 In this presentation we will take a look at classifications of cash flows on the statement of cash flows. There's going to be three major categories on the statement of cash flows. Those will be operating activities, support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it investing activities and financing activities. So our goal here when we go through the statement of cash flow as we work through the statement of cash flows is going to be in part to decide which area these cash flows should go should they go into operating investing or financing. It's going to be common questions and common problems and really just information we need to know when reading the statements of cash flows. So we'll start off with the operating activities. We're just going to look at the major components of the cash flows within the operating activities. So we'll talk about in flows and outflows. Remember what we're talking about here is cash. So when we're talking about the statement of cash flows, we're talking about cash flows, the cash that goes into the company, the cash that goes out of the company. We're going to talk about in flows and outflows here related to operating activities. Before we go into the list of in flows and outflows related to operating activities, we want to know first that operating activities is going to be similar to us thinking about the income statement on a cash basis. So when we think about the operating activities, we're really thinking or one way to think about it would be that if we were to have the income statements on a cash basis, then what would the inflows and outflows be that'll basically be what are in the operating activities? When we get to the thought process in terms of how to determine operating investing and financing activities, we'll go more through that in the thought process. But just note operating activities you want to tie out in some way to income statement on not an accrual basis as is a normal income statement, but a cash basis. So any kind of sales then of course would be the operating activities, the sales related to cash sales or sales from collection on credit sales. So in other words, that would be sales from a cash flow basis that would be the major component of the operating activities. And that would include the sales that would be cash sales that we made now and sales that we collected on. So if we made a sale in the past, say last month, we made a sale or last year, let's say we made a sale on account, we did the work recorded revenue last year, but we got the cash this year from the accounts receivable, we reduced accounts receivable and recorded the revenue this year. I mean, recorded the cash when we got the cash this time. Well, from a cash flow statement, of course, the cash was received now this year, even though the work was done last year. So that would be from a cash flow perspective, cash flow this year from the sale that happened last year. On the outflow side, we'd have payments for operating expenses. So that would be the typical outflow. And again, you can think of it as a comparison to the income statement, where we would record the expense when we incur it in accordance with the matching principle. But here, of course, we're talking cash flows. And so the expenses that we have, similar to the income statement, we're going to record them here when the cash goes out, whether they be for expenses that we paid at the same time as we consumed the expense, or if they went through accounts payable, meaning, for example, if last year we paid for an expense, and then we didn't pay for it last year, we put it on account, we had an expense that we put on account into accounts payable and paid for it this year because we're paying off the payable, then that would be included in the cash flow this year, although it would not be an expense because we've recorded the expense last year when we incurred the expense, not when we paid for it. So you can see that relationship here. These are going to be items that are in the revenue cycle, meaning revenue and income and expenses are going to be our typical cash flows for the operating activities. However, on a cash basis, rather than an accrual basis, we're kind of converting the accrual basis to a cash basis for the operating activities. Now those two ways that we can do that, we can do that with a direct method and an indirect method. We'll talk about that later, but just note now that when we talk about those two methods, they apply only to the operating activities. Now we're going to go to the investing activities, same things, inflows and outflows for investing activities. Now note that when we look at cash inflows and outflows, we're hoping that most of the activity, like a lot of the action that's happening, is probably going to be in the operating activities because that's what our normal operations are. But we have other type of activities that we'll be dealing with other areas, income, investment activities and financing activities. And these are things you might want to think about in terms of the way I would think about it is, if you think of the normal journal entry related to something, is there an income statement account involved in it? If it is, then you probably have something dealing with an operating activity. If not, then you probably have something dealing with investing or in financing. So we'll talk more about that later, but just get an idea of that now. So sales of property plants and equipment. This is often one that was confusing when I first learned the statement of cash flows because property plants and equipment is going to be an asset and we're using the term investment activities here. So note that when you think about investments, you may be thinking like I used to of just stocks and bonds as like the types of investments and property plants and investments is a fixed asset. It's not in the same category, but in another sense it is. All assets that we have on the balance sheet are investments in