The statement presented above lumped together all sources of cash and uses of cash. To understand better how cash flows have been influenced by various decision, it is helpful to classify cash flows into three classes.
Operating activities
Operating activities involve producing and selling goods and services. Cash inflows from operating activities include monies received from customers for sales of goods and services. Cash outflows from operating activities include payments to suppliers for materials to employees for services, and to the government for taxes.
Investing activities
Investing activities involve acquiring and disposing fixed assets,buying and selling financial securities and disbursing and collecting loans. Cash inflows from investing activities include receipts from the sale of assets recovery of loans and collection of dividend and interest. Cash outflows from investing activities include payments for the purchase of assets and disbursement of loans.
Financing activities
Financing activities involve raising money from lenders and shareholders, paying interest and dividend, and redeeming loans and share capital. Cash inflows from financing activities include receipts from issue of securities and from loans and deposits. Cash outflows from financing activities include payment of interest on various forms of borrowings, payment of dividend, retirement of borrowings and redemption of capital.
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