Business activities can be classified into three groups:
- Operating activities involve those activities conducted in the course of running a business. These activities determine net income and changes in the working capital account (accounts receivable, inventory, and accounts payable). Examples:
- Selling goods and services
- Employing managers and workers
- Buying goods and services
- Paying taxes
- Investing activities are those associated with spending funds to begin and continue operations. In general, these activities affect the long-term asset items on the balance sheet. Examples:
- Buying resources such as land, buildings, and equipment needed in the operation of the business.
- Selling these resources when no longer needed.
Selling land, buildings, and equipment is associated with investing activities, even though it results in a cash inflow, because it involves resources used to begin and continue operations.
- Financing activities are related to obtaining or repaying capital. In general, these activities affect the debt and the equity items on the balance sheet. Examples:
- Issuing stock
- Paying dividends to stockholders
- Obtaining loans from creditors
- Repaying amounts plus interest to creditors
Payments of dividends and interest are associated with financing activities, even though they involve cash outflows, because they are necessary to obtain funding.
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