The claims of creditors and stockholders on the corporation’s resources are differ-
ent. The resources owned by a business (corporation) are called its assets. In case of a
corporation’s liquidation or bankruptcy, creditors have first claim on its assets. Only
after the creditors’ claims are satisfied can the stockholders obtain corporate assets. In
addition, while creditors expect to receive timely payments of their claims, which may
include interest, stockholders are not entitled to regular payments. However, many
corporations distribute earnings to stockholders on a regular basis as long as the claims
of creditors are being satisfied. These distributions of earnings to stockholders are
calleddividends.Investing Activities
Once financing has been obtained, a business uses investing activitiesto obtain the
necessary assets to start and operate the business. Depending upon the nature of the
business, a variety of different assets must be purchased. For example, Milton Hershey
purchased the German chocolate-making machinery and later con-
structed a building to house the Hershey operations. In addition to
machinery and buildings, other assets could include computers, office
furnishings, trucks, and automobiles. Although most assets have physi-
cal characteristics, such as equipment, some assets are intangible in
nature. For example, a business may purchase patent rights for use in a
manufacturing process or product.
A business may acquire assets through financing activities when the
business acquires cash through borrowing or issuing shares of stock.
Cash is used to purchase assets through investing activities, such as in
the preceding paragraph. Finally, assets may be acquired through oper-
ating activities, as we will describe in the next section.
Assets may take a variety of different forms. For example, tangible
assets include cash, land, property, plant, and equipment. Assets may
also include intangible items, such as rights to patents and rights to pay-
ments from customers. Rights to payments from customers are called
accounts receivable. Other intangible assets, such as goodwill, copy-
rights, or patents, are often grouped together and reported as intangible
assets. A business may also prepay for items such as insurance or rent.
Such items, which are assets until they are consumed, are normally re-
ported as prepaid expenses.Operating Activities
Once resources have been acquired, a business uses operating activitiesto implement
its business emphasis. Hershey’semphasis was to mass-produce and distribute choco-
late candies at affordable prices. When Hershey sold its chocolates, it received revenue
from its customers. Revenueis the increase in assets from selling products or services.
Revenues are often identified according to their source. For example, revenues received
from selling products are called sales. Revenues received from providing services are
calledfees.
To earn revenue, a business incurs costs, such as wages of employees, salaries of
managers, rent, insurance, advertising, freight, and utilities. Costs used to earn rev-
enue are called expenses. Depending upon the nature of the cost, expenses may be
identified in a variety of ways. For example, the cost of products sold is often referred
to as the cost of merchandise sold,cost of sales, or cost of goods sold. Other expenses are
often classified as either selling expensesoradministrative expenses. Selling expenses
include those costs directly related to the selling of a product or service. For example,12 Chapter 1 The Role of Accounting in Business
© JANIS CHRISTIE/PHOTODISC/GETTY IMAGES