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Introduction to
Accounting and
Business

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completing edit Master
chapter, title
you should style
be able to:
1. Describe the nature of a business and types of business
organization.
2. Describe the role of ethics and accounting in business.
3. Describe the importance of business ethics, why ethics is
a fundamental business concept and the basic principles
of proper ethical conduct and legal compliance.
4. Explain what accounting is.
5. Identify the users and uses of the accounting information.
6. Describe the role of accounting in business and
specialized accounting fields.
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3

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completing edit Master
chapter, title
you should style
be able to:
7. Explain the meaning of generally accepted accounting
principles (GAAPs).
8. Describe the assumptions, principles, and constraints and
relate to the practice of accounting.
9. State the basic accounting equation and explain each
element of the equation.
10. Analyze the effects of business transactions on the basic
elements of the accounting equation.
11. Describe the financial statements of a proprietorship and
how they are prepared.
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Objective
Objective 11
Describe the nature of a
business and types of business
organization
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Types of Businesses

Service
ServiceBusiness
Business Service
Service
The
TheWalt
WaltDisney
DisneyCompany
Company Entertainment
Entertainment
Malaysia
MalaysiaAirlines
AirlinesSystem
System(MAS)
(MAS) Transportation
Transportation
Maybank
MaybankCorporation
Corporation Financial
Financialservices
services
Marriott
MarriottInternational
InternationalHotels
Hotels Hospitality
Hospitalityand
andlodging
lodging
KPMG
KPMG Auditing
Auditing

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Types of Businesses

Merchandising
Merchandising Business
Business Product
Product
Giant
Giant General
Generalmerchandise
merchandise
Amazon.com
Amazon.com Internet
Internetbooks,
books,music,
music,video
video
Toy
ToyR
RUs
Us Toys
Toys
Panasonic
Panasonic Consumer
Consumerelectronics
electronics
Gap
GapInc.
Inc. Apparel
Apparel

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Types of Businesses

Manufacturing
Manufacturing Business
Business Product
Product
General
GeneralMotors
MotorsCorporation
Corporation Cars,
Cars,trucks,
trucks,vans
vans
Nokia
Nokia Cell
Cellphones
phones
Dell
DellInc.
Inc. Personal
Personalcomputers
computers
Nike
Nike Athletic
Athleticshoes
shoesand
andapparel
apparel
FF&&NNCompany
Company Beverages
Beverages
Sony
SonyCorporation
Corporation Stereos
Stereosand
andtelevisions
televisions

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Common Forms of Business Organizations

Proprietorship
Partnership
Corporation
Limited liability company

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Proprietorship 1-1
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owned by one individual,

more than 70% of business organizations in


Malaysia are organized by proprietorships,

easy and low cost of organizing,

financial resources are limited to the owners


resources, and

commonly used by small businesses such as


hardware stores, laundries, restaurants, and grocery 9
shop.
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Partnership 1-1
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owned by two or more individuals,

about 10% of business organizations in Malaysia


are organized by partnerships,

combine the skills and resources of more than one


person, and

like proprietorships, small local businesses such


as automotive repair shops, music stores, beauty
salons, and clothing stores may be organized as
partnerships. 10
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Corporation
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organized under state or federal statutes as a separate
legal taxable entity
generates 90% of the total dollars of business receipts
received.
comprises only 20% of the business organizations in
Malaysia.
ownership is divided into shares of stock, sold to
shareholders (stockholders)
able to obtain large amount of resources by issuing
stock.
is used only by large businesses. 11
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Limited liability company (LLC)

combines attributes of a partnership and a


corporation in that it is organized as a corporation.

can elect to be taxed as a partnership

a popular alternative to a partnership

has tax and liability advantages to the owners.

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A business stakeholder is a
person or entity having an interest
in the economic performance and
well-being of a business.

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Capital market stakeholders


provide the major financing for the
business in order for the business to
begin and continue its operations.

