Question

The statement of cash flows is very useful because it provides valuable information to investors, creditors, and other users. Distinguish among the three types of activities that are reported in the statement of cash flows. Please discuss in detail. (Please no handwritten responses - they can be difficult to decipher.)

Answer 1

Answer:- The statement of cash flows: The primary purpose of the statement of cash flows is to provide information about cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period Summarize the operating, investing, and financing activities of an entity. The statement of cash flows is very useful because it provides valuable information to investors, creditors, and other users.

Explanation:- Cash flows are classified as operating, investing, or financing activities on the statement of cash flows, depending on the nature of the transaction. Each of these three classifications is defined as follows.

1)-Operating activities include cash activities related to net income. For example, cash generated from the sale of goods (revenue) and cash paid for merchandise (expense) are operating activities because revenues and expenses are included in net income.

2)-Investing activities include cash activities related to non current assets. Non current assets include (a) long-term investments; (b) property, plant, and equipment; and (c) the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. (Note that interest received from loans is included in operating activities.)

3)-Financing activities include cash activities related to non current liabilities and owners’ equity. Non current liabilities and owners’ equity items include (a) the principal amount of long-term debt, (b) stock sales and repurchases, and (c) dividend payments. (Note that interest paid on long-term debt is included in operating activities.)