Statement of Cash Flows | Intermediate Accounting | CPA Exam FAR | Chp 5 p 2

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The information in a statement of cash flows should help investors, creditors, and others to assess: (1) the entity’s ability to generate future cash flows; (2) the entity’s ability to pay dividends and meet obligations; (3) the reasons for the difference between net income and net cash flow from operating activities; and (4) the cash and noncash investing and financing transactions during the period. The required presentation of the statement of cash flows provides financial statement users with information about the major sources and uses of cash during the fiscal period.

Classification of Cash Flows

3. The statement of cash flows classifies cash receipts and cash payments by operating, investing, and financing activities. Operating activities include all transactions and events that are not investing and financing activities. Operating activities include the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services, and cash payments to suppliers and employees for acquisitions of inventory and expenses. Operating activities involve income determination items.

4. Investing activities include (a) making and collecting loans, and (b) acquiring and disposing of investments and productive long-lived assets. Investing activities involve cash flows generally resulting from changes in long-term asset items.

5. Financing activities involve liability and stockholders’ equity items and include (a) obtaining cash from creditors and repaying the amounts borrowed, and (b) obtaining capital from owners and providing them with a return on, and return of, their investment. Financing activities involve cash flows generally resulting from changes in long-term liability and stockholders’ equity items.

6. The typical cash receipts and cash payments of a business entity classified according to operating, investing, and financing activities are shown below.

Operating Activities
Cash inflows
From sales of goods or services.
From returns on loans (interest) and on equity securities (dividends).
Cash outflows
To suppliers for inventory.
To employees for services.
To government for taxes.
To lenders for interest.
To others for expenses.

Investing Activities
Cash inflows
From sale of property, plant, and equipment.
From sale of debt or equity securities of other entities.
From collection of principal on loans to other entities.
Cash outflows
To purchase property, plant, and equipment.
To purchase debt or equity securities of other entities.
To make loans to other entities.

Financing Activities
Cash inflows
From sale of equity securities.
From issuance of debt (bonds and notes).
Cash outflows
To stockholders as dividends.
To redeem long-term debt or reacquire capital stock.


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  • Hi there professor Farhat. I'm studying statement of cash flows for my intermediate II class. I'm not sure what video I should watch up to in your playlist, because I also see some similar videos after video 5.

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  • Can someone explain why does Depreciation expense goes from 4000 to 40000 at min 43:00 ?

  • If a company issues common stock they receive cash. If the company issues common stock and retires long-term debt it is a noncash activity. However, would you still report the cash inflow of the issuance of stock in the financing section? I'm missing how the issuance of stock to retire debt is a noncash activity. The company is paying off the debt with the cash received, correct?

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  • G MMG MM

    Author Reply

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  • if it dividends received wouldn't it be some sort of investing activity ?
    why operating? or will it depends on the main operation of the company ?

  • Thanks

  • hi Professor ,

    first of all, I want to thank you for sharing with us all great knowledge and experience.

    I see that we are given: Depreciation expence at 4000 not 40000 and accounts payable 7000 not 4000.

    I came up with a Net Cash Income of 48000.


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    Author Reply

    Is there a Part 3?

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  • I'm in chapter 23 in Interm. Acctg (entire chapter on Statement of Cash Flows). It was helpful to watch this video since it's more simplified. Now I can return to the more complex chapter with greater understanding. Thanks Professor Farhat!

  • Hi, Prof,
    Where is the Inventories or Purchases that made our account payable to Increase? I don't see it in the operating activities. Is it possible to Increase the Account payable without any transaction in the income statement ? Thanks.

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  • Just a heads up, in the illustration at 43:17, depreciation expense is 4,000, but in the next slide depreciation expense is 40,000. The problem is solved with the 40,000, but i think it meant to use 4,000 so the cash flow from operations should be 39,000, and the total increase in cash should 46,000. Thanks for the videos, they've been really helpful!

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