Accounting and Finance For Managers

ACCOUNTING AND FINANCE FOR MANAGERS
(BADM682)
Credit Hrs: 2 Contact Hrs: 3
Pre-requisite: None
 By: Mama S. (MSc, MA in PA, PhD Candidate)

Email: masult04@gmail.com
Phone No: 0962092248
CHAPTER ONE
INTRODUCTION TO ACCOUNTING
Accounting, accountability and the account
 Businesses exist to provide goods or services to customers in exchange for a

financial reward.
 Public-sector and not-for-profit organizations also provide services, although
their funding comes not from customers but from government or charitable
donations.
 While this book is primarily concerned with profit oriented businesses, most of
the principles are equally applicable to the public and not-for-profit sectors.
 Business is not about accounting. It is about markets, people and operations
(the delivery of products or services), although accounting is implicated in all
of these decisions because it is the financial representation of business
activity.
What is accounting?
Accounting is an information system
that provides quantitative, financial
information to stakeholders about the
economic activities and condition of a
business so that they can make
business/economic
decisions.
Accounting: Definition
The process of
identifying, measuring, recording and
communicating economic information to permit
informed judgment and decisions by users of
the information.
.
Identifying: Identify those events that are
considered as an evidence of economic activity
relevant to the Business
Recording: Keeping of a chronological diary of
measured events in an orderly and systematic
manner
Communicating: Communicate through the
preparation and distribution of accounting
reports to the interested parties.
The
accounting
process
Accounting
“links” decision
makers with Accounting
Economic
economic
activities information
activities ¾ and
with the results of
their decisions.
Actions
(decisions) Decision
makers
Accountability: Definition
 Accountability: The capacity and willingness to give
explanations for conduct, stating how one has discharged one’s
responsibilities, an explaining of conduct with a credible story
of what happened, and a calculation and balancing of
competing obligations, including moral ones.
 Accountability is:
more total and insistent ... [it] ranges more freely over space
and time, focusing as much on future potential as past
accomplishment
Accountability: Definition
Accounting is a collection of systems and processes used to record, report and
interpret business transactions.
Accounting provides an account – an explanation or report in financial terms – about
the transactions of an organization. It enables managers to satisfy the stakeholders in
the organization (owners, government, financiers, suppliers, customers, employees
etc.) that they have acted in the best interests of stakeholders rather than themselves.
This is the notion of accountability to others, a result of the stewardship function of
managers that takes place through the process of accounting. Stewardship is an
important concept because in all but very small businesses, the owners of businesses are
not the same as the managers.
This separation of ownership from control makes accounting particularly influential
due to the emphasis given to increasing shareholder wealth (or shareholder
value). Accountability results in the production of financial statements, primarily
for those interested parties who are external to the business. This function is called
financial accounting.
Cont…
Accounting is traditionally seen as fulfilling three
functions:
• Scorekeeping: capturing, recording, summarizing and
reporting financial performance.
• Attention-directing: drawing the attention of
managers to, and assisting in the interpretation of,
business performance, particularly in terms of the
comparison between actual and planned
performance.
 Problem-solving: identifying the best choice from a
range of alternative actions.
History and development of
accounting record
Ancient accounting record:
Using system called “stewardship”. The document
facilitate the owner to control and identify their asset,
which is under the custody of the steward
Renaissance in Italy:
Accounting technique using double entry book-keeping
was introduced. A system to ensure that financial
information was recorded efficiently and accurately.
History and development of
accounting record
Industrial Age:
In 19th century the emergence of large corporations,
separation of the owners from the managers, makes
the businesses reports became more complex. Needs to
prepare financial statements to the shareholders.
Post Industrial Age:
Accounting is a need for decision making –
information element.
The Different between Accounting
and bookkeeping:
Accounting:
“a process of identifying, recording, classifying and
summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least, of a
financial character, and interpreting the result thereof”
(AICPA, 1961)
Bookkeeping:
“ only involves activities of collecting and recording financial
data”
USERS OF FINANCIALINFORMATION
Internal Users:
 Managers who plan, organize and run the business
e.g. production supervisors, marketing
 managers, and directors
 Owners of the business
USERS OF FINANCIAL INFORMATION
… cont’d
External Users:
 Resource providers
e.g. investors, employees, creditors
 Recipients of goods and services
e.g. customers, beneficiaries
 Reviewers
e.g. regulatory
 agencies, media, governments, trade unions, special interest
groups
Accounting policies and explanatory
notes
 Important additional notes to define statement
prepared
e.g. accounting policies
 Any additional information that is not shown in the
Definition: FRS 101
financial statement will effect the fairly presentation

