Certified Financial Management Specialist Practice Exam

Which of the following represents the three types of cash flows?

1. Investment, income, and expenses

2. Operating, investing, and financing cash flows

3. Net profit, loss, and revenue

4. Current, long-term, and variable cash flows

The correct answer is: Operating, investing, and financing cash flows

The correct answer, which identifies the three types of cash flows as operating, investing, and financing cash flows, provides a clear framework for understanding how cash moves within a business. Operating cash flows refer to the cash generated from a company's regular business operations. This includes revenue from sales and payments to suppliers and employees. It indicates the company’s capability to generate sufficient cash to sustain its operations and fund other cash flows. Investing cash flows involve the cash spent on acquiring long-term assets, such as property, equipment, and investments in other companies, as well as cash received from the sale of these assets. This type of cash flow reflects the investments that a company makes to grow and expand its operations. Financing cash flows relate to the funds raised from external sources and the outflow of cash to pay back creditors and pay dividends to shareholders. This includes transactions like issuing stocks or bonds and taking out loans. Together, these three categories provide a comprehensive understanding of the cash inflows and outflows of a business, giving insight into its financial health and operational efficiency. Understanding these classifications helps in analyzing financial statements accurately and making informed decisions based on cash management practices. The other options do not encompass the complete and standardized definition of cash flows used in financial analysis.