Question: What room the three varieties of cash flows presented ~ above the declare of cash flows?

 

Answer: Cash flows space classified as operating, investing, or financing tasks on the statement of cash flows, relying on the nature of the transaction. Each of these three classifications is defined as follows.

You are watching: Which of the following describes the operating activities section of the statement of cash flows?

Figure 12.1 \"Examples the Cash flows from Operating, Investing, and also Financing Activities\" shows instances of cash flow activities that generate cash or require cash outflows within a period. Figure 12.2 \"Examples of Cash Flow task by Category\" presents a an ext comprehensive list of instances of items commonly included in operating, investing, and financing sections of the explain of cash flows.


Figure 12.2 examples of Cash Flow activity by Category

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*Receipts that cash because that dividends indigenous investments and for interest on loan made to various other entities are had in operating tasks since both item relate to net income. Likewise, payments the cash for interest on loans v a bank or on bonds issued are likewise included in operating tasks because these items likewise relate to net income.


 

Question: Which ar of the explain of cash operation is pertained to by most financial specialists to be most important?

 

Answer: The operating tasks section that the statement of cash flows is normally regarded together the most crucial section due to the fact that it offers cash circulation information related to the day-to-day operations of the business. This ar answers the question, “how lot cash go we generate from the daily activities of our main point business?” Owners, creditors, and also managers are many interested in cash circulation generated indigenous daily activities rather than from a one-time issuance of share or a one-time revenue of land. The operating tasks section allows stakeholders to assess the recurring viability the the company. We talk about how to use cash flow information to evaluate institutions later in the chapter.


Business in action 12.2

Cash activity at Home Depot and Lowe’s

The house Depot. Inc., and also Lowe’s Companies, Inc., are huge home improvement retail providers with stores throughout phibìc America. A testimonial of the declaration of cash flows because that both companies reveals the adhering to cash activity. Positive amounts are cash inflows, and an adverse amounts room cash outflows.


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Amounts space in millions.


This info shows both carriers generated far-ranging amounts of cash from day-to-day operating activities; $4,600,000,000 because that The residence Depot and also $3,900,000,000 for Lowe’s. The is amazing to keep in mind both companies spent significant amounts of cash to obtain property and also equipment and also long-term investments as reflected in the an adverse investing activities amounts. For both companies, a far-reaching amount the cash outflows indigenous financing tasks were for the repurchase of typical stock. Apparently, both companies decided to return cash to owner by repurchasing stock.


Source: The house Depot Inc., “2010 yearly Report,” http://www.homedepot.com; Lowe’s service providers Inc., “2010 annual Report,” http://www.lowes.com.

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Key Takeaway

The three categories the cash flows room operating activities, investing activities, and financing activities. Operating activities include cash activities related to net income. Investing tasks include cash activities related to noncurrent assets. Financing activities include cash tasks related come noncurrent liabilities and owners’ equity.

Review difficulty 12.2

Identify whether each of the adhering to items would show up in the operating, investing, or financing activities section the the declare of cash flows. Define your answer for each item.

Cash payments for purchases of was Cash receipts from sale of common stock Cash payments for equipment Cash receipts native sales of products Cash dividends paid to shareholder Cash payments to employees Cash payment to lenders for attention on loan Cash receipts from collection of primary for loan made to various other entities Cash receipts native issuance of binding Cash receipts from arsenal of attention on loan made to other entities

Solution to Review difficulty 12.2

the would show up as operating activity since merchandise task impacts net income as an price (merchandise costs ultimately flow through price of goods sold ~ above the earnings statement). The would show up as financing activity due to the fact that sale of typical stock effects owners’ equity. The would appear as investing activity due to the fact that purchase the equipment effects noncurrent assets. That would appear as operating activity since sales task impacts net income as revenue. That would show up as financing activity due to the fact that dividend payments influence owners’ equity. It would appear as operating activity due to the fact that employee payroll task impacts net revenue as an expense. The would show up as operating activity since interest payments impact net revenue as one expense. That would show up as investing activity because principal collections influence noncurrent assets. It would show up as financing activity due to the fact that bond issuance task impacts noncurrent liabilities. It would appear as operating activity due to the fact that interest received impacts net earnings as revenue.