Financial accounting mainly deals with the creation of a number of important financial documents. One such document is known as a cash flow statement. The purpose of a cash flow statement is to analyze and record various cash flow activities of a business. Cash flow activities refer to any financial activities of a firm that involves the flow of cash in and out of the firm. There are three main types of cash flow activities that take place in a business – operating activities, investing activities and financing activities. A cash flow statement is divided into three segments based on this classification of cash flow activities.
The cash flow generated as a result of operating activities is the amount of cash generated by manufacturing, selling or providing services or products to your customers. It also includes the payment collected from customers. These are the activities that can be found on a company’s income statement. Some of the important operating activities include receipts from selling goods and services, cash received from sale of loans, interest received on loans, amount paid to suppliers of goods and raw materials, salary paid to employees, payments made on behalf of employees, payments made towards interest and purchase of merchandise. Factors that may influence the amount of cash flows from operational activities include depreciation in value of physical assets, deferred tax payments, amortization of intangible assets, any profit or loss from the sale of a non-current asset and revenue generated from investments.
Investing activities refers to any activities of a business that involves the purchase of an asset which is required for long term use. These activities can be found in the ‘assets’ section of a firm’s balance sheet. The investing activities that may take place in a business include purchase and sale of assets such as land, building, equipment and marketable securities, loans extended to suppliers or received from customers and any expenditure related to mergers or acquisition.
The cash flow generated from financing activities is the amount of cash flow that is affected by paying off debts or securing a loan from an owner or a lending institution. These activities can be located in the Liability and Equity section of a company’s balance sheet. They also include activities that affect the equity and long-term liabilities of a firm. Some important financing activities of a business are payments made towards dividends and repurchase of company shares, repaying the principal amount of a debt and a company’s net borrowings.
In order to recognize the amount of cash flowing in and out of a business, it is of utmost importance to first identify the different types of activities that may have a substantial impact on the cash flow of the firm.