Question

Differentiate between investing activities, operating activities and financing activities. Please provide examples of each in your discussion.

Answer 1

Investing Activities

Cash flow from investing activities is an item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from amounts spent on investments in capital assets such as plant and equipment. For Example:- Cash paid for the purchase of plant and equipment, Cash received from the sale of investments in bonds etc.

Operating Activities

Operating activities are the company's core business activities, such as manufacturing, distributing, marketing and selling a product or service. Operating activities should generally provide the majority of a company's cash flow and largely determine whether a company is profitable. For Example:- Cash Sales, Cash received from debtors, Cash paid to creditors etc.

Financing Activities

Cash flow from financing activties is a category in a company's cash flow statement that accounts for external activities that allow a firm to raise capital. In addition to raising capital, it also include repaying investors, adding or changing loans and issue of stock. Cash flow from financing activities show investors the company's financial strength. For Example:- Cash paid for repayment of loan, issue of common stock, interest paid on bonds etc.