Accounting Roles:
 Language of Business
 Decision making tool
 Create accountability and control
 As an Information system
DECISION TOOLKIT
 Are the business operations profitable?
 Does the business rely mainly on debt or equity to
finance its assets?
 Does the business generate sufficient cash from
operations to fund its investing activities?
 Is the company using its assets effectively?
 Is the company maintaining an adequate margin
between sales and expenses?
 Can the company meet its short-term obligations?
 Can the company meet its long-term obligations?
MANAGEMENT ACCOUNTNG DEFINED
 Management accounting is the presentation of
accounting information in such a way so as to
assist management in the creation of policy
and in the day-to-day operations of an
undertaking.
Management Accounting Objectives
 To assist the management in promoting efficiency.
 To interpret financial statements to enable the
management to formulate future plans.
 To arrange for the systematic allocation of
responsibility for implementation of plans and budgets.
 To analyze monetary and non monetary transactions.
 To compare the actual performance with plan &
identifying deviations and their causes.
 To prepare budget covering all functions of business.
Need and importance of
management accounting
 Creates harmony between the management & employees.
 Enables the management to improvise its services to its

customers.
 Various operations can be planned with the help of accounting

information, budgeting & forecasting.
 Avoid business from facing seasonal fluctuations.
 Helps in communicating up to date information to various

parties interested in successful working of the business
Need and importance of
management accounting
 The use of management accounting may controlled or even
eliminate various types of wastages.
 The management aims to control the cost of production and at

the same time increase efficiency of employers.
 Different tools of management accounting have provided

validity, objectivity & reliability in business management.
Management Accounting Functions
1. Forecasting
 Making short-term & long-term finance and planning the business for future operations.
2. Organizing
 Organizing the human & physical resources of the business.
3. Coordinating
• Providing different tools for coordination.
4. Controlling
• Controlling performance by using standard costing, marginal costing and budgetary
control.
5. Analysis and interpretation
6. Communicating
7. Economic appraisal
• Appraisal of social & economic forces, govt. policies and interpret their effect on
business.
SCOPE OF MANAGEMENT ACCOUNTING
• Management accounting is concerned with presentation of
accounting information in the most useful way for the management.
• Its scope is, therefore, quite vast and includes within its fold almost
all aspects of business operations.
 Financial Accounting: Management accounting is mainly concerned
with the rearrangement of the information provided by financial
accounting. Hence, management cannot obtain full control and
coordination of operations without a properly designed financial
accounting system.
 Cost Accounting: Standard costing, marginal costing, opportunity
cost analysis, differential costing and other cost techniques play a
useful role in operation and control of the business undertaking.
 Revaluation Accounting: This is concerned with ensuring that
capital is maintained intact in real terms and profit is calculated
with this fact in mind.
SCOPE OF MANAGEMENT ACCOUNTING
 Budgetary Control: This includes framing of budgets,

comparison of actual performance with the budgeted
performance, computation of variances, finding of their
causes, etc.
 Inventory Control: It includes control over inventory from
the time it is acquired till its final disposal.
 Statistical Methods: Graphs, charts, pictorial presentation,
index numbers and other statistical methods make the
information more impressive and intelligible.
 Taxation: This includes computation of income in
accordance with the tax laws, filing of returns and making tax
payments.
LIMITATIONS OF MANAGEMENT ACCOUNTING
 Based on accounting information
 Wide scope-leads to inaccurate results
 Costly-installation
 Evaluation stage
 Opposition to change- rearrangement of rules and

regulations may not be liked by people.
Who is Management accountant?
The officer who is concerned with management

