Chapter 12
Using Accounting Information
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Three Sources and Uses of Cash
A business generates and consumes cash in three ways
•
Operating Activities
•
Investing Activities
•
Financing Activities
As you can see in Figure 12.23, the cash flow statement is broken into these three sections. At this
point, we are not concerned with the individual line items, only the purposes of each section.
Cash Flows fromOperating Activities
Operating activities
are those necessary to run the daily operations of the business. This section
of the cash flow statement tracks the movement of cash within a business on the basis of day-to-
day activities. It is the most important section of the cash flow statement because the future of a
business largely depends on the activities reported in this section.This section includes items such
as the cash regularly received from revenues and collections of receivables throughout the year. It
also includes items such as regular payments of cash for expenses, inventory, and accounts payable.
Second Cup has been able to generate positive cash flows from operating activities in both 2013
and 2014. This is a good sign because it means that the business does not rely on selling capital
assets or shares to fund its daily operations.
Cash Flows from Investing Activities
Investing activities
includes any exchange of cash related to the long-term financial investments
or capital assets of the business. Capital assets are long-term assets such as vehicles, equipment,
and land.The purchase of these assets can be thought of as the business investing in itself because
they usually result in increased operations. For example, if a truck is purchased during the year, cash
flows from investing activities decrease. Alternatively, if the business sells land, cash flows increase
because the business receives cash in exchange for the land.
It is not necessarily a bad thing to have negative cash flows from investing activities. In fact, positive
cash flows from investing activities can be a red flag, especially when cash flows from operations
are negative. As shown in the investing activities section of the cash flow statement, Second Cup
used a lot of cash to purchase new equipment over the past two years.This is a good sign because it
shows that the company is investing in its future by upgrading its capital assets and/or expanding
into new markets.
Cash Flows from Financing Activities
Recall that both debt and equity are used to finance businesses.
Financing activities
are any
payments or receipts of cash that relate to changes in either long-term debt or shareholders’ equity.
This section of the cash flow statement tracks the movement of cash within a business based on the
