Week+2+notes.pdf - WEEK 2 Chapter 2 Financial reporting mechanics Companys life is supported by three main activities operating financing and investing

Week+2+notes.pdf - WEEK 2 Chapter 2 Financial reporting...

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WEEK 2 Chapter 2: Financial reporting mechanics Company’s life is supported by three main activities, operating, financing and investing. Operating activities presents basically main activity which makes money for company. They are part of it every day co mpany’s operations. They are the activities which help to complete main purpose of the business. Like selling cars by Toyota, selling furniture by IKEA and serving meals by AB restaurants. Operating activities of a company are reflected in income statement, which shows revenues from operating the business and all costs connected with these revenues. Investing activities reflect purchase and sale of company’s assets. Company’s purchase of land, machinery, buildings and equipment are part of its investment activities. Companies differ in the amount and composition of their investment. Some companies may require huge investments in acquiring and selling their products, while others require little investment. Size of investment does not necessarily determine company success. It is the efficiency and effectiveness with which a company carries out its operations that determine earnings and returns to owners. Investing decisions involve several factors such as type of investment necessary amount required, acquisition timing, asset location, and contractual agreement (purchase, rent, and lease). Decisions on investing activities affect growth, and influence riskiness of operations. Investments in short-term assets are called current assets. These assets are expected to be converted to cash in the short term. Investments in long-term assets are called noncurrent assets. Financing activities refer to methods that companies use to raise the money to pay for these needs. Because of their magnitude and their potential for determining the success or failure of a venture, companies take care in acquiring and managing financial resources. There are two main sources of external financing equity investors (also called owners or shareholders) and creditors (lenders). A company considers several issues, including the amount of financing necessary, sources of financing (owners or creditors), timing of repayment, and structure of financing agreements. Decisions on these issues determine a company’s organizational structure, affec t its growth, influence its exposure to risk, and determine the power of outsiders in business decisions. Investors provide financing in a desire for a return on their investment, after considering both expected return and risk. Risk for creditors is the possibility a business will default in repaying its loans and interest. In this situation, creditors might not receive their money due. Business activities are captured in financial statement elements such as assets, liabilities, equity, revenues and expenses.
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