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Product or service market stakeholders
include customers who purchase the
businesss products or services as well
as the vendors who supply inputs to the
business.

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Government stakeholders
have an interest in the economic
performance of a business. City,
county, state, and federal governments
collect taxes from businesses within
their jurisdiction.

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Internal stakeholders include
individuals employed by the business.
Managers have an incentive to
maximize the economic value of the
business. Employees have an interest
because their jobs depend on it.

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Objective Master title style
Objective 22 and
and 33 2-3

Describe the role of ethics and accounting in


business

Describe the importance of business ethics,


why ethics is a fundamental business
concept and the basic principles of proper
ethical conduct and legal compliance.
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ethics?to edit Master title style 2-3
Because our actions are watched and judged as
right or wrong, honest or dishonest, and fair or bias.
because it has impact on society and others.
to communicate credible economic information
activities.
These judgments represent the standards of conduct
known as ethics.

Ethics is the moral principles that guide the 19


conduct of individuals.
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The answer to
Master title style 2-3

What went wrong 1. Individual


for these character
companies? 2. Firm culture
(Exhibit 2) 3. Laws and
involves three enforcement
factors.

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Objective
Objective 44

Explain what accounting is.

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Accounting
an information system that provides
reports to stakeholders about the
economic activities and condition of a
business.

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Objective
Objective 55

Identify the users and uses of the


accounting information

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Who uses the accounting information?

Internal users
eg. marketing managers, production supervisors,
finance directors, and company officers.

they need detailed information like financial


comparison of operating alternatives, projection of
income from new sales, and forecasts of cash needs
for the coming year on a timely basis in running the
business.

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Who uses the accounting information?


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External users
Investors to make decisions whether to buy, hold, or sell their share
in the company.

Tax authority check for companys tax compliance.

Security Commission (SC) to make sure that company is operating


within the prescribed rules.

Customers observe whether company continues to maintain product


quality and warranty and then decide whether to continue supporting
its products.

Labour union want to know whether company can afford to give


pay
raises or benefits. 25

Economic planners to forecast economic activities.


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Clickby to
The process edit
which Master
accounting title style
provides
information to business stakeholders is as follows:
Identify stakeholders.

Assess stakeholders information needs.

Design the accounting information system to meet


stakeholders needs.

Record economic data about business activities and events.

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Prepare accounting reports for stakeholders.
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Objective
Objective 66

Describe the role of the accounting


profession in business and specialized
accounting fields

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Financial accounting is primarily concerned
with the recording and reporting of economic
data and activities for a business.

Managerial accounting uses both financial


accounting and estimated data to aid
management in running day-to-day
operations and in planning future operations.
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Accountants employed by a business firm or
a not-for-profit organization are said to be
employed in private accounting [annual
starting salaries $28500-$72500].
Accountants employed individually or within
a public accounting firm in tax or audit
service are said to be employed in public
accounting [annual starting salaries
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$36625-$44375].
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Objective
Objective 77

Explain the meaning of GAAPs

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GAAPs (Generally Accounting Accepted Principles)
are a standard set of rules and standard system used in
preparing financial statements.
The aim - stakeholders can compare financial
performance and condition of one company to another.
Accounting principles and concepts develop from
research, practice, and pronouncements of authoritative
bodies such as the Malaysian Accounting Standards
Board (MASB).
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Objective
Objective 88

Describe the assumptions,


principles, and constraints
and relate to the practice of
accounting.
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When developing GAAPs, there are certain basic
style
assumptions made.

The assumptions provide a foundation for the


accounting process.

There are FOUR main basic accounting


assumptions:

[i] Economic Entity Assumption


[ii] Going Concern Assumption,
[iii] Time Period Assumption, and
[iv] Monetary-unit Assumption. 34
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There are FIVE basic accounting
principles guiding accounting practices namely:

[i] Cost Principle,


[ii] Objectivity Principle,
[iii] Revenue Recognition Principle,
[iv] Matching Principle, and
[v] Full Disclosure Principle.

