For the exclusive use of p. duong, 2015.
Harvard Business School 9-193-103
Rev. November 3, 1998
Statements of Cash Flows: Three Examples
John Stacey, a sales engineer for Aldhus Corporation, was worried. A flight delay had caused him to miss last week’s accounting class in the evening MBA program in which he had enrolled at the suggestion of the personnel director at Aldhus, a growing manufacturer of computer peripherals. The class he had missed had been devoted to a lecture and discussion of the statement of cash flows, and he was sure the material he had missed would be covered in the weekly quiz that was part of each class session. A classmate had faxed Stacey some notes distributed by their instructor, but they were too cryptic
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Notice that the statement of cash flows is divided into three sections: operating activities, investing activities, and financing activities. Each section shows the cash inflows and the cash outflows associated with that type of activity. Operating activities shows the inflows and outflows related to the fundamental operations of the basic line or lines of business that the company is in. For example, it would include cash receipts from the sale of goods or services and the cash outflows for purchasing inventory, and paying wages, taxes and rent. Investing activities shows cash flows for the purchase and sale of assets not generally held for resale and for the making and collecting of loans. (Maybe it should more appropriately be called the investing and disinvesting activities section.) Here is where you would see if the company sold a building, purchased equipment, made a loan to a subsidiary, or purchased a piece of equity in its supplier. Finally, financing activities shows the cash flows associated with increasing or decreasing the firm’s financing, for example, issuing or repurchasing stock and borrowing or repaying loans. It also includes dividends, which are cash flows associated with equity. However, ironically, it does not include interest payments; these are included in operating activities. John Stacey: That seems strange