Definition
ASC 230-10 requires a statement of cash flows that classifies cash flows as operating, investing or financing. Operating activities include cash from customers and payments to suppliers, employees and for interest. Investing covers purchases and sales of long-lived assets and investments. Financing covers borrowings, repayments, equity issuances, dividends and buybacks. The total explains the change in cash, cash equivalents and restricted cash. Non-cash investing and financing activities are disclosed separately.
Why it matters in an audit or review
Classification errors and cash balances that do not tie to the balance sheet are frequent findings. Auditors recompute the statement from the trial balance, check that the ending total agrees to cash and restricted cash on the balance sheet, and test the classification of unusual items. A tie-out of net change to bank evidence supports the cash figure.
Example
Illustrative: net income of $400,000 plus depreciation of $90,000, less a receivable increase of $60,000, plus a payable increase of $25,000, gives operating cash flow of $455,000. Capital spending is $300,000 (investing). Borrowing of $100,000 less dividends of $50,000 is $50,000 (financing). Net increase in cash is $205,000.
Common mistakes
- Classifying dividends or equity buybacks as operating.
- Omitting restricted cash from the reconciled total.
Sources
- FASB ASC 230-10, Statement of Cash Flows, Overall (including 230-10-45-4, 45-15 and 45-17)
- KPMG, Handbook: Statement of cash flows (kpmg.com)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error