accounting function in an organization is known
as management accountant.
Functions of management accountant
 To assure physical protection for the business through internal
control & proper insurance coverage.
 To consult with all segments of management.
 To administer the tax policies & procedures
 To supervise & coordinate preparation of reports to govt.
agencies.
 To compare performance with operating plan & standards & to
report and interpret the results of operations to all levels of
management and owners of business as well.
 To establish, coordinate, administer an integral part of
management, an adequate plan for the control of operations.
 To continuously appraise economic & social forces & govt.
influences and interpret their effect on business.
Duties of a management accountant
 To maintenance of adequate records of all contracts and
leases.
 The preparation as a budget director, in conjunction with
other officers of an annual budget, covering all activities of
the corporation for submit to board of directors prior to the
fiscal year.
 The preparation & interpretation of all statistical records &
reports of the corporation.
 The costing of all physical inventories.
 The compilation of production costs.
 Continuous audit of all accounts & records of the corporation
wherever located.
 The compilation of costs of distribution.
RECENT DEVELOPMENTS IN MANAGEMENT
ACCOUNTING
 To maintenance of adequate records of all contracts and leases.
 The preparation as a budget director, in conjunction with other officers of an
annual budget, covering all activities of the corporation for submit to board of
directors prior to the fiscal year.
 The preparation & interpretation of all statistical records & reports of the
corporation.
 The costing of all physical inventories.
 The compilation of production costs.
 Continuous audit of all accounts & records of the corporation wherever located.
 The compilation of costs of distribution.
 The installation & interpretation of all accounting records of the corporation.
 The preparation & interpretation of the financial statements & reports of the
corporation.
Differences Between Management And
Cost Accounting
Differences Between Management And
Financial Accounting
Accounting and its Relationship to
Shareholder Value and Business Structure
The separation of ownership from control and the
divisional zed form of business includes:
 Emergenceof capital markets and value-based
management- tools for measuring shareholder value
 The link between shareholder value, strategy and
accounting
 the shift towards a decentralized, multidivisional
business structure and the measurement and
management of divisional (i.e. business unit)
Capital and product market
What are the main powers of shareholders?
 Elect directors
 Appoint the auditors in an annual meeting of the shareholders
 Entitled to annual report of company’s financial performance
What are 2 ways can Companies be categorized ?

 private
 Public
.
What is a private Company?

(Characteristics)
 Only a few shareholders shares traded

privately
What is a public Company?

 Many share holders shares are traded
publicly
.
What is capital market?

 The market in which investors buy and sell the shares of
companies is associated with the Stock Exchange.
What is Equity?
 funds that Companies obtain from shareholders
What is debt?
 funds that companies raise by borrowings from financiers
 Both of these (equity and debt) constitute the capital employed

in the business.
.
What is the cost of capital?

 Represents the cost incurred by the organization to fund all
its investments, comprising the cost of equity and the cost of
debt weighted by the mix of debt and equity.
What is cost of debt?

 Interest, which, price charged by the lender.
What is cost of Equity?
 is partly dividend and partly capital growth, because most
shareholders expect both regular income from profits (the
dividend) and an increase in the value of their shares over
time in the capital market.
.
 Thus, the different costs of each form of capital, weighted by