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There are TWO main accounting constraints:

[i] conservatism and


[ii] materiality

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The business entity concept
limits the economic data in
the accounting system to
data related directly to the
activities of the business.

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The cost concept is the


basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.

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The objectivity concept


requires that the accounting
records and reports must be
supported by independent or
unbiased evidence.

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The unit of measure


concept requires that
economic data be
recorded in dollars.

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Example 1
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On August 25, Gallatin Repair Service extended an offer of
$125,000 for land that had been priced for sale at $150,000. On
September 3, Gallatin Repair Service accepted the sellers
counter offer of $137,000. On October 20, the land was assessed
at a value of $98,000 for property tax purposes. On December 4,
Gallatin Repair Service was offered $160,000 for the land by a
national retail chain. At what value should the land be recorded
in Gallatin Repair Services records?

Follow My Example
$137,000. Under the cost concept, the land should be recorded at
the cost to Gallatin Repair Service. 41
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Objective
Objective 99

State the basic accounting


equation and explain each
element of the equation.
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The Accounting Equation

Assets = Liabilities + Owners Equity

The resources
owned by a
company.
Yield benefits in
the future 43
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The Accounting Equation

Assets = Liabilities + Owners Equity

The rights of the


creditors, which
represent debts
of the company
(creditors claim
on coms assets) 44
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The Accounting Equation

Assets = Liabilities + Owners Equity

Shareholders
claims on assets

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The Accounting Equation

Assets = Liabilities + Owners Equity

After each transaction is recorded, the


accounting equation must remain in balance!

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Example 2
Johan is the owner and operator of Youre A Star, a motivational consulting
business.
The At theaccounts
following end of itsappear
accounting
in theperiod, December
adjusted 31, 2008,
trial balance of Youre A
Star has assets
Hindsight of $800,000
Consulting. and liabilities
Indicate whetherofeach
$350,000.
account Using thebe
would
accounting
reported equation,
in the determine
(a) current the(b)
asset; following amounts:
property, plant, and
a. Owners
equipment; (c)equity,
currentas liability,
of December 31, 2008. liability; or (e)
(d) long-term
b. Owners
owners equityequity, as of December
section the December31, 2009, assuming
31, 2007, that assets
balance sheet
increased
of Hindsight by $130,000 and liabilities decreased by $25,000
Consulting.
during 2009.

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Example 2
Johan is the owner and operator of Youre A Star, a motivational consulting
business.
The At theaccounts
following end of itsappear
accounting
in theperiod, December
adjusted 31, 2008,
trial balance of Youre A
Star has assets
Hindsight of $800,000
Consulting. and liabilities
Indicate whetherofeach
$350,000.
account Using thebe
would
accounting
reported equation,
in the determine
(a) current the(b)
asset; following amounts:
property, plant, and
a. Owners
equipment; (c)equity,
currentas liability,
of December 31, 2008. liability; or (e)
(d) long-term
b. Owners
owners equityequity, as of December
section the December31, 2009, assuming
31, 2007, that assets
balance sheet
increased
of Hindsight by $130,000 and liabilities decreased by $25,000
Consulting.
during 2009.
Follow My Example
a. A = L + OE b. A = L + OE
$800,000 = $350,000 + OE $130,000 = $25,000 + OE
OE = $450,000 OE = $155,000
OE on Dec. 31, 2009:
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$605,000 ($450,000 + $155,000) 46
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Objective
Objective 10
10
Analyze the effects of business
transactions on the basic elements
of the accounting equation.

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A business transaction is an
economic event or condition that
directly changes an entitys
financial condition or directly
affects its results of operations.

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On November 1, 2007, Kris


Klarah begins a business that
will be known as
JaringSolutions.

