Question

In the Statement of Cash Flows, why do we split out the operating, investing, and financing activities? Does the Statement of Cash Flow also recognize off-balance sheet assets and liabilities? Does any statement include it and should it?

Answer 1

Operating, investing and financing activities are completely different in their nature.

Operating activities are completely relating to day today operations like selling of goods or rendering services etc., where investing activities relate to a Company's investments like investing outside and to generate income from such investments etc., and financing activities relate to how a Company generates its capital from outsiders like shareholders, bondholders or money lenders etc. to start up a fresh business or to continue to run the exiting business.

For all of these activities, Cash is the main key which plays a vital role and for more visibility, cash generation and spending, from each of such three activities are shown separately in Statement of Cash Flows.

No, the statement of cash flows does not recognize off-balance sheet assets and liabilities as such off-balance sheet assets and liabilities are shown separately under Notes to Accounts and some will be hidden. For example Collateral debt obligations etc.