 In this discussion, we will discuss the discussion question of describe the differences between the operating, investing, and financing activities. If we see a discussion question like this, we're basically listing off the components of the statement of cash flows and therefore support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. It's basically a question about the statement of cash flows and we may want to start then with just defining what the statement of cash flows is, what the operating, investing, and finances are in relation to the statement of cash flows, then go into those specific categories and possibly give some examples of what would be included in those categories. So we would say the statement of cash flows then is going to be one of the major financial statements along with the balance sheet, the income statement, the statement of equity. We will have the statement of cash flows, the statement of cash flows then providing the more information over and above the other statements in that they're giving us cash flow information, the inflows and outflows of cash. The operating investing and financing activities are categorizing the major categories of that cash flow. So we're looking at the change in cash, what did cash do over the time period, that major change the difference and we're breaking that difference out into the major types of categories saying it's either operating, investing or financing. Why is that important? We're going to have these three categories are going to kind of tell us, you know, what the major components are for the activity that's happening within cash. Now what are those three categories? So the operating activities is going to be similar to kind of what the income statement is doing. However, on a cash basis, in other words, the cash flows from operate operations, the operating activities, the cash flows from operations are going to give us the information that an income statement would on an accrual basis. And so we're looking to get an end result, which would be similar to net income on the income statement. However, net income on the income statement is on a cat on a accrual basis. And we're looking for a cash basis. The reason most of the information is here is because the income statement, remember, tells us, you know, the activity that tells us what's going on in the company that's given us the story of what's going on. But it does so on an accrual basis. We're going to be describing that same kind of activity in this case by basically being driven by the cash that's happening. And we know that cash, of course, is involved in every cycle at some point or another night. It's not the best determining factor in terms of our performance because the cash flow could differ in timing from the performance. That's why we use the accrual basis on an income statement. But the cash flow statement is going to be really important in terms of telling us a story in terms of cash flow. And so the operating activities then will be, you can think of it as similar to the income statement. Two methods could be used in the operating activities, either an indirect method or direct method. The indirect method is going to basically reconcile net income to cash flows from operations, kind of like a net income on an accrual basis to net income on a cash basis, in essence. So we're just going to take where we ended on the income statement, reverse out the non-cash stuff and then get to the cash basis. The direct method would, in essence, take basically the income statement and go line by line and figure out each line more on a cash basis to get to a line by line total of a cash basis net income cash or which would be cash flows from operating activities. So then we have the investing activities and the financing activities usually have a lot less activity involved in them. The investing activities will include typical investments we have, like stocks and bonds. If we were to invest in stocks and bonds, then that would be something when we buy and sell them that we would include in investing, as we would think. However, there's also things, any type of investment in a long-term asset like property plants and equipment will also be included in investing activities. And that's because we're basically investing in a long-term asset. We're buying something that's going to be used in the future to generate revenue. That's a type of investment. So we have to be able to think of things in that format when we consider the investing activities as well. It's useful to think of the journal entry and say, okay, is the journal entry related to whatever I'm thinking about dealing with income statement accounts, revenue and expenses? If not, then it might be some other investing or financing. So for example, if we bought equipment for cash, we would debit equipment in credit cash. And there's nothing there that deals with an income statement account. We depreciate it, and the depreciation may be something we have to deal with in operating activities, but the initial purchase of investment doesn't. And therefore it's not going to be an operating activity. It's going to be investing activity in this case. Financing activity then is going to be something that we use to finance the company, meaning either inflows are going to be things that we're giving money simply to finance the company, not through operations because that would be operating, not through investing or like selling stocks, but through things like loans and things like the investors putting money in the company. Outflows for financing activities are going to be us giving back those investments to owners or giving back loans or payables of some kind. So examples there would be if we issued stock, if the owner, if it was a partnership or a sole proprietor was putting money into the company, that would be inflows from investing activities. If we took out a loan, that would be an inflows from investing activities. If we paid back the loan, or if we paid back the owner in the form of dividends or draws, that would be in the financing activities. So those are just going to be some examples that we would have in terms of the different categories. That would be probably the way to explain an essay question like this would be to just list out what the financial statement is, what's the statement of cash flows, how does it fit on the financial statements, what are the major components and then probably some examples of those major components and then kind of why we would break it out into these major components operating investing and financing.