CFA Level I Exam · Analyzing Statements of Cash Flows I

Cash Flow Statement Classification: CFO, CFI and CFF Explained

Updated 7 October 2026 · Fact-checked

The cash flow statement sorts every cash receipt and payment into operating (CFO), investing (CFI) or financing (CFF) activities. CFO covers day-to-day business, CFI covers long-term asset transactions, and CFF covers capital raised from or returned to owners and lenders. Interest and dividends are classified differently under IFRS and US GAAP. Non-cash deals are disclosed separately.

Understand Cash Flow Statement Classification: CFO, CFI, CFF

A cash flow statement answers one question: where did cash come from, and where did it go? It groups cash movements into three buckets so you can see whether a company funds itself from its business or from outside capital.

Operating activities (CFO) are the cash effects of the company's normal business: cash from customers, payments to suppliers and employees, and income taxes paid. Under US GAAP, interest paid, interest received and dividends received also sit here. Trading securities held for dealing purposes are usually treated as operating too.

Investing activities (CFI) are purchases and sales of long-term assets and of investments in other entities: property, plant and equipment, intangibles, and debt or equity securities of other companies. Loans made to others and their repayment are also investing.

Financing activities (CFF) are transactions with the providers of capital: issuing or repurchasing shares, issuing or repaying debt, and paying dividends to your own shareholders. Under US GAAP, dividends paid are always CFF. Under IFRS, dividends paid may be shown in either CFO or CFF. Under US GAAP, interest paid is not financing, even though it relates to debt.

Non-cash transactions do not move cash, so they are left out of the three totals. Examples are buying a building by issuing a mortgage, or converting bonds into shares. Both IFRS and US GAAP require them to be disclosed elsewhere, such as in the notes, so the statement does not hide important investing and financing events.

Key formulas to remember

Net change in cash: CFO + CFI + CFF (+ effect of exchange rates on cash) = Net change in cash and cash equivalents; Beginning cash plus this net change equals ending cash on the balance sheet.
IFRS: interest paid: CFO or CFF (company's choice); Must be applied consistently and disclosed.
IFRS: interest received: CFO or CFI (company's choice); Financial institutions typically report these in CFO.
IFRS: dividends paid: CFO or CFF (company's choice); Dividends paid to own shareholders.
IFRS: dividends received: CFO or CFI (company's choice); Dividends from investments in other companies.
US GAAP: interest and dividends: Interest paid, interest received, dividends received = CFO; dividends paid = CFF; No choice under US GAAP.
Income taxes paid: CFO (unless specifically identified with an investing or financing transaction under IFRS); US GAAP generally puts all taxes paid in CFO.
Non-cash transactions: Excluded from CFO, CFI and CFF; disclosed in notes; Examples: asset bought with debt or shares, debt-for-equity swap.

How to solve Cash Flow Statement Classification: CFO, CFI, CFF questions

Use the same short routine for any classification question. Decide first which standard applies, then what the cash was for.

1Check the reporting standard. If the question says US GAAP, interest and dividend rules are fixed. If it says IFRS, note whether the company has a choice.
2Ask whether cash actually moved. If not (asset bought with a note or shares, conversion of debt), it is a non-cash transaction and is excluded from all three totals.
3Ask whether the item is part of normal revenue-producing activity or working capital: customers, suppliers, wages, taxes. If yes, it is CFO.
4Ask whether it concerns long-term assets or investments in other entities. If yes, it is CFI.
5Ask whether it concerns raising or repaying capital with owners or lenders. If yes, it is CFF.
6Apply the interest and dividend rules last, since they are the usual exception.
7Add the signs: inflows positive, outflows negative. Check the total against the change in cash if the question asks for it.

Quickest way: The three-question filter

When to use it: Use it on standalone multiple-choice items where you must pick the right classification in about 90 seconds.

Did cash move? If not, pick the option that says non-cash or disclosed in the notes.
Does it involve interest or dividends? Check IFRS versus US GAAP first. Under US GAAP, of the interest and dividend items only dividends paid go to CFF; interest paid, interest received and dividends received are CFO.
Otherwise: customers, suppliers, staff and tax mean CFO; long-term assets and other companies' securities mean CFI; own shares and own debt mean CFF.
Eliminate any option that puts a non-cash item in a total or that gives US GAAP a free choice.

