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Unformatted text preview: Chapter 3 Organizing a Business: Equity and Debt Financing Review of Concepts A. The four functions of the firm include operating , investing , financing and decision making . Operating activities include the main business activities of the firm plus peripheral activities which produce other revenues and expenses and gains and losses. The firm reports the results of its operating functions on the income statement for a period of time. Investing activities relate to the purchase and sale of long-term assets. Assets and liabilities created or affected by investing activities appear on the balance sheet. Gains and losses from certain investing activities appear on the income statement as peripheral gains and losses. Financing activities include sales or repurchases of the companys own stock and borrowing money. Financing activities are reported on the balance sheet. The cash portions of all operating, investing, and financing activities are reported on the cash flow statement. Decision-making activities cannot be quantified and reported on the financial statements, but the results of operations, cash flows, and the resulting balance sheet reflect the decisions made by management. B. To form a corporation, incorporators are required to file a formal application, called articles of incorporation, with the appropriate state agency. If the state agency approves the application, it issues a corporate charter, stock is sold, and the incorporators formulate the corporation's bylaws. The bylaws are the basic rules for management to follow. Stockholders next elect a board of directors, the board elects a chairperson, and the board hires the officers to run corporation's business. C. Groups associated with a corporation include: Incorporators- persons who file a formal application to create a corporation with the appropriate state agency. 45 46 Chapter 3: Organizing a Business: Equity and Debt Financing Stockholders persons who purchase and own stock of the corporation. Board of Directors individuals elected by the stockholders who have the ultimate responsibility for managing the corporation. Officers- individuals hired by the Board of Directors who are responsible for the day to day operations of the company. D. The board of directors has the ultimate responsibility for managing the corporation. Most boards restrict themselves to formulating very broad corporate policy, planning, and appointing officers to conduct the corporations daily operations. The board acts as a link between the stockholders and the officers of the company. E. Corporate officers usually include: Chief Executive Officer is responsible for all corporate activities. Chief Operating Officer directs the daily business operations....
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