the proportions of different forms of debt and equity, constitute
the weighted average cost of capital.
 The management of the business relationship with capital
markets is called financial management or corporate finance.
Companies use their capital:
 to invest in technologies, people and materials in order to make,
buy and sell products or services to customers. This is called the
product market.
The focus of shareholder wealth:
 to obtain funds at competitive rates from capital markets and
invest those funds to exploit imperfections in product markets.
 Where this takes place, shareholder wealth is increased through
dividends and increases in the share price.
Value-based management
 Assumesthe primary goal of businesses is to increase
shareholder value.
Approaches include:
Total share holder return,
 market value added,
shareholder valued added,
economic value added
Capital and product market structure and interaction
Value-based management… Cont…..
Total shareholder return (TSR)
 Compares the dividends received by shareholders and the
increase in the share price with the original shareholder
investment, expressing the TSR as a percentage of the
initial investment.
Market value added (MVA)
 is the difference between total market capitalization
(number of shares issued times share price plus the market
value of debt) and the total capital invested in the business
by debt and equity providers.
 This is a measure of the value generated by managers for
shareholders.
Value-based management…
shareholder value added (SVA)
 to refer to the increase in shareholder value over time.
 shareholder value as the economic value of an investment, which can be
calculated by using the cost of capital to discount forecast future cash
flows (which called free cash flows) into present values (discounted cash
flow techniques
What are the 7 drivers of shareholder value?
1. sales growth rate,
2. operating profit margin,
3. income tax rate,
4. working capital investment,
5. fixed capital investment,
6. cost of capital and
7. forecast duration.
Managers make three types of decisions that influence these
value drivers and lead to shareholder value:
1. Operating decisions – product mix, pricing, promotion,
customer service etc., which are then reflected in the sales
growth rate, operating profit margin and income tax rate.
2. Investment decisions – in both inventory and capacity,
which are then reflected in both working capital and fixed
capital investment.
3. Financing decisions – the mix of debt and equity and the
choice of financial instrument determine the cost of capital,
which is assessed by capital markets in terms of business
risk.
 What is the value of growth Duration ?
Estimated number of years over which the return from
investments is expected to exceed the cost of capital.
What do the 7 value drivers determine?
 Cash flow from operations
 Level of debt
 Cost of capital
 Shareholder value
 A detrimental consequence of the emphasis on shareholder
value is that it has led to a continued focus on short-term
financial performance at the expense of longer-term strategy.
Economic Value Added (EVA)
 is a financial performance measure.
 EVA’s ‘economic profit’ is the amount by which earnings
exceed (or fall short of) the minimum rate of return that
shareholders and financiers could get by investing in other
securities with a comparable risk
What are examples of modified after- tax operating profit?
 Employee training
 Research and development
 Advertising
What are examples of modified total capital?
Fixed assets
Working capital etc …
Shareholder Value, Accounting and strategy
 The focus of accounting in business organizations is shareholder value – increasing the value of
the business to its shareholders – through dividends from profits and/or through capital growth.
 Strategy both influences and is influenced by shareholder value.
 Strategy is reflected in the functional business areas of marketing, operations and human
resources, through the actions the business wants to take to achieve, maintain and improve
competitive advantage.
What is a shareholder ( strategic) value analysis?
 Emphasizes how shareholders value is achieved Via: new/redesigned products and services,
management of costs, development of performance measurement systems, improved decision
making
 Compare cost with customer value
Shareholder Value, Accounting and strategy… Cont…
The relationship between Shareholder value, strategy and accounting

Shareholder Value, Accounting and strategy
What is financial management concerned with?
 Financial management is concerned with raising funds from shareholders or financiers to provide
the capital the business needs to sell and produce goods and services.
What is financial accounting?
 It represents the stewardship function, that managers are accountable to those with a financial
interest in the business and produce financial reports to satisfy that accountability
What does management accounting do?
 Management accounting provides the information for planning, decision-making and control.
Shareholder Value, Accounting and strategy….
 The importance of strategy for management accounting and the information it provides is that a
strategic perspective involves taking a longer-term view about the business than is usually
provided by traditional accounting reports.
 Management accounting comprises a set of tools and techniques to support planning, decision
making and control in business organizations. Accounting is – or at least should be – integrated
with business strategy.
 However, these same accounting tools and techniques can be used to help evaluate the
performance of customers, suppliers and competitors in order to improve competitive
advantage. This is called strategic management accounting,
Company regulations and Corporate Governance
What is the single objective of the firms?
- profit or Wealth Maximization?
What is legislations governs federally registered companies ?
Ethiopian corporation act or Canada business Corporation act or others
What is the single objective of the firms?
- profit or Wealth Maximization?
What is legislations governs federally registered companies ?
Ethiopian corporation act or Canada business Corporation act or others
What do shareholders do?
 Appoint directors to manage company on their behalf
 Have no management rights
 Receive annual report with financial statements
 Hold annual meeting to elect directors, ratify dividend, appoint auditors
What do directors do?
 Can authorize company borrow money
 Must keep accounting records and produce financial reports in a
specified format
 If the company makes profit, they can recommend dividends be paid
Corporate governance- System by which companies are directed and controlled boards of
directors are responsible for it.
Business events; transactions
and the accounting system
Introduction to Financial Statements
Companies prepare interim

financial statements and annual
financial statements.
2000
X
FINANCIAL STATEMENTS
Definition: FRS 101
 Financial statement is a structured financial

representation of the financial position of an
Definition: FRS 101
enterprise and the transaction undertaken by an
enterprise
Objectives and purposes of
Financial Statement
1. Provide information about the financial position,
performance and cash flow of an enterprise
2. Show the results of management’s stewardship of
the resources entrusted toFRS
Definition: it 101
3. Assists users in predicting the enterprise’s future
cash flow and the timing and certainty of the
generation of cash and cash equivalents.
Components of FS
1. Balance Sheet
2. Income Statement
3. A statement showing:
 All changes in equity
 Changes in equity other thanDefinition: FRSfrom
those arising 101capital transaction with owners and
distribution with owners
4. Cash Flow Statement, and
5. Accounting policies and explanatory notes
FINANCIAL STATEMENTS
Income Statement:
Reports revenues less expenses for a particular period of time
Balance Sheet:
Definition:
Reports assets and claims to those assets atFRS 101
a particular point in time
Statement of Changes in Equity:

