How to differentiate between operating investing and financing activities
Operating activities refer to the day-to-day activities that are directly related to the core operations of a business, which generate revenue. These activities involve the production, sales, and delivery of goods or services. Operating activities are essential for the sustainability and growth of a company. Examples of operating activities include:
1. **Sales of Goods or Services:** Revenue generated from the sale of products or services is a primary operating activity. This includes cash sales as well as credit sales.
2. **Purchasing of Inventory:** The purchase of inventory or raw materials for production is another operating activity. It involves cash outflow to acquire goods that will be sold to customers.
3. **Payment of Operating Expenses:** Operating activities also include the payment of expenses directly related to running the business, such as salaries, rent, utilities, and marketing costs.
4. **Collection of Accounts Receivable:** When customers pay their outstanding debts, it is considered an operating activity. This inflow of cash represents the collection of accounts receivable.
5. **Payment of Accounts Payable:** Similarly, when a business pays its outstanding debts to suppliers, it is considered an operating activity. This outflow of cash represents the payment of accounts payable.
Investing activities involve the acquisition or disposal of long-term assets that are not intended for immediate resale. These activities are aimed at enhancing the company’s long-term capabilities or generating investment income. Examples of investing activities include:
1. **Purchase or Sale of Property, Plant, and Equipment:** Investing activities include the acquisition or sale of fixed assets, such as land, buildings, machinery, or vehicles.
2. **Investment in Marketable Securities:** Companies may invest surplus cash in stocks, bonds, or other marketable securities to earn additional income.
3. **Purchase or Sale of Investments:** Investing activities also include buying or selling investments in other companies or subsidiaries.
4. **Loans Made or Received:** Loans provided to other entities or loans received from external sources are considered investing activities.
Financing activities involve transactions that affect the company’s capital structure and its relationship with owners and creditors. These activities are related to raising funds or repaying obligations to investors or lenders. Examples of financing activities include:
1. **Issuance of Common Stock:** When a company issues new shares of common stock, it is considered a financing activity. The proceeds received from the sale of stock increase the company’s equity.
2. **Issuance of Debt:** Companies may raise funds by issuing bonds or taking on loans. The cash received from these activities is considered a financing activity.
3. **Repayment of Debt:** When a company repays the principal amount of a loan or bond, it is considered a financing activity. This outflow of cash reduces the company’s liabilities.
4. **Payment of Dividends:** Cash payments made to shareholders as dividends are considered financing activities. It represents a return of profits to the owners.
5. **Purchase of Treasury Stock:** When a company buys back its own stock from the market, it is considered a financing activity. This reduces the company’s equity.
In summary, operating activities are the day-to-day activities that generate revenue, investing activities involve the acquisition or disposal of long-term assets, and financing activities relate to raising funds or repaying obligations. These activities collectively reflect the financial health and performance of a company.
Community Answer
Differentiate the operating, investing and financing activities. Accou.
Operating activity is concerned with regular operating work or we can say day to day activity..
Investment Activity is the activity which is sale and purchase or invested into a business for a longer period of time..
Finance Activity refers to the activities that are related to the money invested or sold up security in the business to Increse Pr decrease the finance of the business..
How to differentiate between operating investing and financing activities
Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Business Studies
16th Edition · 1552 pages
Chapter 5: Q24Q. (page 238)
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Differentiate between operating activities, investing activities, and financing activities.
Short Answer
Operating activities include all the transactions used in determining net income having a cash effect. Investing activities include acquiring and disposing of fixed assets and investments for cash.Financing activities include capital generating activities.
Step by step solution
Definition of Fixed Assets
All the assets or resources acquired to use in business operations for the long run and generating benefits are fixed assets.
Difference between all three activities reported in the statement of cash flow
- The operating activities section of the balance sheet reports ordinary business functions. It includes changes in current assets and liabilities and non-cash expenses.
- Investing activities include only the transaction providing a cash sale and purchase of fixed assets or investments.
- Financing activities include issuing and redeeming securities of any type for cash.
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Most popular questions from this chapter
Martinez Corporation engaged in the following cash transactions during 2017.
Sale of land and building $191,000
Purchase of treasury stock 40,000
Purchase of land 37,000
Payment of cash dividend 95,000
Purchase of equipment 53,000
Issuance of common stock 147,000
Retirement of bonds 100,000
Compute the net cash provided (used) by investing activities.
In its December 31, 2017, balance sheet Oakley Corporation reported as an asset, “Net notes and accounts receivable, $7,100,000.” What other disclosures are necessary?
E5-8 (L02) (Current vs. Long-term Liabilities) Frederic Chopin Corporation is preparing its December 31, 2017, balance sheet. The following items may be reported as either a current or long-term liability.
1. On December 15, 2017, Chopin declared a cash dividend of (2.50 per share to stockholders of record on December 31. The dividend is payable on January 15, 2018. Chopin has issued 1,000,000 shares of common stock, of which 50,000 shares are held in treasury.
2. At December 31, bonds payable of )100,000,000 are outstanding. The bonds pay 12% interest every September 30 and mature in installments of (25,000,000 every September 30, beginning September 30, 2018.
3. At December 31, 2016, customer advances were )12,000,000. During 2017, Chopin collected (30,000,000 of customer advances; advances of )25,000,000 should be recognized in income.
Instructions For each item above, indicate the dollar amounts to be reported as a current liability and as a long-term liability if any.
IFRS5-4 Rainmaker Company prepares its financial statements in accordance with IFRS. In 2017, Rainmaker recorded the following revaluation adjustments related to its buildings and land: The company’s building increased in value by (200,000; its land declined by )35,000. How will these revaluation adjustments affect Rainmaker’s statement of financial position? Will the reporting differ under GAAP? Explain.
P5-4 (L03) GROUPWORK (Preparation of a Corrected Balance Sheet) The balance sheet of Kishwaukee Corporation as of December 31, 2017, is as follows.
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