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Operating cash flows come from the activities that generate a business’s revenue, investing cash flows concern long-term assets and other investments, and financing cash flows change its borrowings or contributed equity. Classify each actual receipt or payment by its cause, then add the three sections to reconcile the change in cash. A non-cash transaction does not become a cash flow simply because it changes the balance sheet.
The classification test
Start with the transaction, not the sign of the cash movement. Customer collections and supplier payments normally sit in operating activities. Buying equipment is an investing outflow; selling such an asset is an investing inflow. Borrowing money is a financing inflow, while repaying principal is a financing outflow. The IFRS Foundation’s IAS 7 summary sets out these activity definitions.
This matters in the CFA curriculum because the same closing cash balance can arise from very different sources. CFA Institute’s cash flow overview links the cash flow statement to the income statement and balance sheet, and includes the difference between IFRS and US GAAP presentations. Classification makes that reconciliation interpretable.
An illustrative transaction ledger
Suppose an invented company starts a period with cash of 40 monetary units. During that period it collects 120 from customers, pays 70 to suppliers, buys equipment for 30, raises 20 by issuing debt and pays 10 in dividends. All amounts are illustrative cash transactions, not company data.
| Customer collections | Operating | +120 |
| Supplier payments | Operating | −70 |
| Equipment purchase | Investing | −30 |
| Debt issue | Financing | +20 |
| Dividend payment | Financing | −10 |
Operating cash flow is 120 less 70, or +50. Investing cash flow is −30. Financing cash flow is 20 less 10, or +10. Together they give a +30 net movement, so the illustrative closing cash is 70. The example deliberately leaves out interest and taxes so the three-way logic is easy to see.
Mistakes to catch before you answer
- Classifying by positive or negative sign. A cash inflow could be operating, investing or financing. Its source decides.
- Confusing profit with cash. Revenue earned on credit is not a customer receipt until cash arrives.
- Putting the whole debt payment in financing. Principal and interest may need separate treatment. Check the applicable accounting standard before assigning interest.
- Assuming one universal rule for interest and dividends. The classification can depend on the reporting standard and period. Read the basis stated in the question before assigning these items.
For revision, classify individual transactions first and only then compute section totals. The CFA programme page provides the programme context, while how it works explains the available study route.
Sources
- Analyzing Statements of Cash Flows I | CFA Institute · cfainstitute.org · Retrieved
- IFRS - IAS 7 Statement of Cash Flows · ifrs.org · Retrieved
