describe the three categories of cash flows reported in the statement of cash flows

There are 3 types of cashflows in a statement of Cash flow. These are classified as operating activities, investing activities and financing activities. The cassification of cashflows on the statement of cash flows, depends on the nature of the transaction. Each of these three classifications is described below:

Operating activities: Operating activities include cash activities related to net income. For example, cash generated from the sale of goods (revenue) and cash paid for purchasing raw materials (expense). These are operating activities because revenues and expenses are included in net income.

Investing activities: Investing activities include cash activities related to noncurrent assets. Noncurrent assets includes (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 or cash paid for an investment in another company are all included in this category. (It is worth noting that interest received from loans is included in operating activities.)

Financing activities: these type of activites include cash activities related to noncurrent liabilities and owners’ equity or capital. Noncurrent liabilities and owners’ equity items include (1) the principal amount of long-term loan, (2) stock sales and repurchases, and (3) dividend payment. (Again Note that interest paid on long-term debt is included in operating activities.)