Q9: How does the concept of viewing a firm as having operating and financial activities (that we studied in ACCT11059 Accounting, Learning & Online Communication) fit in with the way we present a Statement of Cash Flows into operating, investing and financing activities?
In ACCT11059 Study Guide Chapter 4 Section 4.2, we looked at a firm’s operating and financial activities. We saw that operating activities are a firm’s interactions with the product and input markets:
“A firm’s operating activities include decisions about which operating assets to acquire or to sell, what agreements to enter into with employees, suppliers and customers, as well as various other activities to add value to the inputs a firm acquires from suppliers.”
ACCT11059 Study Guide Chapter 4 Section 4.2
And we also saw that financial activities of a firm are:
“…its interactions with the capital markets, with equity and debt investors”
ACCT11059 Study Guide Chapter 4 Section 4.2.
Now the concepts of operating and financial activities we used in ACCT11059 are a little bit different to the definitions of operating and financing activities used in the definitions of cash flows from operating activities and cash flows from financing activities. These differences are:
- Operating activities in a Statement of cash flows includes interest received and interest paid by a firm. We included these items as part of a firm’s financial activities in ACCT11059.
- Investing activities in a Statement of cash flows were included as part of a firm’s operating activities in ACCT11059.
- Financing activities in a Statement of cash flows are all included as part of a firm’s financial activities in ACCT11059.
There are no standard terms in accounting, and the same or similar words can refer to different concepts.
Also, see Martin’s videos ACCT11059 Operating and Financing Activities.