Final answer:
The statement of cash flows segregates cash inflows and outflows into operating, financing, and investing activities. These categories cover day-to-day business transactions, purchases and sales of long-term assets, and funding of the business respectively. Understanding capital markets is also important as they transform financial flows between entities.
Step-by-step explanation:
The statement of cash flows segregates cash inflows and outflows by operating, financing, and investing activities. Operating activities involve the day-to-day functions of a business that affect its cash flow, such as sales of goods and services and payments to suppliers. Investing activities account for the purchase and sale of long-term assets like equipment, property, and investments in other businesses. Financing activities include transactions related to funding the business such as issuing stocks, bonds, or taking out loans.
As an example, the top portion of a balance of payments tracks the flow of exports and imports and the payments for those, which is related to the operating activities. The bottom portion, however, looks at international financial investments like stocks and bonds, or real estate abroad, as well as international borrowing and lending, aligning with investing activities. Additionally, understanding how capital markets transform financial flows is crucial as they repackage money that moves between suppliers and demanders of financial capital through various financial instruments including stocks and bonds.