Question

Compare and contrast operating, investing, and financing activities.

Answer 1

Business activities: Business activities include operating,investing and financing activities. Operating activities, or the fundamental activities the business engages in can include the production, sales, and delivery of the company's product as well as collecting payment from its customers.

Operating Activities: The activities involved in earning revenues. For example, the purchase or manufacturing of merchandise and the sale of the merchandise including marketing and administration. In the statement of cash flows the operating activities section identifies the cash flows involved with these activities by focusing on net income and the changes in the current assets and current liabilities.

Why Cash Flow from Operating Activities is Important. Because cash flow indicates the immediate health of a company, cash flow is an important factor that helps determine a company's ability to pay its current expenses. These expenses include operating expenses such as labor costs and the repayment of debts.

Operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services and cash payments to suppliers and employees for acquisitions of inventory and expenses.

Investing Activities:  

Investing activities are the second main category of net cash activities listed on the statement of cash flows and consist of buying and selling long-term assets and other investments. In other words, this is the net amount of cash received and paid during an accounting period for long-term assets and investments. You can think of these activities like the money a company uses to invest in itself or the money it makes from its investments.

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 ...

  

Investing activities generally involve long-term assets and include:

• Making and collecting loans.

• Acquiring and disposal of investments and productive long-lived assets.

Financing Activities:

Cash flow from financing (CFF) activities 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, financing activities also include repaying investors, adding or changing loans, or issuing more stock.

In other words, financing activities are transactions with creditors or investors used to fund either company operations or expansions. These transactions are the third set of cash activities displayed on the statement of cash flows.

Financing activities involve long-term liabilities, stockholders' equity (or owner's equity) , and changes to short-term borrowings. Financing activities are reported in its own section of the financial statement known as the statement of cash flows (SCF) or cash flow statement.

Examples of financing activities that involve long-term liabilities include the issuance or redemption of bonds. An increase in bonds payable is reported as a positive amount in the financing activities section of the SCF. The positive amount signifies a source of cash, or that cash was provided by issuing additional bonds. A decrease in bonds payable will be reported as a negative amount in the financing activities section of the cash flow statement. A negative amount connotes that cash was used to repurchase or redeem the corporation's bonds.

Financing activities liability and stockholders; equity items and include:

• Obtaining cash from creditors and repaying the amounts borrowed.

• Obtaining capital from owners and providing them with a return, and return of, their investment.