Accounting Chapter 1 | 1.2 The Three Types of Business Activity

Assets

Resources owned by a business.

DO IT! 2 | Business Activities Classify each item as an asset, liability, common stock, revenue, or expense. 1.Cost of renting property. 2.Truck purchased. 3.Notes payable. 4.Issuance of ownership shares. 5.Amount earned from performing service. 6.Amounts owed to suppliers. ACTION PLAN •Classify each item based on its economic characteristics. Proper classification of items is critical if accounting is to provide useful information.

Solution 1.Cost of renting property: Expense. 2.Truck purchased: Asset. 3.Notes payable: Liability. 4.Issuance of ownership shares: Common stock. 5.Amount earned from performing service: Revenue. 6.Amounts owed to suppliers: Liability.

Common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Net loss

The amount by which expenses exceed revenues.

Net income

The amount by which revenues exceed expenses.

Expenses

The cost of assets consumed or services used in the process of generating revenues.

Revenue

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.

If Columbia sells goods to a customer and does not receive cash immediately, then the company has a right to expect payment from that customer in the near future. This right to receive money in the future is called an?

account receivable.

The ____________ ______________ ______ keeps track of the results of each of the various business activities—financing, investing, and operating.

accounting information system

Columbia may also have liabilities arising from these expenses. For example, it may purchase goods on credit from suppliers. The obligations to pay for these goods are called ______________ _____________. Additionally, Columbia may have ___________ ___________ on the outstanding amounts owed to the bank. It may also have ______ ___________ to its employees and ______ _____ ______________, _______________ _____ _____________, and ____________ ____ _________ to the government.

accounts payable. interest payable wages payable sales taxes payable, property taxes payable, and income taxes payable

excess

an amount of something that is more than necessary, permitted, or desirable.

Expenses take many forms and are identified by various names depending on the type of?

asset consumed or service used.

Columbia Sportswear may borrow money in a variety of ways. For example, it can take out a loan at a bank or borrow directly from investors by issuing debt securities called?

bonds.

The two primary sources of outside funds for corporations are?

borrowing money (debt financing) and issuing (selling) shares of stock in exchange for cash (equity financing).

In accounting language, expenses are the?

cost of assets consumed or services used in the process of generating revenues.

Expenses take many forms and are identified by various names depending on the type of asset consumed or service used. For example, Columbia keeps track of these types of expenses: ____ __ _____ ____ (such as the cost of materials), __________ ____________ (such as the cost of salespersons' salaries), _____________ _____________ (such as the cost of advertising), ___________________ _____________ (such as the salaries of administrative staff, and telephone and heating costs incurred at the corporate office), ___________ _____________ (amounts of interest paid on various debts), and _________ ___ ___________ (corporate taxes paid to the government).

cost of goods sold selling expenses marketing expenses administrative expenses interest expense income tax expense

Stockholders, on the other hand, have no claim to corporate cash until the claims of?

creditors are satisfied.

Persons or entities to whom Columbia owes money are its?

creditors.

Suppose you buy a company's stock instead of loaning it money. You have no legal right to expect any payments from your stock ownership until all of the company's creditors are paid amounts currently due. However, many corporations make payments to stockholders on a regular basis as long as there is sufficient cash to cover required payments to creditors. These cash payments to stockholders are called?

dividends.

Before Columbia can sell a single Sorel® boot, it must purchase wool, rubber, leather, metal lace loops, laces, and other materials. It then must process, wrap, and ship the finished product. It also incurs costs like salaries, rents, and utilities. All of these costs, referred to as ___________, are necessary to produce and sell the product.

expenses

Example of the three types of business activity, Gert Boyle's parents, the founders of Columbia Sportswear, obtained cash through financing to start and grow their business. Some of this ___________ came from personal savings, and some likely came from outside sources like banks. The family then ___________ the cash in equipment to run the business, such as sewing equipment and delivery vehicles. Once this equipment was in place, they could begin the ___________ activities of making and selling clothing.

financing invested operating

All businesses are involved in three principal types of business activity—?

financing, investing, and operating.

Property, plant, and equipment is sometimes called?

fixed assets.

Revenues arise from different sources and are identified by various names depending on the nature of the business. For instance, Columbia's primary source of revenue is the sale of sportswear. However, it also generates ___________ __________ on debt securities held as investments. Sources of revenue common to many businesses are?

interest revenue sales revenue, service revenue, and interest revenue.

Goods available for future sales to customers are assets called?

inventory.

If a company has excess cash that it does not need for a while, it might choose to?

invest in securities (stocks or bonds) of other corporations.

The company purchases its longer-lived assets through?

investing activities.

Once the company has raised cash through financing activities, it uses that cash in? Investing activities involve the purchase of the _______________ a company needs in order to operate. A growing company purchases many resources, such as? Resources owned by a business are called?

investing activities. resources computers, delivery trucks, furniture, and buildings. assets.

Investments are another example of an?

investing activity.

Corporations also obtain funds by selling shares of stock to _____________.

investors.

Revenue For example, Columbia records ____________ when it sells a footwear product.

is 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. revenue

loan

lend (a sum of money or item of property).

Amounts owed to creditors—in the form of debt and other obligations—are called?

liabilities.

It takes money to make?

money.

When revenues exceed expenses, ___ ______ results.

net income

When expenses exceed revenues, a ___ ____ results.

net loss

Specific names are given to different types of liabilities, depending on their source. Columbia may have a ____ ________ to a bank for the money borrowed to purchase delivery trucks. Debt securities sold to investors that must be repaid at a particular date some years in the future are ____ ________.

note payable bonds payable

Other assets with shorter lives, result from _______________ ____________. For example, _________ are assets used in day-to-day operations.

operating activities. supplies

Once a business has the assets it needs to get started, it begins?

operations activity.

Columbia compares the revenues of a period with the expenses of that period to determine whether it earned a?

profit.

Different types of assets are given different names. For example, Columbia Sportswear's sewing equipment is a type of asset referred to as?

property, plant, and equipment.

Equity financing is the method of?

raising capital by selling company stock to investors.

(HEADING: Operating Activities) Columbia Sportswear is in the business of selling outdoor clothing and footwear. It sells TurboDown jackets, Millenium snowboard pants, Sorel® snow boots, Bugaboots™, rainwear, and anything else you might need to protect you from the elements. We call amounts earned on the sale of these products?

revenues.

The claims of creditors differ from those of __________________. If you loan money to a company, you are one of its creditors. In lending money, you specify a payment schedule (e.g., payment at the end of three months). As a creditor, you have a legal right to be paid at the agreed time. In the event of nonpayment, you may legally force the company to sell property to pay its debts. In the case of financial difficulty, creditor claims must be paid before?

stockholders stockholders' claims.

Common stock is the term used to describe?

the total amount paid in by stockholders for the shares they purchase.

Liabilities

Amounts owed to creditors in the form of debts and other obligations.

____ is one of the more important assets owned by Columbia or any other business.

Cash

Dividends

Payments of cash from a corporation to its stockholders.