Reports amount of profit for the period and the changes in equity
Cash Flow Statement:

 Reports information regarding cash receipts and cash payments for a particular
period of time
The Concept of the Business Entity
A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.
A Starting Point: Statement of Financial
Position
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
Assets
Balance Sheet
December 31, 2002
Cash Assets are
$ 22,500 Liabilities:
Notes receivable 10,000 economic resources
Notes payable $ 41,000
Supplies 2,000 that are owned by
Salaries payable 3,000
Land
Building
100,000
the business and
Total liabilities
90,000 Owners' Equity:
$ 80,000
Office equipment 15,000 are expected to

Capital stock 150,000
Total
provide positive
$ 300,000 Total $ 300,000
future cash flows.
Assets
Cost Principle
These accounting
Stable-Dollar principles support Going-Concern
Assumption cost as the basis Assumption
for asset valuation.
Objectivity
Principle
The Cost (Historical Cost) Principle
Accounting cost concept states that all assets are
recorded in the books of accounts at their purchase
price, which includes cost of acquisition,
transportation and installation and not at its market
price, i.e. original cost. It means that fixed assets
like building, plant and machinery, furniture, etc are
recorded in the books of accounts at a price paid for
them.
This is the figure that appears on the source
document for the transaction in almost
all cases.
The Going / Continuing Concern
ConceptThis concept states that a business firm will
continue to carry on its activities for an indefinite
period of time, i.e. every business entity has
continuity of life. Thus, it will not be dissolved in
the near future.
This is an important assumption of accounting, as
it provides a basis for showing the value of assets
in the balance sheet.
In this basis, assets are recorded based on their
original cost and not on market value. Assets are
assumed to be used for an indefinite period of
time and not intended to be sold immediately.
The Objectivity Principle
 The objectivity principle states that
accounting will be recorded on the basis of
objective evidence, i.e. different people
looking at the evidence will arrive at the
same values for the transaction, and
accounting entries will be based on fact and
not on personal opinion or feelings.
•The source document for a transaction is
almost always the best objective evidence
available.
Stable-Dollar Assumption
 A limitation of measuring assets at historical cost is that the value of the

monetary unit or dollar is not always stable.
 Inflation- the situation where the value of the monetary unit decreases, i.e.
it will purchase less than it did previously.
 When inflation becomes severe, historical; cost amounts for those assets
lose there relevance as a basis for making business decisions
Liabilities
Balance Sheet
December 31, 2002
Liabilities are
debts that
represent negative
Supplies
Land
2,000
100,000
Salaries payable
Total liabilities
3,000
$ 80,000
future cash flows
for the enterprise. Retained earnings 70,000
Total $ 300,000 Total $ 300,000
Owners’ Equity
Balance Sheet
December 31, 2002
Owners’ equity
represents the
owner’s claim to
Supplies
Land
2,000
100,000
Salaries payable
Total liabilities
3,000
$ 80,000
the assets of the
business. Retained earnings 70,000
Total $ 300,000 Total $ 300,000
Owners’ Equity
Changes in Owners’
Equity
• Owners’ • Payments
Investments to Owners
• Business • Business
Earnings Losses
The Accounting Equation
Assets
Assets ==Vagabond
Liabilities ++ Agency
Travel
Liabilities Owners’
Owners’Equity
Equity
Balance Sheet
December 31, 2002
$300,000
Assets=
$300,000 = $80,000
$80,000 +Liabilities
+ $220,000
$220,000
& Owners' Equity
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity
Total $ 300,000 Total $ 300,000
Let’s analyze
some
transactions for
JJ’s Lawn Care
Service.
On May 1, 2003, Jill Jones and her family
invested $8,000 in JJ’s Lawn Care Service and
received 800 shares of stock.
JJ's Lawn Care Service
Balance Sheet
May 1, 2003
Assets Owners' Equity
Cash $ 8,000 Capital Stock $ 8,000
Total $ 8,000 Total $ 8,000

On May 2, JJ’s purchased a riding lawn
mower for $2,500 cash.
Balance Sheet
May 2, 2003
Assets Owners' Equity
Cash $ 5,500 Capital Stock $ 8,000
Tools & Equipment 2,500
Total $ 8,000 Total $ 8,000

