According to AS-3 (Revised), cash flows should be classified in three main categories:
● Cash Flow from operating activities
● Cash Flow from investing activities
● Cash Flow from financing activities
Cash flow from operating activities
Inflow of cash from operating activities represents the level of sufficient cash generation necessary to maintain operating capability without recourse to external resource of financing.
In other words, operating activities mean principal revenue-producing activities of a firm. It represents the transactions those determine the profit or loss of a firm.
Examples of cash Flows from operating activities:
● Cash sale (goods or services)
● Cash receipts from commission, fees and royalties income etc.
● Cash payments to workers or employees in form of salary or wages.
● Cash payments to supplier of goods or services.
● Cash receipt on account of insurance premium by insurance companies.
● Cash payments in form of claims, annuity and other benefits.
● Cash payments or refund of income tax in case not included in investing or financing activities.
● Cash payments on account of current and future contracts.
Note: Cash receipt on sale of plant and machinery comes under category of investing activities.
Cash flow from investing activities
Assets and long-term investments that do not come under cash equivalents are known as investing activities. Investing activity represents how much investment in long-term assets has been made to earn profit in future.
Examples of Cash Flows from investing activities:
● Cash payments to acquire tangibles and intangibles assets including construction of assets and capitalization of research and development cost.
● Cash receipts from sale of investments and disposal of fixed assets.
● Cash payment for investments in shares, warrants and debentures of other companies etc. excluding those which are covered under cash equivalents or purchased for trading purpose. If so, those come under operating activities.
● Cash received from disposal of or sale of shares, warrants or redemption of funds other than those which are kept for trading purpose.
● Advances or loan made to third party other than by financing companies.
● Cash payment for future contracts other than trading purpose.
● Cash received from future contracts other than trading purpose.
Cash flow from financing activities
The activities which may result in change in size and composition of owner’s capital including preference shares are called financing activities. Separate disclosure is important for financing activities.
Examples of Cash flows from financing activities include cash received on issue of shares, debentures, loans, bonds and other short- or long-term borrowings.
Cash payments on redemption of debentures bonds, preference shares etc.