Question

Describe the three key cash-related activities of a firm.

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Answer 1

The three cash related activities of a firm are

1. Activities relating to operations of the firm

2. Activites relating to investments made by the firm

3. Activities relatig to financing of the firm.

1. Activities relating to operations of the firm:

These are the basic activities for which the firm has come into existence. These relate to the day to day operations such as purchase , sale and expenses of the firm. These are the activities from which the firm generates profits and the owners will be very much interested in the way these activities are carried out.

2. Activities relating to investments

These are the activities wherein the cash is used for acquiring long term assets which will help the firm in generating revenues and profits over a period of time. Whereas the operating activities are short term (reporting period) , investing activities have a long term effect. The operational activities are dependent on the nature of investments made by the firm.

3. Activities relating to financing of the firm

These are very vital for the above two types of activities. The nature and amount of finances raised by the firm will determine in the operational and investing decisions.A proper mix of the short term and long term financing is very important for efficient use of the funds and thereby higher returns for the owners.

As can be seen all the three activities are related to cash utilisation and each has a very important role in the overal functioning of the firm.