On May 8, JJ’s purchased a $15,000 truck.
JJ’s paid $2,000 down in cash and issued a note payable
for the remaining $13,000.
Balance Sheet
May 8, 2003
Assets Liabilities and Owners' Equity
Tools & Equipment 2,500 Notes Payable $ 13,000
Truck 15,000 Owners' Equity:
Capital Stock 8,000
Total $ 21,000 Total $ 21,000

On May 11, JJ’s purchased some repair
parts for $300 on account.
Balance Sheet
May 11, 2003
Tools & Equipment 2,800 Notes Payable $ 13,000
Truck 15,000 Accounts Payable 300
Total Liabilities $ 13,300
Owners' Equity:
Capital Stock 8,000
Total $ 21,300 Total $ 21,300

Jill realized she had purchased more repair parts than needed.
On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns for
$150, a price equal to JJ’s cost. JJ’s will receive the cash within 30 days.

Balance Sheet
May 18, 2003
Accounts Receivable 150 Notes Payable $ 13,000
Tools & Equipment 2,650 Accounts Payable 300
Truck 15,000 Total Liabilities $ 13,300
Owners' Equity:
Capital Stock 8,000
Total $ 21,300 Total $ 21,300

On May 25, ABC Lawns pays JJ’s $75 as a partial
settlement of its accounts receivable.

Balance Sheet
May 25, 2003
Truck 15,000 Total Liabilities $ 13,300
Owners' Equity:
Capital Stock 8,000
Total $ 21,300 Total $ 21,300

On May 28, JJ’s pays $150 of its accounts
payable.
Balance Sheet
May 28, 2003
Truck 15,000 Total Liabilities 13,150
Owners' Equity:
Capital Stock 8,000
Total $ 21,150 Total $ 21,150

On May 29, JJ’s recorded lawn care services
provided during May of $750. All clients paid in
cash.
Balance Sheet
May 29, 2003
Owners' Equity:
Capital Stock 8,000
Retained Earnings 750
Total $ 21,900 Total $ 21,900
On May 31, JJ’s purchased gasoline for the
lawn mower and the truck for $50 cash.
Balance Sheet
May 31, 2003
Owners' Equity:
Capital Stock 8,000
Retained Earnings 700
Total $ 21,850 Total $ 21,850
Now, let’s review how JJ’s transactions
affected the accounting equation.
Assets = Liabilities + Owners' Equity
Accts. Tools & Notes Accts. Capital Retained
Cash + Rec. + Equip. + Truck = Payable + Pay. + Stock + Earnings
May 1 $ 8,000 $ 8,000
Balances $ 8,000 $ 8,000
May 2 (2,500) $ 2,500
Balances $ 5,500 $ 2,500 $ 8,000
May 8 (2,000) $ 15,000 $ 13,000
Balances $ 3,500 $ 2,500 $ 15,000 $ 13,000 $ 8,000
May 11 300 $ 300
Balances $ 3,500 $ 2,800 $ 15,000 $ 13,000 $ 300 $ 8,000
May 18 $ 150 (150)
Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
May 25 75 (75)
Balances $ 3,575 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
May 28 (150) (150)
Balances $ 3,425 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000
May 29 750 750
Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 750
May 31 (50) (50)
Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 700
Let’s prepare the Income Statement and
Statement Assets of Cash Flows
= for JJ’s+ Lawn
Liabilities Owners'Care
Equity
Accts. Tools & Notes Accts. Capital Retained
Service for the month ending May 31, 2003.
Cash + Rec. + Equip. + Truck = Payable + Pay. + Stock + Earnings
May 1 $ 8,000 $ 8,000
Balances $ 8,000 $ 8,000
May 2 (2,500) These
$ 2,500These transactions
transactions
Balances $ 5,500 $ 2,500 $ 8,000
May 8 (2,000) impact
impact
$ 15,000 the
the
$ 13,000
Balances
May 11
$ 3,500 $ 2,500
300
Statement
$ 15,000
Statement of
of Cash
$ 13,000
Cash
$ 300
$ 8,000
Balances $ 3,500 $ 2,800 Flows.

