Which of the following activities are included in operating activities in cash flow statement?

1) Cash payments to creditors and Bills payables
2) Cash advances and loans made to third parties
3) Cash payments to acquire fixed assets
4) Cash payment for buy-back of equity shares
5) Cash receipts from debtors and bills receivables
6) Cash receipts of insurance claim for property involved in accident
7) Cash payments or refunds of income taxes

1, 5, 7

The correct answer is option 2- 1, 5, 7.

1) Cash payments to creditors and Bills payables- OPERATING ACTIVITY
2) Cash advances and loans made to third parties- INVESTING ACTIVITY
3) Cash payments to acquire fixed assets- INVESTING ACTIVITY
4) Cash payment for buy-back of equity shares- FINANCING ACTIVITY
5) Cash receipts from debtors and bills receivables- OPERATING ACTIVITY
6) Cash receipts of insurance claim for property involved in accident-  INVESTING ACTIVITY
7) Cash payments or refunds of income taxes- OPERATING ACTIVITY

*Operating activities are the activities that constitute the primary or main activities of an enterprise. For example, for a company manufacturing garments, operating activities are procurement of raw material, incurrence of manufacturing expenses, sale of garments, etc. These are the principal revenue generating activities (or the main activities) of the enterprise and these activities are not investing or financing activities. The amount of cash from operations’ indicates the internal solvency level of the company, and is regarded as the key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, paying dividends, making of new investments and repaying of loans without recourse to external source of financing. Cash flows from operating activities are primarily derived from the main activities of the enterprise. They generally result from the transactions and other events that enter into the determination of net profit or loss.

*As per AS-3, investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Investing activities relate to purchase and sale of long-term assets or fixed assets such as machinery, furniture, land and building, etc. Transactions related to long-term investment are also investing activities. Separate disclosure of cash flows from investing activities is important because they represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

* As per AS-3, financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in case of a company) and borrowings of the enterprise. Separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds ( both capital and borrowings ) to the enterprise.