Classification of Cash Flows

While preparing cash flow statement for a company one should have knowledge about classification of cash flows in order to prepare a comprehensive and accurate cash flow statement. Basically, the cash flow statement is concerned with the flow of cash in and cash out of the company.

The net cash flow of a company over a period is equal to the change in cash balance over a period of time so if more cash is available with the company it will be positive and it will be negative if the cash balance decreases. The cash flow can be classified as follows:

1. Operational cash flows: It refers to revenue generated as well as payments made as a result of normal business activities done by the company. Cash flows from operations should be net positive if the company wants to remain solvent.

2. Investment cash flows: It includes Cash received from the sale of fixed assets as well as receipt of interest on loan given by the company to others, also cash spent on capital expenditure and purchase of investments is included in this category.

3. Cash flows from financing activities: It includes cash received from the issuance of debt and equity, or cash which is paid out as dividends; debt repayments, interest on debt etc… are included under this category.

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