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Assets = Owners Equity


Cash Kris Klarah, Capital
=
a. 25,000 25,000 Investment
by Kris
Klarah

a. Kris Klarah deposits $25,000 in a bank


account in the name of JaringSolutions. 52
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Assets = Owners Equity
Cash + Land Kris Klarah, Capital
Bal. 25,000 = 25,000
b. 20,000 +20,000
Bal. 5,000 20,000 25,000

b. JaringSolutions exchanged $20,000 for


land.
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Owners
Assets = Liabilities + Equity
Accounts Kris Klarah,
Cash + Supplies + Land Payable Capital
=
Bal. 5,000 20,000 25,000
c. +1,350 +1,350
Bal. 5,000 1,350 20,000 1,350 25,000

c. During the month, JaringSolutions


purchased supplies for $1,350 and agreed
to pay the supplier in the near future (on 54
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account). 54
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Beginning with entry (d) the


asset section will be shown
first, then the liabilities and
owners equity will be shown
in the following slide.

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Assets

Cash + Supplies + Land


5,000 1,350 20,000
Bal.
d. +7,500
12,500 1,350 20,000
Bal.

d. JaringSolutions provided services to


customers, earning fees of $7,500 and
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received the amount in cash. 54
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Liabilities + Owners Equity
Accounts Kris Klarah, Fees
Payable + Capital + Earned
1,350 25,000 Bal.
+7,500 d.
1,350 25,000 7,500 Bal.

d. JaringSolutions provided services to


customers, earning fees of $7,500 and
received the amount in cash. 57
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Expenses
10

The amounts used in earning revenue are


called expenses. Adding expenses to the
owners equity section results in a space
problem. To adjust for these added
headings, the word Bal. has been omitted
from the following Slides. The bottom row
in these four slides provides the balances
after each transaction.
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Assets
Cash + Supplies + Land
Bal. 12,500 1,350 20,000
e. 3,650
Bal. 8,850 1,350 20,000

e. JaringSolutions paid the following


expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
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Liabilities + Owners Equity


Accounts Kris Klarah, Fees Wages Rent Utilities Misc.
Payable + Capital + Earned Expense Expense Expense
Expense
1,350 25,000 7,500
2,125 800 450 275 e.
1,350 25,000 7,500 2,125 800 450 275

e. JaringSolutions paid the following expenses:


wages, $2,125; rent, $800; utilities, $450; and
miscellaneous, $275. 60
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Assets
Cash + Supplies + Land
Bal. 8,850 1,350 20,000
f. 950
Bal. 7,900 1,350 20,000

f. JaringSolutions paid $950 to


creditors during the month. 61
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Liabilities + Owners Equity


Accounts Kris Klarah, Fees Wages Rent Utilities Misc.
Payable + Capital + Earned Expense Expense Expense
Expense
1,350 25,000 7,500 2,125 800 450 275
950 f.
400 25,000 7,500 2,125 800 450 275

f. JaringSolutions paid $950 to


creditors during the month. 62
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Assets
Cash + Supplies + Land
Bal. 7,900 1,350 20,000
g. 800
Bal. 7,900 550 20,000

g. At the end of the month, the cost


of supplies on hand is $550, so
$800 of supplies were used. 63
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Liabilities + Owners Equity


Accounts Kris Klarah, Fees Wages Rent Supplies Util. Misc.
Payable + Capital + Earned Exp. Exp. Exp. Exp. Exp.
400 25,000 7,500 2,125 800 450 275
800 g.

