In accounting, When do you know whether to attribute an activity as operating or financing  

Answer:

Cash flow statement is the statement which sum up the sources of cash inflows and outflows during a particular period of time. These statements are prepared from balance sheets, profit and loss account, and additional information.

It helps to determine whether the company is able to meet his liabilities or not.

Its further classification is explained below:

Step-by-step explanation

Cash inflows and outflows are divided into three types of activities namely-

• operating activities
• investing activities
• financing activities

Operating activities are the activities related to net income. It is further classified into :

• Non cash and non operating expenses - It includes depreciation, interest on long term borrowings, discount on issue of shares, loss on sale of fixed assets etc. are added back.
• Non operating income and gains - Profit on sale of fixed assets, interest, rent, dividend received etc. are deducted.

Investing activities are the activities related to acquisition and disposal of long term assets and other investments are included in cash equivalent. It also includes the principal amount of loans made to other entities.

Financing activities are the activities which results in the change in the size and composition of owner's capital and borrowing of the enterprise. It includes proceeds from issue of shares, issue of debentures, loans, payment of dividends etc.