Subject 1. The Classification of Business Activities
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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.
In Reading 27 [Understanding the Cash Flow Statement] a more detailed discussion of different business activities and their impact on cash flows will be provided.
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