Key Concepts of Business Activities

Three Principal Types of Business Activity

• Definition: All businesses engage in three main types of activities that are essential to their operations: financing, investing, and operating.

Financing Activities

• Purpose: To obtain outside funds needed for business operations.
  • Sources of Financing:
  • Debt Financing:
    • Involves borrowing money.
    • Liabilities are amounts owed (e.g., loans).
    • Types of Liabilities:
    • Notes Payable: Monies borrowed from banks or lending institutions.
    • Bonds Payable: Debt securities sold to investors.
  • Equity Financing:
    • Involves issuing (selling) shares of stock for cash.
    • Common Terminology:
    • Common Stock: Represents the amount paid by stockholders for shares.
    • Dividends: Payments made to stockholders.

Investing Activities

• Purpose: To acquire resources necessary for company operations.
  • Assets: Resources owned by a business, such as:
  • Computers
  • Delivery trucks
  • Furniture
  • Buildings
  • Cash
  • Property, Plant, and Equipment: Type of asset invested in to produce goods.
  • Investments: Includes securities, such as stocks or bonds of other corporations.

Operating Activities

• Purpose: Relates to the day-to-day functions of a business after securing necessary assets.
  • Revenue:
  • Definition: Increase in assets or decrease in liabilities from selling goods or performing services.
  • Common Sources:
    • Sales Revenue
    • Service Revenue
    • Interest Revenue
  • Assets in Operations:
  • Supplies: Assets used in daily operations (not sold to customers).
  • Inventory: Goods available for sale.
  • Accounts Receivable: Right to collect money in the future from customers.
  • Expenses: Costs incurred from consuming assets or utilizing services such as:
  • Cost of goods sold
  • Selling expenses
  • Administrative expenses
  • Interest expenses
  • Income taxes
  • Liabilities from Expenses: Includes accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable.
  • Net Income: Occurs when revenues exceed expenses.
  • Net Loss: Happens when expenses exceed revenues.

Classification Exercise

• Classify the following items as asset, liability, common stock, revenue, or expense:
  1. Cost of renting property - Expense
  2. Truck purchased - Asset
  3. Notes payable - Liability
  4. Issuance of ownership shares - Common Stock
  5. Amount recorded from performing services - Revenue
  6. Amounts owed to suppliers - Liability