II. Major Classifications of Cash Flow

Cash Flow Statements are broken down into three sections:

•    Operating activities
•    Investing activities
•    Financing activities

III. Operating Activities

Operating activities (all transactions and events that normally enter into the determination of operating income) include cash receipts from selling goods or providing services, as well as income from items such as interest and dividends. Operating activities also include your cash payments such as inventory, payroll, taxes, interest, utilities, and rent. The net amount of cash provided (or used) by operating activities is the key figure on a statement of cash flows.

Cash receipts include:

•    Sale of goods or services
•    Interest revenue
•    Dividend revenue

Cash payments include:

•    Inventory purchases
•    Payroll
•    Taxes Interest expense
•    Other (utilities, rent, etc.)

Note: While cash inflows from interest or dividends could be considered investing or financing activities, the FASB classifies them as operating activities (which means you should too!).

IV. Investing Activities

Investing activities include transactions and events involving the purchase and sale of securities (excluding cash equivalents), land, buildings, equipment, and other assets not generally held for resale. It also covers the making and collecting of loans. Investing activities are not classified as operating activities because they have an indirect relationship to the central, ongoing operation of your business (usually the sale of goods or services).

Cash receipts include:

•    Sale of plant assets
•    Sale of a business segment
•    Sale of investments in equity securities of other entities or debt securities (other than cash equivalents)
•    Collection of principal on loans made to other entities

Cash payments include:

•    Purchase of plant assets
•    Purchase of equity securities of other entities or debt securities (other than cash equivalents)
•    Loans to other entities

To be continued…