Hi.
Else here.
In this video, we'll be exploring
the classification of business activities
and why this information is important.
There are three main business activities--
financing, investing, and operating.
In order to better understand these activities,
let's start a business and walk through them.
Let's say you want to start a business that
develops iPhone apps.
You've seen other people do it, and you
figure it's an excellent way to join the 250,000 people who
start businesses every year in Canada.
If you start this business, what do you
think you'll have to do first?
The first thing is to get financing for your business.
Financing activities are all about getting or repaying cash.
You may have savings of your own,
but you might need to borrow money.
That's called debt financing.
If you're a corporation, you can sell shares.
That's called equity financing.
Financing activities are all about funding your business.
Remember that involves not just getting the funds,
but also paying them back or paying dividends.
After you raise the funds, you'll need to spend it.
Investing activities is when you buy
the things you need in order to run your business, generally
property, plant, and equipment.
For instance, for your app development company,
you'll have to buy computers.
Any long-lived assets that you use to operate a business
are considered investing activities.
Investing activities generally involve the use of cash,
because you tend to spend, spend,
spend to get what you need for your business to operate.
Once you've financed your business
and bought what you need to run it,
you're going to have to begin operating the business.
That would include selling your apps
to earn revenue, service revenue, in this case,
and all the costs you'll incur to earn that revenue,
things like paying the salaries of your employees,
the rent for your space, and anything else.
If you're using, consuming, or incurring costs
to help you generate revenue, those
are considered operating expenses.
And they're part of the operating activities
of a business.
Let's double check your understanding
of the types of business activities.
Remember to pause the video and answer first.
In your app development company, if you sold your old equipment,
it would be considered an--
if you said A, operating activities, because you sold
something, you're incorrect.
You don't sell old equipment day to day
as part of your operations.
So it's not operating activities.
If you said C, financing, because it brought in cash,
you're wrong also.
Financing involves only debt or equity financing.
The correct answer is B, investing activities.
Note that in each activity, what goes into that activity
comes out of that same activity.
The purchase of equipment is recorded under investing.
And, therefore, the sale of equipment is also investing.
Similarly, if a company borrows money,
it would be under financing activities.
When they pay the money back, that would also
go under financing activities.
What it comes in, it comes out of, the exact same activity.
Let's practice a bit more and look
at a few other transactions.
For the next four slides, classify each transaction
as operating, investing, or financing.
You should also be able to say if it's
an inflow or an outflow.
Remember, to do this, you have to know the definition
of each of the activities.
If you don't, your answers will not only be wrong here,
but they'll also be wrong on a test or exam when
you eventually write it.
Dividends of a 100,000 are paid to shareholders.
Dividends involve shareholders, and the sale or repurchase
of shares is a financing activity,
and, therefore, so are the dividends payment.
Financing activity, outflow.
Payment of 250,000 are collected from customers.
Anything having to do with customers
is part of the day-to-day operations of the business.
So the correct answer is operating activities, inflow.
Pay $20,000 to renovate a store.
This is an investment in future revenue generation
and, therefore, is part of investing activities, outflow.
Last one.
Interest is paid on an outstanding loan.
Now, the answer to this one is either operating or financing.
IFRS says that interest paid on a loan
may go into financing activities,
because the taking of a loan and repaying of a loan
is part of financing activities.
So the interest payments can be also.
But IFRS also says that interest costs
are an expense on the income statement
and are paid to support the day-to-day activities
of the business.
Therefore, they can be included instead as part
of operating activities.
Under IFRS, the choice is the company's.
However, once the company makes a choice,
they must continue placing it in the same activity
into the future.
Note that ASPE only allows interest payments
to be included as part of operating activities.
Why is knowing about the different activities important?
Accounting is an information system
that provides financial information for decision
makers.
That information is useful only if those using it
can understand it.
Remember that the main users of financial information
are investors, lenders, and creditors.
Many of those users believe that the statement of cash flow
is useful for predicting how much cash
will be available in the future for either repaying
debts or paying dividends.
The statement of cash flow is divided into three activities--
financing, investing, and operating.
By understanding the different types of activities,
you can tie that understanding into the structure of the cash
flow statement, which we'll be covering
in the next series of videos.