Financial Accounting: In an Economic Context

SUMMARY OF KEY POINTS

The three basic activities of a business and how they are reflected in the financial statements.

Businesses must first attract capital and then invest it in productive assets that can be used to produce saleable goods and/or services. The three basic activities involved in conducting a business are (1) financing activities, (2) investing activities, and (3) operating activities. Financing activities involve the collection of capital through equity or debt issuances and any associated payments, such as dividends and debt payments. Investing activities involve the acquisition and sale of producing assets, the assets used to produce and support the goods and services provided. Operating activities involve the sale of the goods and services. Operating activities produce additional capital that can be reinvested in the producing assets, used to service debt payments, and distributed to the owners in the form of dividends.

The balance sheet lists assets (goods and producing assets) and financing sources (equity, debt, and reinvestments from net earnings) at a particular point in time. The income statement is a measure of operations, the activities (revenues and expenses) involved in selling the goods and services. The statement of shareholders' equity measures changes in contributed capital and the extent to which the business reinvests its net earnings and pays ...