There are three major types of business activities: financing, investing and operating.

The
accounting information system keeps track of the results of each of these business activities. The
financing and investing are non operating activities. Operating activities are related to the
everyday and ongoing operations of a business whereas non operating activities are not related to
the everyday and ongoing operations of a business.
The purpose and importance of each:
Operating activities
Operating activities involves production, sales, and delivery of products of the company and also
collecting payment from its customers. Such as, purchase of raw materials, advertising, shipping
product and so on. It is generally concerned with the short term asset and liabilities. Once the
business has the assets it needed, it can begin its operation.
Investing activities
Investing activities involves purchases or sales of an asset, payments associated to mergers and
acquisitions, dividends received and loans made to suppliers or received from customers. It is
generally related with the purchase and sales of long term assets that a company need to operate.
Its purpose is to obtain money by building up operations or purchasing investment products such
as stocks, bonds and annuities.
Financing activities
Financing activities involves inflow of cash from investors and outflow of cash to shareholders
as dividends since the company generates income. The extra activities which affect the long-term
liabilities and equity of the company are too recorded in the financing activities. The primary

source of funds may include borrowing money and issuing share of stock for cash. Its purpose is
to obtain money through borrowing, earnings or investment from outside sources.
The combination of financing, investing and operating activities on the whole helps the company
in managing their cash flow. The combination helps the company to ensure that they get the
maximum benefit out of it to grow business.
There is a positive relationship between the amount of risk and amount of expected return. The
higher the risk connected with any business, the higher will be its expected returns and higher
will be the chances of substantial losses. One of the most difficult problems for investors is to
estimate the highest level of risk he is able to assume.

In the above figure, risk is measured along the horizontal axis and increases from left to right.
Expected rate of return is measured on the vertical axis and increases from bottom to top. The
line from o to R (f) is the rate of return or risk less investments commonly associated with the
yield on government securities. The diagonal line from R (f) to E(r) illustrates the concept of
expected rate of return increasing as the level of risk increases.

References
Source: Boundless. (2015). Boundless Web site. Retrieved March 11, 2016 from
https://www.boundless.com/accounting/textbooks/boundless-accountingtextbook/introduction-to-accounting-1/overview-of-key-elements-of-the-business19/activities-of-the-business-financing-investing-and-operating-118-5147/

Sources: Risk-Return Tradeoff. (n.d.). Investopedia Web site. Retrieved March 12, 2016 from
http://www.investopedia.com/terms/r/riskreturntradeoff.asp