Statement of Cash Flows
A statement classifying cash receipts and payments into operating, investing, and financing activities.
FAR loves to make you classify a single transaction or build the indirect-method operating section. The tell: a list of items you must drop into the right bucket. Memorize the boundary cases—under U.S. GAAP, interest paid, interest received, and dividends received are operating, but dividends paid are financing (IFRS currently lets you choose; that choice narrows under IFRS 18). Buying/selling PP&E and investments are investing; issuing stock or debt and repaying principal are financing. A frequent trap: cash flows from securities held for trading are operating, not investing—classification follows the asset’s purpose.
In the indirect method, start with net income and reverse the accrual world: add back depreciation/amortization and losses, subtract gains, then adjust working capital—an increase in a current asset is subtracted, an increase in a current liability is added. Students invert these signs constantly. It reconciles only cash, so watch for noncash investing/financing disclosures.
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