Chapter 14 Statement of Cash Flows

Financing Activities

Financing activities is the last category listed on the statement of cash flows. Financing activities include cash inflows and outflows involved in long-term liabilities and equity. Financing activities include issuing stock, paying dividends, and buying and selling treasury stock. Dividend income that the company earns from investing in other companies' stock is classified as operating cash inflows (NOT financing). Interest income and interest expense are also classified as operating cash flows.

Classification of Cash Flows

There are three basic types of cash flows, and the statement of cash flows has a section for each: Operating activities Investing activities Financing activities

Investing Activities

Investing activities is the second category listed on the statement of cash flows. This section reports cash receipts and cash payments that increase or decrease long-term assets. It includes the cash inflow from selling and the cash outflow from purchasing long-term assets.

Operating Activities

Operating activities is the first section on the statement of cash flows. This section reports on activities that create revenue or expense in the entity's business. This is often the most important category. Dividend income that the company earns from investing in other companies' stock is classified as operating cash inflows (NOT financing). The cash dividends that the company pays out is a financing activity. Interest income and interest expense are also classified as operating cash flows.

How to check the accuracy of the net change of cash flows on the statement of cash flows?

We get the net changes of cash flows from the three sections (operating, investing, financing) and add the three together. Remember, in each section, the net amount could be positive or negative. If the net cash flow is positive, it means that there is a net cash flow provided for that activity. If the net cash flow is negative (net cash outflow), it means that there is a net cash flow USED for that activity. Adding these three together, the net change should be the difference between cash balance at the beginning of the year (this can be found in last year's balance sheet), and cash balance at the end of the year (this can be found in current year's balance sheet).