FINANCIAL MANAGEMENT
Clarify the difference between operating, financing, investing activities
Operating activities refers to the functions of a business that directly associates with the provision of goods and services to the market. The activities include production, distribution, marketing and selling goods and services. In addition, the operating activities provide most of the organization’s cash flow and play a role in determining whether it is profitable. Cash flows from operating activities comes from net income productions (Klychova et al. 2019, p.02075). For instance, operating cash flows encompasses cash foundations from sales and cash used for inventory purchase and to pay operating expenses like utilities and salaries. Operating cash flows also encompass income tax, cash flows from interest and dividend revenue.
Operating activities are differentiated from financing or investing activities which are functions of an organization because of the indirect provision of goods and services. The operating earnings indicated in the financial statement of the organization is the operating profit that has remained after the deductions operating expenditure from operating revenues (Muzira 2020, p.19-28). In the case of vagueness, operating activities can be viewed by financial statements classification. Many organizations relay operating earnings from operations as a particular line on the earnings statement. In addition, interest expenses are excluded from operating earnings, for instance, a store’s operating activities might include; Buying resources and paying for labour to make clothing, managers, paying transport, arrangement of transporting the resources to retail stores and customers, and paying taxes. There are other less mutual operating activities encompasses lawsuits cash settlements and insurance money. Also, accountants add devaluation expenditure, liability increase, net earnings, and losses in order to get a correct picture of the cash flow of the company.
Financing activities
These are transactions that involve long term liabilities, equity of the owner and transitions to short- term borrowings. These activities include finance sources like investors and creditors for non-trading liabilities like bonds and loans among others, cash flow and cash equivalents between the sources of finance and the organization. The cash flow from financing activities is the money that the organization took to take care of its activities. This is one of the sections on the statement of the company’s cash flows. The activities’ purpose is to raise the capital and pay back its investors (Omag 2016, p.115-122). The activities include stocks and adding loans payment of cash dividends. If there is a positive number on the cash flow statement, it shows that the business has expected cash. This is important because the asset levels are boosted. When it indicates negative on the other hand, it shows that the business has paid out capital, for instance, paying off long term debt or shareholders.
In addition, an example of financing activities including long-term liabilities is the reclamation of debt like bonds. Improvements in bonds payable are indicated by a positive amount and show that the cash has been made by the bonds that have been added. Also, the use of cash may or may not be included (Varshney and Jain 2016, p.43-45). However, the cash flow statement records activities that might affect cash. Those that do not affect cash are identified as non-cash financing activities. This encompasses converting debt to common stock. These activities give intuitions into the organizations financial health and its goals. Positive cash flow shows that the business is thriving and provides a room for growth and rise of assets. Negative cash flow shows the refining liquidity position of the organizations business and also give information regarding its dividend regulations. Examples of financing activities include issuing of bonds, the redemption of bonds, and repayment of existing debts and sale of treasury stock among others.
Investment activities
These are identified as one of the major groups of net cash activities that are reported on the cash flow statement. The activities involve purchasing and selling long-term assets and other businesses investments within a particular reporting time. These activities provide insights into total gains and losses in investments experienced during a definite period. They are a critical element of an organizations cash flow statement that indicates earned cash and expenditure over a certain period. In these activities, cash flow is known as a line item on a business cash flow statement, which is one of the main financial statements that organizations have to prepare
A company gains or losses in the cash flow when a business purchases or sells an investment. Examples of investing activities include purchasing investments. If an organization decides to purchase an investment for instance bonds or any other kind of investment, the decrease in the organization’s cash flow will show the investment cost. This is because the cash is going out to cover the acquisitions. Another example is a fixed asset purchase. This involves buildings, land and vehicles which are always bought on credit without the use of cash. Purchasing fixed assets will be reported in the cash flow statement as an investment activity over time. A decrease in on the cash flow will indicate an investing activity line item each time the organization pays in cash toward a credit purchase. In addition, investing activities are known to be one of the most essential part records on a cash flow statement of the business (Giyosalievich 2020, pp.1177-1185). They indicate how a business might have the potential to be successful in future and generate more revenue for the business. If a negative amount is recorded, it’s a good sign that the business is doing investments in capital assets and that means that in future, the organization can anticipate that there will be growth.