Common mistakes in Cash Flow Statement Classification: CFO, CFI, CFF

Putting interest paid in CFF under US GAAP.
Interest relates to debt, and debt is financing, so it feels natural.
Fix: Under US GAAP, interest paid is CFO. Only IFRS lets you choose CFO or CFF.
Including a non-cash transaction, such as buying equipment with a loan from the seller, in CFI and CFF.
Students see both an investing and a financing element.
Fix: No cash changed hands, so it appears in neither total. It is disclosed in the notes.
Treating dividends received as financing.
The word dividend is linked with financing in the mind.
Fix: Dividends paid to your own shareholders are CFF (or CFO under IFRS). Dividends received on investments are CFO (US GAAP) or CFO/CFI (IFRS).
Assuming IFRS and US GAAP give the same classification for taxes and interest.
Students memorise one set of rules.
Fix: Learn the IFRS choices (listed in the key formulas) and the fixed US GAAP rules side by side.
Putting the cash proceeds from selling equipment in CFO.
The sale feels like a business event, and the gain is on the income statement.
Fix: The full cash proceeds are CFI. The gain is removed from CFO in the indirect method.
Classifying debt repayments by splitting interest and principal wrongly.
Both are paid together in one instalment.
Fix: Principal repaid is CFF. Interest is CFO under US GAAP, and CFO or CFF under IFRS.

Worked examples

Example 1

A company reports under US GAAP. During the year it pays $12 million in interest, receives $3 million in dividends from an equity investment, pays $20 million in dividends to its own shareholders, and issues bonds for $100 million cash. Which total is affected by each item, and what is the net effect on CFO and CFF? (Ignore all other items.)

Show the solution

Interest paid under US GAAP is CFO: −12.
Dividends received under US GAAP are CFO: +3.
Dividends paid to own shareholders are CFF: −20.
Bond issuance for cash is CFF: +100.
CFO = −12 + 3 = −9.
CFF = −20 + 100 = +80.

Answer: CFO = −$9 million; CFF = +$80 million.

Example 2

A company buys a building worth €50 million by paying €10 million in cash and issuing a €40 million mortgage to the seller. It also sells old machinery for €6 million cash. What is the impact on CFI?

Show the solution

The cash paid for the building is €10 million, an investing outflow: −10.
The €40 million mortgage is a non-cash transaction. It is excluded from CFI and CFF and disclosed in the notes.
The machinery sale brings €6 million cash, an investing inflow: +6.
CFI = −10 + 6 = −4.

Answer: CFI = −€4 million; the €40 million mortgage-financed portion is disclosed as a non-cash transaction.

Exam tips

Memorise the IFRS table of four items (interest paid, interest received, dividends paid, dividends received) and the single US GAAP rule. Most questions test this.
If a stem mentions assets acquired by issuing shares or debt without cash, expect the answer to be that it is excluded from the statement.
Read the standard named in the stem before reading the options. A choice that is valid under IFRS is often wrong under US GAAP.
Use sign discipline: inflows are positive and outflows negative before adding totals.
With no penalty for wrong answers, never leave a question blank. Eliminate non-cash and wrong-standard options first, then guess.

Practice questions from Analyzing Statements of Cash Flows I

Cash Flow Statement Classification: CFO, CFI, CFF in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cash Flow Statement Classification: CFO, CFI, CFF: frequently asked questions

What is the difference between IFRS and US GAAP for interest and dividends in the cash flow statement?

US GAAP fixes them: interest paid, interest received and dividends received are CFO, and dividends paid are CFF. IFRS allows interest paid and dividends paid in CFO or CFF, and interest received and dividends received in CFO or CFI. The choice must be applied consistently.

Are non-cash investing and financing activities included in the cash flow statement?

No. They do not change cash, so they are excluded from CFO, CFI and CFF. Both IFRS and US GAAP require disclosure elsewhere, such as in the notes. Examples are acquiring an asset with a mortgage and converting bonds into equity.

Where do income taxes paid go in the cash flow statement?

Generally in CFO. Under IFRS, taxes can be classified as investing or financing only when they can be specifically identified with such a transaction. Under US GAAP, taxes paid are generally part of CFO.

Is the purchase of another company's bonds CFI or CFO?

It is usually CFI, because it is an investment in the securities of another entity. The exception is securities held for trading, which are typically operating. Interest received on those bonds follows the interest rules for the relevant standard.