Flows.
$ 15,000 $ 13,000 $ 300 $ 8,000
May 18 $ 150 (150)
Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
May 25 75 (75)
Balances $ 3,575 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
May 28 (150) (150)
Balances $ 3,425 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000
May 29 750 These
These transactions
transactions 750
Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 750
May 31 (50) impact
impact the the Income
Income (50)
Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 700
Statement.
Statement.
Income Statement
For the Month Ended May 31, 2003
Sales Revenue $ 750

Operating Expense:
Gasoline Expense 50
Net Income $ 700
Investments
Investments by by and
and payments
payments to to the
the owners
owners
are
are not
not included
included on
on the
the Income
Income Statement.
Statement.
Statement of Cash Flows
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash provided by operating activities $ 700
Cash flows from investing activities:
Purchase of lawn mower $ (2,500)
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month $ 4,125
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 $ 4,125
Operating
Operating
Purchase activities
activities include
of lawn mower include$ the
the cash
(2,500)cash
effects
Purchase of truckof revenue and expense
effects of revenue and (2,000)
expense
transactions.
transactions.
Purchase of truck (2,000)
Investing
Investing
Investment activities
activities include
by owners include the
the cash
cash 8,000
effects
Increase
effects of
in cash for
of purchasing
month
purchasing and
and selling
selling$ 4,125
Cash balance, May 31, 2003 assets.
assets. $ 4,125
Financing
of truck activities
Financing
Purchase activities include
include the
the cash
(2,000)cash
effects
Collection
effects of
for
of transactions
sale of repair parts with the owners
transactions with the 75
owners
and
and creditors.
Net cash used by investing creditors.
activities (4,575)
Relationships Among Financial
Statements
Beginning End of
of period Time period
Balance Balance
Sheet Sheet
Income Statement
Forms of Business Organizations
Sole
Sole
Proprietorship Partnership
Partnership Corporation
Corporation
Proprietorship
Reporting Ownership Equity in the
Balance Sheet
Sole
Sole
Ow ner's equity:
Proprietorship
Proprietorship Jill Jones, capital $ 8,000
Partners' equity
Jill Jones, capital $ 4,000
Partnership
Partnership
Bill Jones, capital 4,000
Total partners' equity $ 8,000
Owners' equity
Capital stock $ 7,000
Corporation
Corporation
Total stockholders' equity $ 8,000
The Use of Financial Statements by
Outsiders
Two
Two concerns:
concerns:
Creditors Solvency
Solvency
Profitability
Profitability
Investors
The Need for Adequate Disclosure
Balance Sheet Notes

Notes to
to the
the
Income Statement
financial
financial
statements
statements often
often
provide
provide facts
facts
necessary
necessary forfor the
the
proper
proper
interpretation
interpretation of of
the
the statements.
statements.
Cont.…
Thank You

Accounting and Finance For Managers - MBA CH1

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Accounting and Finance For Managers - MBA CH1

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 By: Mama S. (MSc, MA in PA, PhD Candidate)

 Businesses exist to provide goods or services to customers in exchange for a

financial statement will effect the fairly presentation

 Enables the management to improvise its services to its

 Various operations can be planned with the help of accounting

 Avoid business from facing seasonal fluctuations.

 Helps in communicating up to date information to various

 The management aims to control the cost of production and at

 Different tools of management accounting have provided

 Budgetary Control: This includes framing of budgets,

 Based on accounting information

 Wide scope-leads to inaccurate results

 Opposition to change- rearrangement of rules and

The officer who is concerned with management

What are 2 ways can Companies be categorized ?

What is a private Company?

 Only a few shareholders shares traded

What is a public Company?

What is capital market?

 Both of these (equity and debt) constitute the capital employed

What is the cost of capital?

What is cost of debt?

 Thus, the different costs of each form of capital, weighted by

The relationship between Shareholder value, strategy and accounting

Companies prepare interim

 Financial statement is a structured financial

Statement of Changes in Equity:

Cash Flow Statement:

Office equipment 15,000 are expected to

 A limitation of measuring assets at historical cost is that the value of the

Total $ 8,000 Total $ 8,000

Total $ 8,000 Total $ 8,000

Total $ 21,000 Total $ 21,000

Total $ 21,300 Total $ 21,300

JJ's Lawn Care Service

Total $ 21,300 Total $ 21,300

JJ's Lawn Care Service

Total $ 21,300 Total $ 21,300

Total $ 21,150 Total $ 21,150

Balances $ 3,500 $ 2,800 Flows.

Sales Revenue $ 750

Balance Sheet Notes

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