Identify and explain the main users of financial statements in private firms
Management of the firm
The management is identified as the first user of the financial statements. Although they are the same people who make the financial statements, they may need to refer to them when they are contemplating the success and growth of the firm. They look at the financial statement from the profit earned, assets and liabilities, project financing, cash balances and perspectives of liquidity. The financial statements help them to make important decisions regarding the business (Minnis &Sutherland 2017, pp.197-233). Financial statements help the management to understand major facts regarding the disposition and the performance of a business. It influences the decisions that they make for the growth of the company. They will also be able to give people with ideas about the business so that the right decisions can be made during the right time.
Owners
The owners provide the organization’s capital. They are curious to know whether the business is being done correctly or not and whether the capital is being engaged or not. They are always on high alert on the returns from the investment. Financial statements allow the owners to make strategic decisions that will improve the profitability and growth of the organization (Chen 2019, pp.1-23). Also, it helps them to assess the efficiency of different departments, and profit margins among other things. Through financial statements, the owners can identify tax obligations and also offer support to the investors when it comes to decision making. Additionally, it helps them to provide an overview of their firms to other stakeholders who are interested in their investments.
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Creditors
These are the people who supply goods on credit or bankers or money lenders. Commonly, these categories are interested to know financial soundness before giving credit. The creditors always watch out for security and further credit so that the firm can prosper and credits extended. Financial statements give creditors an all-inclusive look at the financial health of the business. All the details like existing date obligations, earnings, profit, and cash flow all play an important role in the overall business financial profile (Gokgoz 2020). They use the financial statement to evaluate if the business represents a sound credit risk and its capability to repay a debt on time.
Government
Tax authorities are interested in the financial information entity for the purpose of taxation and regulations. The government needs to know how much the taxpayer makes so that government bodies determine the tax thereon. The financial statement will provide the government with a clear picture of the financial health of the firm. The government can also track the firm’s growth and plan for future direction so that the laws and policies can be regulated.
Employees
Bonus payments depend on the magnitude of the profit earned by the firm. Employees always expect regular earnings for their daily needs. Also, the demand for wage rise and conducive working environment for working depends on the financial position. This is why the group of users interested in financial statements (Gokgoz 2020). They can use financial statements to evaluate the profitability of the firm and impacts on their future earnings and job security. They dedicate their time and effort in attaining the firm’s goals. They want firms to be capable of paying salaries and provide them with employee benefits. This helps them in evaluating the possibility of the firm’s expansion and career development opportunities.
References
Chen, Y.J., Liou, W.C., Chen, Y.M. and Wu, J.H., 2019. Fraud detection for financial statements of business groups. International Journal of Accounting Information Systems, 32, pp.1-23.
Giyosalievich, K.N., 2020. Analysis of sources of financing of investment activities of textile enterprises. ACADEMICIA: An International Multidisciplinary Research Journal, 10(5), pp.1177-1185.
Gokgoz, A., 2020. Predicting the TAS-TFRS profit attracting the users of financial statements.
Klychova, G., Zakirova, A., Mannapova, R., Pinina, K. and Ryazanova, Y., 2019. Assessment of the efficiency of investing activities of organizations. In E3S Web of Conferences (Vol. 110, p. 02075). EDP Sciences.
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233.
Muzira, D.R., 2020. Which is a Better Method for Reporting Cash Flows from Operating Activities-Direct or Indirect Method?. Asian Journal of Economics, Business and Accounting, pp.19-28.
Omag, A., 2016. Cash flows from financing activities. Evidence from the automotive industry. International Journal of Academic Research in Accounting, Finance and Management Sciences, 6(1), pp.115-122.
Varshney, N. and Jain, M., 2016. Cash flow statement of Bank of Baroda and Syndicate bank: a comparative analysis of operating, investing and financing activities. Voice of Research, 5(2), pp.43-45.8