List the three sections of the statement of cash flows.
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The three sections of the statement of cash flows are:
1. Operating Activities: This section includes cash flows from the primary operations of the business, such as cash receipts from sales of goods or services and cash payments for expenses like wages, rent, and taxes. It represents the cash flows that are directly related to the day-to-day operations of the company.
To determine the cash flows from operating activities, you can follow these steps:
- Start with the net income from the income statement.
- Adjust for any non-cash items such as depreciation and amortization.
- Consider changes in working capital, including accounts receivable, accounts payable, and inventory.
- Factor in other operating cash flows, such as interest received or paid and taxes paid.
2. Investing Activities: This section includes cash flows from investing activities, which involve the acquisition or disposal of long-term assets or investments. It represents the cash flows related to the purchase or sale of property, plant, and equipment, as well as investments in other companies.
To determine the cash flows from investing activities, you can follow these steps:
- Consider cash inflows from the sale of assets or investments, such as the proceeds from selling property or stocks.
- Account for cash outflows from the purchase of assets or investments, such as buying new equipment or acquiring shares in another company.
3. Financing Activities: This section includes cash flows from financing activities, which involve the raising or repayment of funds from creditors or shareholders. It represents the cash flows related to raising capital, repaying debt, and distributing dividends.
To determine the cash flows from financing activities, you can follow these steps:
- Consider cash inflows from obtaining financing, such as proceeds from issuing new debt or equity.
- Account for cash outflows from repayment of debt, such as principal repayments on loans.
- Factor in any cash paid out as dividends to shareholders.
By analyzing these three sections, stakeholders can understand how a company is generating and utilizing its cash resources, which is crucial for evaluating its financial health and future prospects.