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ACCT CH 2 - CHAPTER F2 BUSINESS ACTIVITIES-THE SOURCE OF...

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CHAPTER F2: BUSINESS ACTIVITIES-THE SOURCE OF ACCOUNTING INFORMATION A. Financing Activities A. A business is an organization that exists for the purpose of making a profit for its owners. 1. Businesses must be effective in meeting the needs of customers by providing goods and services demanded by customers at a price they are willing to pay. 2. The business must also be efficient at controlling costs to maximize profits. 3. A company that is successful creates value for its owners and other stakeholders. A. Business can be financed from either debt or equity. 1. A contribution by owners to a business, along with any profits retained in the business is known as owners’ equity. 2. Debt financing results when a company obtains financial resources from creditors. 3. Interest is a return earned by a creditor. The amount borrowed is the principal of a loan. A. Exhibit 1 illustrates the business activities involved in the exchange of resources and claims between creditors and owners and the company. B. Financing activities occur when owners or creditors provide resources to a company or when a company transfers resources to owners or creditors. I. Accounting for Business Activities A. Accounting provides the basis for describing business activities. 1.An account is a record of increases and decreases in the dollar amount associated with a specific resource. 2.Transactions are descriptions of business events or activities measured in dollar values and recorded in accounts. A. Financial accounting records transactions by using the accounting equation 1.Assets = Liabilities + Owners’ Equity 2.Assets are the resources controlled by a business 3.Liabilities are the claims of creditors to a company’s resources 4.Owners’ Equity represents the claims of owners to a company’s resources.
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5. Exhibit 2 illustrates the impact of financing activities on the accounting equation.
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