Question

Summarize the three types of cash flow activities, and describe at least 2 types of cash flows in EACH type of activity.

Answer 1

Ans. : The three types of cash flow activities are as follows :

• 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.

• Investing activities include cash activities related to non current assets. Non current assets include (1) long-term investments; (2) property, plant, and equipment; and (3) 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).

• Financing activities include cash activities related to non current liabilities and owners’ equity. Non current liabilities and owners’ equity items include (1) the principal amount of long-term debt, (2) stock sales and repurchases, and (3) dividend payments. (Note that interest paid on long-term debt is included in operating activities).