Operating Activities Flashcards
What are revenues?
Revenues are increases in economic benefits-normally an increase in an asset but sometimes a decrease in a liability- that result from the sale of a product or service in the normal course of business.
Revenues come from different sources and are identified by various names. What are sources of revenue in business?
Sources of revenue that are common to many businesses are sales revenue (often just called “sales”), service revenue, interest revenue, and rent revenue.
Selling a product on credit (on account) means? And what is this term called? Why is it an asset?
It means that the company does not immediately receive all of the cash for the sale. This right to receive money in the future is called account receivable. These are assets because they will result in a future benefit - cash - when the amounts owed are eventually collected.
A business can begin its operations once?
Once a business has the finances and has made the investments it needs to get started.
A company’s long-lived assets such as property, plant and equipment are purchased through which activity? What are other ex of assets- typically with shorter lives that result from operating activities ?
Investing activities.
Short-term (trading) investments and accounts receivable.
What other types of receivables that companies have?
Interest receivable, rent receivable, and income tax receivable (aka “deferred tax assets”) that is due from the federal government.
Supplies and inventory are another example of a short-term asset used in day-to-day operations. Describe inventory ~
An inventory is an asset created after supplies have been put together ready for future sale to customers..?
If an inventory consists of merchandise (e.g., food, clothes) for resale, it is usually known as?
Known as merchandise inventory.
When an inventory is sold, it is no longer an asset with future benefits but instead a? What is an expense?
Instead an expense called “cost of goods sold” (cost of inventory sold).
An expense in accounting are the cost of assets that are consumed or services that are used in the process of generating revenues.
Expenses are related to assets and liabilities. When an expense is incurred, what happens to an asset?
When an expense is incurred, an asset will decrease or a liability will increase.
There are many kinds of expenses and they are identified by various names, depending on the type of asset consumed or service used. Provide examples.
Production costs, general and administrative expenses (such as salaries, advertising, utilities, professional fees, rent, and other costs associated with running the business), depreciation expense and depletion expense (i.e., allocation of the cost of using the mine equipment and property), finance costs (amounts of interest paid on various debts), and income tax. All of these expenses are necessary to produce and sell their products.
Short-term liabilities may result from some of these expenses. What short-term liabilities occur when for ex, Eastplats purchases materials and supplies on credit (on account) from suppliers.
The obligations to pay for these goods are called accounts payable. It may also have interest payable on the outstanding (unpaid) amounts owed to various lenders, dividends payable to shareholders, salaries payable to employees, property tax payable to the provincial government, and sales tax payable to the provincial and federal governments. Income tax payable (aka “deferred tax liabilities”) is an example of another liability that is payable to the government.
To determine whether a company earned a profit, what do they do? What’s the goal of every business and what does it mean?
They compare the revenues of a period with the expenses of that same period. The goal of every business is to sell a good or service for a price that is greater than the cost of producing or purchasing the good or providing the service, plus the cost of operating the business. This means that revenues should, ideally, be greater than the expenses incurred to generate the revenue.
What is profit? What is a loss?
Profit is when revenues are more than expenses.
Loss is when expenses exceed revenues.
Summarize the three different activities that companies engage in.
Financing activities: Include borrowing cash from lenders by issuing debt, or conversely, using cash to repay debt. Cash can also be raised from shareholders by issuing shares, or paid to shareholders by repurchasing shares or distributing dividends.
Investing activities: Include purchasing and disposing of long-lived assets such as property, plant and equipment that a company needs to operate and purchasing and selling of long-term investments.
Operating activities: Result from day-to-day operations and include revenues and expenses and related accounts such as receivables, supplies, inventory, and payables.
