Skip to main content. Module Managing Cash Flows. Search for:. Business in Action Amounts are in millions. Key Takeaway The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash activities related to net income. Investing activities include cash activities related to noncurrent assets. Review Problem Cash payments for purchases of merchandise Cash receipts from sale of common stock Cash payments for equipment Cash receipts from sales of goods Cash dividends paid to shareholders Cash payments to employees Cash payments to lenders for interest on loans Cash receipts from collection of principal for loans made to other entities Cash receipts from issuance of bonds Cash receipts from collection of interest on loans made to other entities Solution to Review Problem It would appear as investing activity because purchase of equipment impacts noncurrent assets.
It would appear as operating activity because sales activity impacts net income as revenue. The reason for this is that it could be considered to be a regular part of one's operations or operating activities - one usually pays dividends once a year to one's investors the business owners as standard company practice.
However, I have also heard that it is possible to place dividends paid under cash flow from financing activities. This also makes sense as the investors were the source of finance for the business, and paying them dividends is a sort of repayment to them. Since repayments of loans to the business also go under this section cash flow from financing activities , it seems logical to include dividends paid to investors in this section too.
Both investments and loans are sources of finance , so paying them should also go under this section. So bottom line: If you're outside the US, dividends paid can go under either operating activities or financing activities.
If you're in the US, financing activities only. If you're outside the US, I would also check with your local accounting authority if they have any preference or follow any particular option teacher, lecturer, textbook or accounting standards board. Sorry if you were looking for a totally definitive answer, this one is not so cut-and-dry. Good luck in your studies! Financing activity by: Anonymous If the question is regarding a mutual fund company, then where will be the "dividend received" go into cash flow statement-operating or financing?
IAS 7, Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. A statement of cash flow classifies and presents cash flows under three headings:.
Operating activities can be presented in two different ways. The first is the direct method which shows the actual cash flows from operating activities — for example, the receipts from customers and the payments to suppliers and staff. The second is the indirect method which reconciles profit before tax to cash generated from operating profit. Under both of these methods the interest paid and taxation paid are then presented as cash outflows deducted from the cash generated from operations.
Investing activity cash flows are those that relate to non-current assets including investments. Examples of investing cash flows include the cash outflow on buying property plant and equipment, the sale proceeds on the disposal of non-current assets and any cash returns received arising from investments.
Financing activity cash flows relate to cash flows arising from the way the entity is financed. Entities are financed by a mixture of cash from borrowings from third parties debt and by the shareholders equity. Examples of financing cash flows include the cash received from new borrowings or the cash repayment of debt as well as the cash flows with shareholders in the form of cash receipts following a new share issue or the cash paid to them in the form of dividends.
This topic is examined in much more depth in the FR examination than it is at FA. For example, in FA, an extract, or the whole statement of cash flow might be required in the multi-task questions but it could also be constructed as an OT question. FR, however, is more likely to ask for an extract from the statement of cash flows using more complex transactions for example, the purchase of PPE using right-of-use asset leases.
However, that does not mean that FR will never require the preparation of a complete statement of cash flows so be prepared. There are two different ways of starting the cash flow statement, as IAS 7, Statement of Cash Flows permits using either the 'direct' or 'indirect' method for operating activities. The direct method is intuitive as it means the statement of cash flow starts with the source of operating cash flows.
This is the cash receipts from customers. The operating cash out flows are payments for wages, to suppliers and for other operating expenses which are deducted. Finally the payments for interest and tax are deducted.
Alternatively, the indirect method starts with profit before tax rather than a cash receipt. The profit before tax is then reconciled to the cash that it has generated. This means that the figures at the start of the cash flow statement are not cash flows at all.
In that initial reconciliation the profit before tax is adjusted for expenses that have been charged against profit that are not cash out flows; for example depreciation and losses on disposal of non-current assets, have to be added back, and non-cash income; for example, investment income and profits on disposal of non-current assets are deducted.
The changes in inventory, trade receivables and trade payables working capital do not impact on the measurement profit but these changes will have impacted on cash and so further adjustments are made. For example, an increase in the levels of inventory and receivables will have not impacted on profit before tax but will have had an adverse impact on the cash flow of the business. Thus, in the reconciliation process, the increases in inventory and trade receivables are deducted from profit before tax.
Conversely, decreases in inventory and trade receivables are added back to the profit before tax.
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