BUSINESS EDUCATION 8
Finance
All businesses are involved in three types of financial/accounting activities-financing, investing and
operating. These activities are tracked and communicated through:
 Statement of Earnings
 Statement of Retained Earnings
 Balance Sheet
 Cash Flow Statement
Questions
1.) What are the three types of financial activities that businesses are involved in?
A CLOSER LOOK – FINANCIAL ACTIVITES
Financing Activities
Borrowing money from institutions (loan), selling (issuing) shares to investors in exchange for cash,
buying goods on credit and borrowing directly from investors by issuing debt securities called bonds.
Investing Activities
After money is raised for financing activities, the money is then used for investing activities. Investing
activities involve the purchase of resources called assets (this is what a company needs to operate). For
example, inventory, computers, vehicles, buildings, and land. These are all assets obtained from
investing activities.
Operating Activities
Once a business has the assets it needs to get started, it can begin its operating activities. Products and
services can now be sold and the money collected is called revenue.
Questions
1.) What activity is a company taking part in when it is issuing stocks?
2.) What is revenue?
3.) Provide examples of assets
A CLOSER LOOK – FINANCIAL REPORTING
Statement of Earnings
The statement of earnings reports the success or failure of the company’s operations for a period of time.
It includes revenues, expenses and income tax expense.
Statement of Retained Earnings
If a business is profitable at the end of each period it must decide what portion of earnings to pay to
shareholders in dividends. Some high profitable companies do not pay dividends and use their profit to
invest into their companies for further expansion. The statement of earnings shows the amounts and
causes of changes in retained earnings during the period.
The time period is the same as that covered by the statement of earnings. The beginning retained
earnings amount is shown on the first line of the statement. Then net earnings are added and dividends
are deducted to calculate the retained earnings at the end of the period. If a company has a net loss, it is
deducted (rather than added) in the statement of retained earnings.
Balance Sheet
The balance sheet reports assets and claims to those assets at a specific point in time. These claims are
subdivided into two categories: claims of creditors and claims of shareholders. Claims to creditors are
called liabilities and claims of shareholders, the owners of the company, are called shareholder’s equity.
Assets = Liabilities + Shareholder’s Equity
Cash Flow Statement
The primary function of a cash flow statement is to provide financial information about the cash receipts and
cash payments of a business for a specific period of time. To help investors, creditors and others in their
analysis of a company’s cash position, the cash flow statement reports the cash effects of a company’s
operating activities, investing activities and financing activities. In addition, the statement shows the net
increase or decrease in cash during the period, and the cash amount at the end of the period.
Questions
4.) How would you finance your business? Would you get a loan from the bank? Would you issue
shares to investors? Or would you purchase goods on credit? (or will you look at more then one
option)? Explain why you chose your answer. As well, research what the interest rate may be on a
loan from any bank.
5.) Write down what assets you will invest in for your company to be successful
6.) Write down some expenses that your company may acquire