Business and Activities include any
activity a business engages in for the primary purpose of making a profit. This
is a general term that encompasses all the economic activities carried out by a
company during the course of business. Business activities, including
operating, investing and financing activities, are ongoing and focused on
creating value for shareholders.
KEY
TAKEAWAYS
- Business activities are any events that are undertaken by a corporation for the purpose of earning a profit.
- Operating activities relate directly to the business providing its goods to the market, including manufacturing, distributing, marketing, and selling; they provide most of the company's cash flow and hugely influence its profitability.
- Investing activities relate to the long-term use of cash, such as buying or selling a property or piece of equipment, or gains and losses from investments in financial markets and operating subsidiaries.
- Financing activities include sources of cash from investors or banks, and the uses of cash paid to shareholders, such as payment of dividends or stock repurchases, and the repayment of loans.
Understanding Business and Activities
There are three main types of business activities:
operating, investing, and financing. The cash flows used and created by each of these activities are
listed in the cash flow statement. The
cash flow statement is meant to be a reconciliation of net income on an accrual basis to cash flow. Net income is taken from the bottom
of the income statement, and the cash impact of balance sheet changes are
identified to reconcile back to actual cash inflows and outflows.
Noncash
items previously deducted from net income are added back to determine cash
flow; noncash items previously added to net income are deducted to determine
cash flows. The result is a report that gives the investor a summary of
business activities within the company on a cash basis, segregated by the
specific types of activity.
Operating Business Activities
The first section of the cash flow statement is cash flow
from operating activities. These
activities include many items from the income statement and the current portion
of the balance sheet. The cash flow statement adds back certain noncash items
such as depreciation and amortization. Then changes in balance sheet line items, such as
accounts receivable and accounts payable, are either added or subtracted based
on their previous impact on net income.
These line items impact the net income on the income
statement but do not result in a movement of cash in or out of the company. If
cash flows from operating business activities are negative, it means the
company must be financing its operating activities through either investing
activities or financing activities. Routinely negative operating cash flow is
not common outside of nonprofits.
Investing Business Activities
Investing
activities are in the second section of the
statement of cash flows. These are business activities that are capitalized
over more than one year. The purchase of long-term assets is recorded as a use
of cash in this section. Likewise, the sale of real estate is shown as a source
of cash. The line item "capital expenditures" is considered an investing activity and can be found in this
section of the cash flow statement.
Financing Business Activities
The cash flow statement's final section includes financing
activities. These include initial public offerings,
secondary offerings, and debt financing. The section also lists the amount of
cash being paid out for dividends, share repurchases, and interest. Any
business activity related to financing and fundraising efforts is included in
this section of the cash flow statement.
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