Business activities are classified into operating, investing and financing activities.
Operating activities
Operating activities include the following transactions:
- Issuance of stock
- Borrowings from a bank
- Issuance of bonds payable
- Repayment of borrowings
- Repayment of bonds payable
- Purchase of entity’s own stock
- Cash dividend, stock dividend
Investing activities
Investing activities include the following transactions:
- Purchase of property, plant and equipment
- Sale of property, plant and equipment
- Purchase of securities issued by other entities
- Sale of securities issued by other entities
- Purchase of intangible assets
- Sale of intangible assets
Financing activities
Financing activities include the following transactions:
- Issuance of stock and bonds
- Borrowings from creditors
- Repayment of the borrowings from creditors
- Repayment of bonds payable
- Repurchase of the entity’s own stock
Review Questions
1. What are the typical forms of business organizations?
Sole proprietorship, partnership and corporation
2. What are the characteristics of a sole proprietorship?
- Owner and business are not separated
- Business is not a separate entity
- Owner has unlimited liability for business obligations
- Appropriate for small operations
3. What are the characteristics of a partnership?
- More than one partners own the business together
- Business is not a separate entity
- General partners have unlimited liability for business obligations
- Limited partners have limited liability for business obligations
- Income from partnership is transferred to partners
- Partners pay individual income tax on the income from partnership
4. What are the characteristics of a corporation?
- Business is a separate entity
- Owners of a corporation are stockholders
- Stockholders have limited liability up to the amount invested in stock
- Raising a large capital is easier for a corporation
- Income from a corporation is taxed twice
- A corporation pays corporate income tax on its income
- Stockholders pay individual income on dividend income
5. What are the advantages of a corporation?
- Stockholders have limited liability up to the amount invested in stock
- Raising a large capital is easier for a corporation
6. What are the disadvantages of a corporation?
Income from a corporation is taxed twice
7. What are the types of business activities?
Operating activities, investing activities and financing activities
8. What are the examples of operating activities?
- Purchase of merchandise, raw materials and supplies
- Sale of goods and merchandise
- Providing services to customers
- Payment of operating expenses
9. What are the examples of investing activities?
- Purchase of land, buildings and equipment
- Purchase of stock and bonds issued by other entities
- Sale of land, buildings and equipment
- Sales of stock and bonds issued by other entities
10. What are the examples of financing activities?
- Issuance of stock and bonds
- Borrowings from creditors
- Repayment of the borrowings from creditors
- Repayment of bonds payable
- Repurchase of the entity’s own stock