Chapter 10
Statement of Cash Flows Financing Activities
The statement of cash flows is a financial statement that Financing activities are cash flows related to an entity’s capital
summarizes an entity’s cash inflows and outflows from: and borrowings. They represent transactions between the
Operating activities entity and its owners (equity financing) and creditors (debt
Investing activities financing).
Financing activities
In simple terms, financing activities involve changes in equity
Its main purpose is to provide relevant information about cash and nontrade liabilities. Examples include:
receipts and cash payments during a period. Cash receipts from issuing ordinary or preference
shares
Cash and Cash Equivalents Cash payments for treasury shares
This statement focuses on changes in cash and cash Cash receipts from issuing bonds, loans, notes, and
equivalents: other borrowings
Cash includes cash on hand and demand deposits Cash payments for loan principal repayments
Cash equivalents are short-term, highly liquid Cash payments for lease liabilities (principal portion)
investments that can be easily converted to cash and
have minimal risk of value changes Noncash Transactions
These are transactions that do not involve cash and are
To qualify as a cash equivalent, an investment must have a disclosed separately in the notes or supporting schedules.
maturity of three months or less from the date of acquisition. Examples include:
Bank overdrafts that are repayable on demand may be Acquisition of assets through issuance of shares
included as part of cash equivalents. These balances may Acquisition of assets through issuance of bonds
fluctuate between positive and overdrawn Conversion of bonds into equity shares
Examples of Cash Equivalents Interest Paid and Interest Received
Short-term treasury bills Generally classified as operating cash flows because they affect
Time deposits (3 months) net income
Money market instruments or commercial paper Alternatively:
Interest paid → may be classified as financing (cost of
Classification of Cash Flows borrowing)
Cash flows refer to the inflows and outflows of cash and cash Alternatively:
equivalents. They are classified into three categories in the Interest received → may be classified as investing
statement of cash flows: operating, investing, and financing (return on investment)
activities.
For financial institutions, both are usually classified as
Operating Activities operating activities.
These are cash flows from the main revenue-generating
activities of the business. They are generally related to net Dividends Received
income or loss. Examples include: Generally classified as operating cash flows.
Cash receipts from sales, services, rent, commissions, Alternatively:
and other income May be classified as investing cash flows as a return on
Cash payments to suppliers for goods and services investment
Cash payments for operating expenses (selling,
administrative, etc.) Dividends Paid
Cash receipts and payments for trading securities Generally classified as financing cash flows.
Income tax payments and refunds (unless classified Alternatively:
elsewhere) May be classified as operating cash flows to show
ability to pay dividends from operations
Investing Activities
These involve cash flows from acquiring and disposing of long-
term assets and investments not classified as cash equivalents.
Examples include:
Purchase or sale of property, plant and equipment and
intangible assets
Purchase or sale of investments (equity or debt
instruments)
Loans made to other parties and collections of those
loans
Advances given and repayments received