What are three activities reported in the statement of cash flows and what information does each activity provide?
The correct answer and explanation is:
Correct Answer:
The three activities reported in the statement of cash flows are:
- Operating Activities
- Investing Activities
- Financing Activities
300-Word Explanation:
The statement of cash flows is one of the core financial statements used to assess a company’s financial health. It provides detailed information about how a company generates and uses cash over a specific period. It categorizes cash flows into three main types of activities:
- Operating Activities:
This section shows cash generated or used by a company’s core business operations. It includes transactions involving revenues and expenses, such as receipts from sales, payments to suppliers, salaries, interest payments, and taxes. Positive cash flow from operations indicates that the company can sustain itself and pay its bills without relying on outside financing. Investors look here to assess the firm’s ability to generate recurring cash. - Investing Activities:
Investing activities reflect cash used in or generated from the purchase and sale of long-term assets and investments. This may include purchasing equipment, selling property, or acquiring other businesses. A negative cash flow in this section often suggests the company is investing in its growth. Conversely, positive cash flow might indicate asset sales or reduced investment, which could be either good or bad depending on the context. - Financing Activities:
This section includes cash inflows and outflows related to the company’s capital structure. It shows transactions with shareholders and creditors, such as issuing or repurchasing stock, borrowing or repaying loans, and paying dividends. This section helps stakeholders understand how the company finances its operations—whether through debt, equity, or internal funds.
By dividing cash flows into these three categories, the statement of cash flows gives a complete picture of how money moves through the business, helping stakeholders evaluate short-term liquidity, long-term investment strategy, and financial sustainability.