What are 'Business Activities'
Business activities include any activity engaged in 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.
BREAKING DOWN 'Business Activities'There are three main types of business activities: operational, investing and financing. The cash flows used and created by each of these activities is listed in the annual report within the financial statement referred to as the cash flow statement. The cash flow statement is meant to be a reconciliation of net income with cash flow. Each line item on the income statement and balance sheet is identified according to business activity. Noncash items deducted from net income are added back to net income and noncash items added to net income are deducted from cash flows. The end result is a report that gives the investor a summary of both cash and noncash business activities within the company.
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 current portion of the balance sheet. The cash flow statement adds back and deducts certain noncash items such as depreciation, amortization, accounts receivable and accounts payable. These line items impact the net income statement but do not result in a movement of cash in or out of the company. If cash flows from business activities resulting from operations are negative, it means the company must be financing operating activities with investing activities or financing activities.
Investing Business Activities
The second section in the statement of cash flows is investing activities. 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 final section of the cash flow statement is the financing activities section. This section provides an overview of all business activities related to financing. These include initial public offerings, secondary offerings and debt financing. The section also shows 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.