Key takeaways
What this article covers, in order:
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
- The edge cases: interest, dividends, taxes and overdrafts
- Worked example: classifying a year at Coldharbour Logistics
- Reading the three sections together
The statement of cash flows sorts every cash movement into three activities. Operating activities are the cash effects of running the business day to day. Investing activities are buying and selling long-term assets and investments. Financing activities are raising and repaying money from owners and lenders. Together they explain exactly why your cash balance changed over the period.
Most items are easy to place. The hard cases are interest, dividends, taxes and overdrafts, where US GAAP and IFRS take different views, and where IFRS itself is changing from 2027. This guide covers both, with a worked example that classifies a full year of transactions under each framework.
Cash flow from operating activities
Operating activities are the principal revenue-producing activities of the business, plus anything that is not investing or financing. Typical items:
- Cash received from customers
- Cash paid to suppliers and employees
- Rent, utilities, insurance and other running costs
- Income taxes paid (usually; see the edge cases below)
Operating cash flow can be presented with the direct method (receipts and payments listed) or the indirect method (starting from profit and adjusting for non-cash items and working capital). Both IFRS and US GAAP allow either.
Cash flow from investing activities
Investing activities cover the purchase and sale of long-term assets and of investments that are not cash equivalents. When people search for "cash flow investments" in an accounting context, this is the section they mean. Typical items:
- Buying property, plant and equipment (capital expenditure)
- Proceeds from selling equipment, vehicles or buildings
- Buying or selling shares and bonds in other entities
- Acquiring or disposing of a subsidiary or business
- Loans made to other parties, and their repayment
Short-term deposits and bills are a common grey area. Under both frameworks, an investment generally counts as a cash equivalent only if it had a maturity of three months or less when you acquired it. A six-month deposit is therefore an investing outflow when you make it, not a movement within cash.
Cash flow from financing activities
Financing activities change the size and make-up of the business's equity and borrowings. Typical items:
- Proceeds from issuing shares
- Buying back shares
- Drawing down loans, bonds or other borrowings
- Repaying loan principal
- Dividends paid to shareholders
The edge cases: interest, dividends, taxes and overdrafts
Under US GAAP (ASC 230)
- Interest paid: operating. Interest capitalised into the cost of an asset is not shown in operating.
- Interest received: operating.
- Dividends received: operating.
- Dividends paid: financing.
- Income taxes paid: operating.
- Bank overdrafts: treated as short-term financing. Changes go in financing activities and an overdraft does not reduce the cash balance.
Under IFRS (IAS 7) before IFRS 18
IAS 7 has allowed a policy choice: interest and dividends paid as operating or financing, and interest and dividends received as operating or investing, applied consistently. Income taxes are operating unless they can be specifically identified with investing or financing. Bank overdrafts that are repayable on demand and form an integral part of cash management can be netted within cash and cash equivalents.
Under IFRS from 2027 (IAS 7 as amended by IFRS 18)
For annual periods beginning on or after 1 January 2027, the choice goes away for entities without a specified main business activity, which covers most ordinary trading businesses:
- Interest paid: financing
- Interest received: investing
- Dividends received: investing
- Dividends paid: financing
Banks, investment entities and other businesses whose main activity is lending or investing follow different rules. The same amendments also make the indirect method start from IFRS 18's operating profit or loss subtotal, and prior-period comparatives have to be restated.
Worked example: classifying a year at Coldharbour Logistics
Coldharbour Logistics runs two refrigerated warehouses for food producers. Here are its main cash movements for the year, and where each one lands. The IFRS column assumes the post-2027 rules.
- Cash collected from storage and handling customers, $2,400,000: operating under both.
- Cash paid for staff, electricity, maintenance and suppliers, $1,750,000: operating under both.
- Income tax paid, $90,000: operating under both.
- Interest paid on the bank term loan, $60,000: operating under US GAAP, financing under IFRS.
- Interest received on deposits, $8,000: operating under US GAAP, investing under IFRS.
- Dividend received from a small shareholding in a packaging firm, $12,000: operating under US GAAP, investing under IFRS.
- New blast freezer and racking, $480,000: investing under both.
- Proceeds from selling three old forklifts, $35,000: investing under both. Any gain on sale is removed from operating cash flow under the indirect method.
- Six-month government bills bought with surplus cash, $100,000: investing under both, because the maturity at purchase was over three months.
- New bank loan drawn to fund the freezer, $300,000: financing under both.
- Loan principal repaid, $120,000: financing under both.
- Dividends paid to shareholders, $70,000: financing under both.
The totals under each framework
US GAAP
- Operating: 2,400,000 − 1,750,000 − 90,000 − 60,000 + 8,000 + 12,000 = $520,000
- Investing: −480,000 + 35,000 − 100,000 = −$545,000
- Financing: 300,000 − 120,000 − 70,000 = $110,000
- Net increase in cash: $85,000
IFRS (from 2027)
- Operating: 2,400,000 − 1,750,000 − 90,000 = $560,000
- Investing: −545,000 + 8,000 + 12,000 = −$525,000
- Financing: 110,000 − 60,000 = $50,000
- Net increase in cash: $85,000
Same business, same bank balance, but operating cash flow is $40,000 higher under IFRS. If you compare a US company with an IFRS company, or calculate a ratio built on operating cash flow, check the classification policy first.
Reading the three sections together
The signs of the three totals tell a story about where a business is in its life:
- Operating negative, investing negative, financing positive: typical of a young business spending on assets and funded by owners or lenders.
- Operating positive, investing negative, financing negative: typical of an established business funding its own investment and repaying debt or paying dividends. Coldharbour is close to this pattern, with a one-off loan for the freezer.
- Operating positive, investing negative, financing positive: a profitable business expanding faster than its own cash allows.
- Operating negative, investing positive: the business may be selling assets to cover operating losses. Look closely.
Within investing activities, compare capital expenditure with depreciation over a few years. Spending consistently below depreciation can mean assets are wearing out without being replaced.
Non-cash transactions stay out of the statement
Some investing and financing transactions involve no cash at all: converting a loan into shares, acquiring equipment directly in exchange for a note to the seller, or swapping one asset for another. These are left out of the statement of cash flows and disclosed separately so readers can still see them.
Common classification mistakes
- Putting equipment purchases in operating because they were paid from the operating bank account. The account does not matter; the nature of the transaction does.
- Showing loan repayments as operating because they are a regular monthly payment. Principal is financing; only interest may be operating, and only under US GAAP or an IFRS policy that allows it.
- Treating a deposit longer than three months as cash.
- Including the gain on an asset sale in operating while also showing the full proceeds in investing.
- Changing classification year to year without restating the comparatives.
A note on "best cash flow investments"
If you came here looking for investments that produce regular cash income, this article is about accounting, not investment selection, and HelloBooks does not give investment advice. What it can help with is reading the investing section of any company's cash flow statement: how much it spends on its own assets, what it buys and sells, and whether its operating cash flow covers that spending.
How HelloBooks helps
HelloBooks builds the cash flow statement from your ledger using the direct or indirect method, so each transaction is classified based on the accounts it posts to rather than re-sorted by hand at year end. The fixed assets register records equipment purchases and disposals, loans and equity sit in their own balance sheet accounts, and bank feeds with bank reconciliation keep the cash figure accurate. Your accountant can review the account mapping once, and every period's statement follows it consistently.
