receipts (inflows) and cash payments
(outflows) during a period. This report classifies cash flows into
operating, investing, and financing activities. It answers important
questions such as:
1. How does a company obtain its cash?
2. Where does a company spend its cash?
3. What explains the change in the cash balance?
4. How much is paid in cash dividends?
B. Importance of Cash Flows
Information about cash flows, and its sources and uses, can
influence decision makers in important ways.
C. Measurement of Cash Flows
The phrase, cash flows refers to both cash and cash equivalents. A
cash equivalent must satisfy two criteria:
1. Be readily convertible to a known amount of cash.
2. Be sufficiently close to its maturity date so its market value is
unaffected by interest rate changes.
D. Classifications of Cash Flows
Cash receipts and cash payments are classified and reported in one
of three categories:
1. Operating activities include transactions and events that
determine net income (with some exceptions such as unusual
gains and losses). Specific examples:
a. Cash inflows from cash sales, collections on credit sales,
receipts of dividends and interest, sale of trading
securities, and settlements of lawsuits.
b. Cash outflows for payments to suppliers for goods and
services, to employees for wages, to lenders for interest, to
government for taxes, to charities, and to purchase trading
2. Investing activities include transactions and events that affect
long-term assets, namely the purchase or sale of these assets.
a. Cash inflows from selling long-term productive assets,
selling available-for-sale securities, notes and held-to-
maturity securities, and collecting principal on loans to
b. Cash outflows from purchasing long-term productive
assets, purchasing available for sale securities and held-to-
maturity securities, and making loans to others.