Cash Flow Activities
As per the accounting standards the cashflow can be divided into 3 activities – Operating, Investing and Financing. This means that any cashflow whether inflow or outflow can be classified among one of these.
Operating activities are normal business operations cash inflows (sales, revenue) and outflows (salary, rent etc.). Investing activities are in the nature of investments like purchases and sale of fixed assets, shares etc. and income thereof. Financing activities are money received in form of loans or capital, repayment thereof and the interest expenses on the same, if any.
Cash Flows from Operating Activity:
These are the principal revenue generating activities of the enterprise.
Net cashflow (positive or negative) of operating activities is reported as ‘Cash flows from operating activities’ or ’cash from operations’.
Key Indicator: The cashflow from operations simply depicts the cash generated from the business for maintaining the operating capability and working capital of the enterprise, repayment the loans, make new investments etc.
Cash flows from operating activities are primarily derived from the main principal revenue-producing activities of the enterprise. For e.g. a company a sold goods worth Rs.10 lakhs but collected Rs.5 lakhs only and the balance 5 lakhs is outstanding debtors. In this case, the cash from operations is 5Lakhs inflow and not 10 Lakhs.
Examples of cash flows from operating activities are:
- Cash receipts from sale of goods and the rendering of services.
- Cash receipts from royalties, fees, commissions and other revenues.
- Cash payments to suppliers for goods and services.
- Cash payments to and on behalf of the employees
- Cash payments to an insurance enterprise for premiums and claims, annuities, and other policy benefits.
- Cash payments of income taxes unless they can be specifically identified with financing and investing activities.
Cash Flows from Investing Activity:
These are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
Cash flows from investing activities are important because they represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.
Examples of cash flows arising from investing activities are:
- Cash outflows from investing activities
- Cash payments to acquire fixed assets including intangibles and capitalized research and development.
- Cash payments to acquire shares, warrants or debt instruments of other enterprises other than the instruments those held for trading purposes.
- Cash advances and loans made to third party (other than advances and loans made by a financial enterprise wherein it is a operating activity).
- Cash receipt from disposal of fixed assets including intangibles.
- Cash receipt from the repayment of advances or loans made to third parties (except in case of financial enterprise).
- Cash receipt from disposal of shares, warrants or debt instruments of other enterprises except those held for trading purposes.
- Interest received in cash from loans and advances.
- Dividend received from investments in other enterprises
Cash Flows from Financing Activity:
These are the activities that result in changes in the size and composition of the owner’s capital (including preference share capital) and borrowings of the enterprise.
Cash Flows from Financing Activity are useful in predicting claims on future cash flows by providers of capital to the entity
Examples of financing activities are:
Cash inflows from financing activities are
- Cash proceeds from issuing shares (equity or/and preference).
- Cash proceeds from issuing debentures, loans, bonds and other short/ long-term borrowings.
Cash outflows from financing activities are
- Cash repayments of amounts borrowed.
- Cash payments to owners to acquire or redeem the entity’s shares;
- Interest paid on debentures and long-term loans and advances.
- Dividends paid on equity and preference capital.
- Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.