MC 3. (A) MC 4. (D) MC 5. (B)
1) What are the three major business activities of a company that are motivated and shaped by planning activities? Explain each activity.
Investing Activities: consists of the acquiring and disposing of assets needed to produce and sell a company’s products or services. These assets may be long-term or short-term assets depending on the nature of the company.
Financing Activities: the methods companies use to fund the investments in assets to conduct their business. The financing will either come from equity, which is from the owner or retained earnings, or from creditors, which will need to be paid back and thus creates debt.
Operating Activities: refers to the production, promotion and selling of a company’s products and services. Costs are incurred through expenses on operating activity such as inventory, salaries, and material, and revenue is generated through sales. When revenue are higher than the expenses, the company has an operating profit, and the company has an operating loss when the expenses exceed the operating revenue.
2) The accounting equation (A=L+SE) is a fundamental business concept. Explain what this equation reveals about a company’s sources and uses of funds and the claims on company resources.
The equation reveals how heavily dependent a company is on debt versus owner and retained income. If money comes in from creditors, it reflects in liabilities, and if it comes from owners or retained earnings, it reflects in shareholder’s equity. Assets indicate where the company has invested its funds. Creditors, by law, have the first right to payments or claims before shareholders.
3) Companies prepare four primary financial statements. What are those financial statements and what information is typically conveyed in each?
Balance Sheet: this reports the company’s financial position at a given point in time. It lists the company’s assets, liabilities, and stockholder equity.