Operating activities, investing activities and financing activities.
Every company prides in creating value for its shareholders. However, there is only one way this can be done; by engaging in business activities. Business activities are events in which an organization participate in for the sole purpose of making a profit. A sceptical look at these businesses reveals an evident diversity in the methods in which these businesses are undergone.
Although all business activities involve the flow of money (that’s what accounting itself is all about anyway), the pattern of flow allows for a classification of business activities into three different categories: Operating activities, investing activities and financing activities.
Operating business activities
This is a principle event which involves the primary business activity that a company or entity performs to earn a profit. In other words, these are the primary business operations which a company partakes in to earn revenue. Anything that the company was created to do; its primary purpose, consists part of its operating activities.
Here, the cash inflows and outflows are reported in two different financial statements. First, you find them recorded on the income statement; which is used down the line to calculate the net income. Secondly, it is recorded on the statement of cash flow- which shows the increase and decrease of cash flow from the three primary sources (operating, investing, financing).
Investing in business activities
This is the second main category of net cash activities. It involves the buying, selling and general trading of long-term assets. Long term assets are non-current assets which are not intended to be converted to cash within at least one year of the balance sheet date. A piece of equipment or property is an example of a long-asset.
So, this is the net amount of cash gotten from long-term assets and investments during an accounting period. However, long-term assets and finances should not be confused with each other as they have different meanings. Long-term assets are usually fixed assets like vehicles, buildings and equipment. If a company sells or buys a car or machinery, the proceeds are recorded in this section. On the other hand, investments frequently involve cash paid for trading or cash equivalents. However, payments on a note payable by a customer that resulted in the sale are considered an operating activity.
Financing business activity
In simple terms, financial activities are transactions carried out by an organization which, in one way or the other, goes on to affect the long-term liabilities and equity of the business. This is the third category of cash activities recorded.
Financial business activity keeps a record of how a company funds its projects, operations and expansions using an external source. If a company pays for its development- using its resources, no financing activity is carried out. The cash inflow usually comes from creditors or investors. And yes, these creditors are keeping an eye on how the company chooses to manage the funds provided for the stated project. In a way, financial activities also predict the liquidity of a company.