a sense because that's why we bought them. We bought them in order to help us generate revenue in the future. They're not helping us generate revenue now. That's why they're assets. That's why they're on the books as assets. We're investing in them now. We put the cash, we got the cash, we left the cash, we spent the cash and we got something else. We didn't expend it now. We didn't get an expense and consume something. We got an investment in this case in property plants and equipment. So anything so you could see the journal entry. If we were to buy it with cash, we would credit cash, debit property plant and equipment, an asset. Neither of those two accounts are income statement accounts. Even if we financed it and got a loan, it would be a liability. So therefore it's not going to be an operating activity. That's one way you can think about it and say, hmm, probably not an operating that would leave you with investing or financing. And it's going to be an investing activity because we're investing in the equipment. And then we have the sale of long-term investments. So if we have an investment on the books as an investment, possibly stocks, then we could sell the investment and then that would be an investing activity as well. That's probably one that would come to mind as an investing type of activity if we bought and sold our long-term investments. If we go to the outflows then, we have the purchase of intangible assets and we've got the purchase of property plant and equipment. So once again, note that anything dealing with property plant and equipment is going to be on the investments portion. And you can think of that journal entry again, what's going to be the major journal entries related to property plants and equipment. Well, we buy it, which would be a debit to property plant and equipment, credit to cash, possibly a credit to notes as well to finance it. None of them have to do with the income statement. And therefore it's going to be something else, either investing or financing, in this case, investing. Or you can just memorize property plant and equipment is going to be investing. We're investing in something. When we sell the property plant and equipment also, we're going to debit cash and we're going to credit property plant and equipment. Now, we might have a gain or loss and you might think, well, that's kind of a, you know, what do we do with that? That's on the income statement. But really, the main components are going to be balance sheet type of accounts there. We'll talk about the gain or loss when we get to that information. But note that anything dealing with property plant and equipment typically will be investing, whether we be buying it or selling it. And then we have the purchase of investments. And once again, that would be more of an investing activity clearly because we're purchasing investments, possibly stocks or bonds that we're investing into. And that would be part of the investing activities. Then we have the financing activities. The final component we'll be taking a look at. We've taken a look at operating investing and now financing. That's going to include issue of common and preferred stock. So when we issue stock, that's going to be something that deals with the owner. So the owners were issuing the stock to the owners is kind of like an initial investment from the owner. So that's going to be a financing type of activity. And then we have the re issuing of treasury stock. So if we had the treasury stock, financing activity, and then the issue of debt. So if we had debt that we're going to be dealing with, then also financing activity, note that these types of entries again, don't deal with anything on the income statements, typically when we have the inflow for the issuance of stock, for example, we would be debiting the cash, but not crediting income, we would be crediting common stock or additional paid in cash and or additional paid in capital. So there's no income statement account involved in that. So typically we would say, okay, it's not going to be operating. And therefore it needs to be something with investing or financing. And these two, we're not dealing with anything in terms of an asset. We're not giving the cash away to buy an asset that we're investing into the future. We're financing the company. The point of this is to get the cash in the company to get capital to get cash and or paying back that capital or cash that we use to finance the company in the past. So that's going to be the financing activities. Then we have the outflows or owner's contributions as well. So note here, when we have the contributions, if it's a corporation, that would be the common stock, we would issue common stock, that would be like an owner investment because we would be getting more owner investment. If we're sole proprietorship or partnership, then the owners would be investing their money back into the company. And we would debit cash and credit their capital account, another type of owner investment for that type of business entity. And then we've got the paying dividends. So when we pay back the dividends, that's going to be part of the financing activities. And note again, what's happening here is we're crediting cash and we're debiting retained earnings or dividends. Neither of those two things are dealing with the income statement and neither of them are dealing with something we're investing in in terms of an asset. They're part of the financing activities. And then we have the purchase of treasury stock and the pay withdrawals. These two are similar. Again, this being for a corporation, when we pay the owner's back, this being for a sole proprietorship or partnership, when we pay the owner's back. And then when we pay the debt, when we pay off the debt, same type of activity. Again, neither of the accounts, we're going to credit cash to pay off, we're going to debit a liability, the note payable to pay off. So it's not typically operating, it's typically going to be financing.