Categorizing Cash Transactions by Activity

What types of activities does a company engage in, and how would categorizing cash transactions into activities help financial statement users? This is a great question. You’ve journalized many transactions involving cash. For example, companies might do the following:

• make sales and get cash for it,
• buy inventory and pay cash for it,
• pay their employees,
• have excess cash that they put into investments,
• pay money to shareholders as a dividend,
• get cash from bank loans,
• pay the bank interest on bank loans,
• and many more…

Looking at the list above, what groupings do you think would be helpful? Let’s follow the income statement. We have two types of income: operating and net income. So we already know that income statement users find operating income useful (that is, income generated from operating the company’s business model). Maybe users would find cash generated from operating the business model useful as well! The first section in the cash flow statement is operating activitiesOperating Activities:
A section on the Statement of Cash Flows. This section includes all transactions the company engages in that fit its business model. For example, companies that purchase and resell goods would record cash from sales to its customers, payments for inventory, and wages paid to employees as operating activities in the Statement of Cash Flow..

Operating Activities:

This category includes all transactions the company engages in that fit its business model. For example, companies that purchase and resell goods would record cash from sales to its customers, payments for inventory, and wages paid to employees as operating activities in the Statement of Cash Flow.

Back to the income statement. Below operating income, we find other income/expenses. These are peripheral activities that arise from investing (i.e., interest income, dividend income, and gains and losses) and financing. The second section in the Statement of Cash Flow is investing activitiesInvesting Activities:
A section on the Statement of Cash Flows. This section includes transactions involving non-current assets such as financial investments and PPE. For example, purchases of long-term investments, sale of investments, buying land, buying equipment, or selling a building. followed by financing activitiesFinancing Activities:
A section on the Statement of Cash Flows. This section includes transactions involving debt and equity. For example, dividends paid, taking on a loan, or repaying loan balances..

Investing Activities:

This category includes transactions involving non-current assets such as financial investments and PPEPP&E:
Property, Plant, & Equipment.. For example, purchases of long-term investments, sale of investments (i.e., divesting), buying land, buying equipment, or selling a building.

Financing Activities:

This category includes transactions involving debt and equity. For example, dividends paid, taking on a loan, or repaying loan balances.

Let’s give this a try. I’ll list transactions involving cash, and you write down whether the transaction is an operating, investing, or financing activity. I’ll do the first few to get you going.