Chapter 6 — Classification of Cash Flows
ASC 230 requires entities to classify cash receipts and cash payments as operating, investing, or financing activities on the basis of the nature of the cash flow. Grouping cash flows into one of these three categories enables investors and creditors to evaluate significant relationships within and between those activities. Such presentation also links similar cash flows (e.g., cash proceeds from and repayments of borrowings), facilitating further analysis of the reporting entity’s activities.
The most appropriate classification of a particular cash flow may not always be
clear because, as indicated in ASC 230, “[c]ertain cash receipts and payments may
have aspects of more than one class of cash flows.” Paragraph BC39 of ASU 2016-15
states that, in such circumstances, entities must determine the appropriate
classification by considering when to (1) “separate cash receipts and cash payments
and classify them into more than one class of cash flows” and (2) “classify the
aggregate of those cash receipts and payments into one class of cash flows based on
predominance.” See Section 6.4
for more information about when cash payments and receipts have more than one class
of cash flows.
This chapter provides an overview of the three cash flow categories as well as guidance on how to apply the cash flow categorization principles in a number of situations.