Untitled Quiz

Classifying Activities in Cash Flow Statements

• Operating Activities: These are the everyday activities of the business, involving the production or sale of goods and services.
  • Inflows: Cash received from customers, sales of goods or services, interest received on loans or investments.
  • Outflows: Cash paid to suppliers, employees, operating expenses, rent, utilities.
• Investing Activities: These are activities that involve the purchase or sale of long-term assets, such as property, plant, equipment, and investments.
  • Inflows: Cash received from sale of fixed assets, collection of loans.
  • Outflows: Cash paid for purchase of fixed assets
• Financing Activities: These activities involve the raising of capital from investors and lenders, and the repayment of that capital.
  • Inflows: Cash from issuing new shares or debt, borrowing money.
  • Outflows: Cash paid for repayment of debt, dividends paid to shareholders.
• Cash Equivalents: These are short-term, highly liquid investments that are readily convertible into cash, such as treasury bills and short-term government bonds.

Illustration 1: Classifying Transactions

• Operating Activities:
  • Cash Sales of goods-in-trade
  • Cash Sales
  • Cash received from Debtors
  • Income tax paid
  • Cash paid to Creditors/Supplier of goods
  • Commission received
  • Office Expenses
  • Sale of Investment by finance Co. (This is a sale of a short-term investment, commonly classified as an operating activity)
• Investing Activities:
  • Purchase of Building
  • Sale of Building
  • Interest received on Investment
  • Purchase of long-term Investment
• Financing Activities:
  • Dividend paid
  • Interest paid on debentures
  • Cash payment of long-term loans
  • Finance Expenses (This can include interest paid and other finance costs)
  • Redemption of Debentures
  • Cash proceeds received from issuing shares at a premium.
• Cash & Cash Equivalents:
  • Investment in (Marketable) short-term Securities
  • Bank Balance

Illustration 2: Cash Flow Inflow and Outflow

• Sale of Fixed Asset at a Loss: This results in a Cash Inflow. However, the inflow is less than the book value of the asset by the amount of the loss.
• Declaration of Final Dividend: This has no effect on cash. The declaration of a dividend does not mean the cash is paid out.
• Cash Deposited into Bank: This has no effect on cash. This is simply a change in the form of holding cash.
• Sale of Marketable Securities for Cash: This results in a Cash Inflow. This is a conversion from Cash Equivalents to Cash.
• Purchase of Marketable Securities for Cash: This results in a Cash Outflow. This is a conversion from Cash to Cash Equivalents.
• Paying to Acquire Shares: This results in a Cash Outflow. This is an investment to increase the ownership interest in the Company.

Illustration 3: Classifying Transactions (Continued):

• Operating Activities:
  • Cash paid to creditors
  • Cash Receipts from Debtors
  • Cash Sales
  • Cash purchases of Goods
  • Trading Commission Received
  • Wages & Salaries paid
• Investing Activities:
  • Interest Received on Debentures held as Investment
  • Brokerage paid on purchase of investments
• Financing Activities:
  • Interest paid on long-term borrowings