# 1. Operating Activities
- Definition: Cash flows related to the core business operations.
- Includes:
- Cash receipts from sales of goods and services.
- Cash payments to suppliers and employees.
- Other cash payments related to operations, like interest and taxes.
- Two Methods of Preparation:
- Direct Method:Lists all major operating cash receipts and payments.
- Indirect Method: Starts with net income and adjusts for non-cash items (e.g., depreciation, changes in working capital).
##2. Investing Activities
- Definition:Cash flows related to the purchase and sale of long-term assets and investments.
- Includes:
- Purchase or sale of property, plant, and equipment (PPE).
- Purchase or sale of marketable securities (except cash equivalents).
- Loans made to other entities or collections from them.
##3. Financing Activities
- Definition: Cash flows related to the acquisition and repayment of capital.
- Includes:
- Issuance or repurchase of shares.
- Borrowings and repayments of debt.
- Dividends paid to shareholders.
# 4. Non-Cash Transactions
- Some significant financial activities do not involve cash (e.g., issuing shares to acquire assets). These should be disclosed in notes to the financial statements, but not included in the cash flow statement.
##-Key Adjustments for Indirect Method (Operating Activities)
- Add back non-cash expenses like depreciation and *amortization
- Adjust for changes in working capital (current assets and liabilities).
- Add back any losses and deduct gains from non-operating activities (like sale of assets).
# Example of Cash Flow Statement (Indirect Method):
1. Operating Activities:
- Net income
- Adjustments for:
- Depreciation
- Changes in receivables, payables, inventory
- Net cash from operating activities
2. Investing Activities:
- Sale/purchase of PPE
- Net cash from investing activities
3. Financing Activities:
- Issuance of shares or bonds
- Dividend payments
- Net cash from financing activities
#- Conclusion
The statement of cash flows provides crucial information about the liquidity and financial flexibility of a business. Understanding the classification of activities and how to adjust for non-cash items is essential in its preparation.