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.