Question

After reading about the Statement of Cash Flows, give me your interpretation of operating activities, investing activities, and financing activities. Don’t just repeat what’s in the book, give it to me in your own words. Can you associate the three activities to your personal life? For example, what is your day-to-day normal operating mode? What do you do to invest in yourself? How do you raise the money to pay for all the things that you spent on yourself?
When you associate it to real life, then the Statement of Cash Flows starts to make sense, so be creative in your analogy.

Answer 1

Cash flow statement in simple shows the movement of cash from opening balance to closing balance. it helps in understanding movement of cash through different activities. Cash is pivotal to any business to run on day to day basis. Hence cash flow statement supplements in understanding it better.

A better way of understanding cash flow statement is is co- relate it to our own day to day spends. Operating activities can be co-related to what we do on day to day basis just like business selling goods and services on day to day basis. Our day to day activity may include purchase of chocolate, watching movies, purchasing books, visiting malls, driving around , purchasing mobile data, etc.

Investing Activity when co-related to our life can be like registering for a college course, taking distant learning course, investing in mutual funds or stocks etc

Financing Activity can be like taking bank loan for educational courses, funding done by parents , or money given to siblings to take up their course.

From above it is clear Cash flow statement helps in segregating and understanding movement of cash through various activities. In short it groups cash inflow/outflow into various activities to understand better and make informed decisions. it also helps in cash flow forecasting and understand cash position better.