Chapter 1
1.2 The Three Types of Business Activity
--> Businesses engage in three types of activity
1. Financing - (from personal savings and outside sources like banks) to start and grow
business
2. Invested – the cash in equipment to run the business, e.g. upstream stuff
3. Operating – activities of making and selling merch
• Accounting information system = keeps track of the results of each of the various
business activities—financing, investing, and operating.
Financing Activities
→ Involve raising money from outside sources
→ Two primary sources of outside funds for corps ... in exchange for cash (equity
financing)
o Borrowing money (debt financing)
o Issuing (selling) shares of stock
• Creditors = people who businesses owe money to
• Liabilities = amounts owed to creditors—in the form of debt and other obligations
o ** specific names are given to different types of liabilities, depending on their
source
- Corporations also obtain funds by selling shares of stock to investors
o Common stock = term used to describe the total amount paid in by
stockholders for the shares they purchase
o ** creditors claims are paid before stockholders. Stockholder have no claim
to corporate cash until the claims of creditors are satisfied
• Dividends = cash payments to stockholders
Investing Activities
→ Involve the purchase of the resources a company needs in order to operate
→ Once a company has raised cash through financing activities, it uses that cash in
investing activities
• Assets = resources owned by a business (ex. Computers, furniture, delivery trucks,
buildings, etc.)
- Different types of assets are given different names
, o Property, plant, and equipment (a.k.a. fixed assets)
o Cash
o Investments
Operating Activities
→ The day-to-day actions taken by a company to produce and sell a product or provide
a service
• Revenues = the increase in assets or decrease in liabilities resulting from the sale of
goods or the performance of services in the normal course of business (the
amounts earned from the sale of products or services)
o Revenues arise from different sources and are identified by various names
depending on the nature of the business
o Common sources of revenue to many businesses =
▪ Sales revenue
▪ Service revenue
▪ Interest revenue
** company purchases its longer-lived assets through investing activities. Assets with
shorter lives, however, result from operating activities **
• Supplies = assets used in day-to-day operations (rather than sold to customers)
• Inventory = assets that are goods available for future sales to customers
• Accounts receivable = the right to receive money in the future
• Expenses = (in accounting) the cost of assets consumed or services used in the
process of generating revenues
o ** expenses take many forms and are identified by various names depending
on the type of asset consumed or service used
- Cost of goods sold (ex. Cost of materials)
- Selling expenses (ex. Cost of salespersons’ salaries)
- Marketing expenses (ex. Cost of advertising)
- Administrative expenses (ex. The salaries of administrative staff;
telephone and heating costs incurred at the corporate office)
- Interest expense (ex. Amounts of interest paid on various debts)
- Income tax expense (ex. Corporate takes paid to the government)
o Possible liabilities arising from expenses:
- Accounts payable = obligations to pay for goods purchased on credit
- Interest payable (ex. Outstanding amounts owed to the bank)
- Wages payable = paid to employees
- Sales taxes payable
1.2 The Three Types of Business Activity
--> Businesses engage in three types of activity
1. Financing - (from personal savings and outside sources like banks) to start and grow
business
2. Invested – the cash in equipment to run the business, e.g. upstream stuff
3. Operating – activities of making and selling merch
• Accounting information system = keeps track of the results of each of the various
business activities—financing, investing, and operating.
Financing Activities
→ Involve raising money from outside sources
→ Two primary sources of outside funds for corps ... in exchange for cash (equity
financing)
o Borrowing money (debt financing)
o Issuing (selling) shares of stock
• Creditors = people who businesses owe money to
• Liabilities = amounts owed to creditors—in the form of debt and other obligations
o ** specific names are given to different types of liabilities, depending on their
source
- Corporations also obtain funds by selling shares of stock to investors
o Common stock = term used to describe the total amount paid in by
stockholders for the shares they purchase
o ** creditors claims are paid before stockholders. Stockholder have no claim
to corporate cash until the claims of creditors are satisfied
• Dividends = cash payments to stockholders
Investing Activities
→ Involve the purchase of the resources a company needs in order to operate
→ Once a company has raised cash through financing activities, it uses that cash in
investing activities
• Assets = resources owned by a business (ex. Computers, furniture, delivery trucks,
buildings, etc.)
- Different types of assets are given different names
, o Property, plant, and equipment (a.k.a. fixed assets)
o Cash
o Investments
Operating Activities
→ The day-to-day actions taken by a company to produce and sell a product or provide
a service
• Revenues = the increase in assets or decrease in liabilities resulting from the sale of
goods or the performance of services in the normal course of business (the
amounts earned from the sale of products or services)
o Revenues arise from different sources and are identified by various names
depending on the nature of the business
o Common sources of revenue to many businesses =
▪ Sales revenue
▪ Service revenue
▪ Interest revenue
** company purchases its longer-lived assets through investing activities. Assets with
shorter lives, however, result from operating activities **
• Supplies = assets used in day-to-day operations (rather than sold to customers)
• Inventory = assets that are goods available for future sales to customers
• Accounts receivable = the right to receive money in the future
• Expenses = (in accounting) the cost of assets consumed or services used in the
process of generating revenues
o ** expenses take many forms and are identified by various names depending
on the type of asset consumed or service used
- Cost of goods sold (ex. Cost of materials)
- Selling expenses (ex. Cost of salespersons’ salaries)
- Marketing expenses (ex. Cost of advertising)
- Administrative expenses (ex. The salaries of administrative staff;
telephone and heating costs incurred at the corporate office)
- Interest expense (ex. Amounts of interest paid on various debts)
- Income tax expense (ex. Corporate takes paid to the government)
o Possible liabilities arising from expenses:
- Accounts payable = obligations to pay for goods purchased on credit
- Interest payable (ex. Outstanding amounts owed to the bank)
- Wages payable = paid to employees
- Sales taxes payable
