Cash flow refers to the amount of money generated or utilized at a given time. In simple terms, it can also be described as the increase in the amount of money or its decrease, that a firm, individual as well as an institution experience. There are three major classifications of cash flow which includes financing activities, investing activities as well as operating activities.
Operating activities involve cash or money that comes from the activities that a firm uses to generate net income. Therefore, investors should be advised to check closely the amount of money a business generates from the operating activities since this gives the best picture of how good the business is generating cash which will eventually benefit the stakeholders. Examples of the operating activities cash flows include cash from sales and those used to buy inventories as well as paying the operating expenses e.g. utilities and salaries. it also includes cash from interest as well as dividend interests and income tax.
Investing activities is another form of cash flow which involves transactions that are related to the long-term asset investments of a given business (Klammer, 2018). Cash flow from investing activities can always be identified by checking on the changes in the changes in the section of the fixed assets of the long-term in the balance sheet. Some of the instances of investing activities are like payments involving buying of land, equipment’s, buildings besides other investments assets.
Finally, financing activity cash flow involves the cash transactions where a business generates money from debts as well as payment of debts. Financing activity cash flow is always identified by looking at the changes involving the long-term liabilities as well as equity. Examples of this form of cash flow include cash obtained from issuing debt instruments e.g. bonds or notes, cash from issuing of capital, payments of cash for distribution dividends.