Cash Flows from Operating, Investing, and Financing Activities

Cash Flows from Operating, Investing, and Financing Activities

The cash flow statement gives information on a company’s cash receipts and payments during a specified period of time. This information can help users of financial statements (creditors, investors, analysts, etc.) evaluate a company’s liquidity and solvency.

Components of the Cash Flow Statement

There are three components of the Cash Flow Statement:

  • Cash Flow from Operating Activities: this provides information on cash flows that are derived from the day-to-day activities of a company. Among others, these cash flows include proceeds from the sale of inventory, and from the provision of services or other activities that are not related to financing or investing. Further, cash flows from operating activities also include cash receipts and payments arising from dealing or trading in securities (not for investment purposes);
  • Cash Flow from Investing Activities: this provides information on cash flows that are derived from the purchase and sale of long-term assets and other investments. Such ventures include the purchase or sale of property, plant, and equipment, intangible assets, and investments in the debt and equity issued by other companies; and
  • Cash Flow from Financing Activities: this provides information on cash flows that are derived from acquiring or repaying capital. Cash inflows would arise from the issuance of stock or bonds and borrowing, while cash outflows would include cash payments for repurchasing stock and repaying bonds or other borrowings.

Question 1

Which of the following would be classified as a cash flow from investing activity?

  1. Proceeds from the issuance of bonds.
  2. Proceeds from the sale of machinery.
  3. Cash received from the sale of inventory.

Solution

The correct answer is B.

Proceeds from the sale of machinery is an example of cash derived from an investing activity.

 A is incorrect because proceeds from the issuance of bonds relate to a financing activity.

C is incorrect because the sale of inventory is an operating activity.

Question 2

How would you classify the cash flow related to paying for shipping expenses of product materials and a new production machine, respectively?

  1. Both are operating cash flows.
  2. Investing cash flow; and operating cash flow.
  3. Operating cash flow; and investing cash flow.

Solution

The correct answer is C.

The first cash outflow is an operating activity. This is because it is related to the production activities of the company. The second cash outflow is an investing activity since it is related to the acquisition of a long-term asset.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep


    Sergio Torrico
    Sergio Torrico
    2021-07-23
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    diana
    diana
    2021-07-17
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    2021-07-16
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    2021-06-28
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Marwan
    Marwan
    2021-06-22
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    2021-05-10
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.