400 25,000 7,500 2,125 800 800 450 275

g. At the end of the month, the cost


of supplies on hand is $550, so
$800 of supplies were used. 64
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Assets
Cash + Supplies + Land
Bal. 7,900 550 20,000
h. 2,000
Bal. 5,900 550 20,000

h. At the end of the month, Kris


withdrew $2,000 in cash from the
business for personal use. 65
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Liabilities + Owners Equity
Accounts Kris Klarah, Kris Klarah, Fees Wages Rent
Supplies Util. Misc.
Payable + Capital + Drawing Earned Exp. Exp.
Exp. Exp. Exp.
400 25,000 7,500 2,125 800 800 450 275
2,000 h.
400 25,000 2,000 7,500 2,125 800 800 450 275

h. At the end of the month, Kris


withdrew $2,000 in cash from the
business for personal use. 66
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Owners Equity

Increased by Decreased by

Owners Owners
investments withdrawals
Revenues Expenses

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Example 3
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Salyo Delivery Service is owned and operated by Jo Salyo.
The following selected transactions were completed by
Salyo Delivery Service during February:
1. Received cash from owner as additional investment,
$35,000.
2. Paid creditors on account, $1,800.
3. Billed customers for delivery services on account,
$11,250.
4. Received cash from customers on account, $6,740.
5. Paid cash to owners for personal use, $1,000.
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Example 3
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Indicate the effect of each transaction on the accounting
equation elements (Assets, Liabilities, Owners Equity,
Drawing, Revenue, and Expense) by listing the numbers
identifying the transactions, (1) through (5). Also, indicate
the specific item within the accounting equation element
that is affected. To illustrate, the answer to (1) is shown
below.
(1) Asset (Cash) increases by $35,000; Owners Equity (Jo
Salyo, Capital) increases by $35,000.
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Follow My Example

(2) Asset (Cash) decreases by $1,800; Liability (Accounts


Payable) decreases by $1,800.
(3) Asset (Accounts Receivable) increases by $11,250;
Revenue (Delivery Service Fees) increases by $11,250.
(4) Asset (Cash) increases by $6,740; Asset (Accounts
Receivable) decreases by $6,740.
(5) Asset (Cash) decreases by $1,000; Owners Equity (Jo
Salyo, Drawing) increases by $1,000.
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For Practice: PE 1-3
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Objective
Objective 11
11

Describe the financial


statements of a proprietorship,
explain how they interrelate,
and how they are prepared.
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Accounting reports, called


financial statements,
provide summarized
information to the owner.

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The income statement is a


summary of the revenue and
expenses for a specific
period of time, such as a
month or a year.

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Income Statement
11

Net income is carried


to the statement of 7472
owners equity
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A statement of owners equity is


a summary of the changes in
the owners equity that have
occurred during a specific
period of time.

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Statement of Owners Equity
11
From the income statement

To the balance sheet


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A balance sheet is a list of


the assets, liabilities, and
owners equity as of a
specific date.

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Balance Sheet
11

This amount is compared


to the net cash flow on the From the statement
statement of cash flows of owners equity
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A statement of cash flows


is a summary of the cash
receipts and payments for
a specific period of time.

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Statement of Cash Flows
11

This amount should match


Cash on the balance sheet. 80
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Income Statement
11

The income statement reports the


revenues and expenses for a period of
time based on the matching concept.
This concept is applied by matching the
expenses with the revenue generated
during a period by those expenses.

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The excess of revenue over


the expenses is called net
income or net profit. If the
expenses exceed the revenue,
the excess is a net loss.

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Click
Example 4
to edit Master title style
The assets and liabilities of Chickadee Travel Service at April 30,
2009, the end of the current year, and its revenue and expenses
for the year are listed below. The capital of the owner, Adam
Cellini, was $80,000 at May 1, 2008, the beginning of the current
year.
Accounts payable $ 12,200 Miscellaneous expense $ 12,950
Accounts receivable 31,350 Office expense 63,000
Cash 53,050 Supplies 3,350
Fees earned 263,200 Wages expense 131,700
Land 80,000
Prepare an income statement for the current year ended April
30, 2009.
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Follow My Example
CHICKADEE TRAVEL SERVICE
INCOME STATEMENT
For the Year Ended April 30,
Fees earned 2009 $263,200
Expenses:
Wages expense $131,700
Office expense 63,000
Miscellaneous expense 12,950
Total expenses 207,650
Net income $ 55,550

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For practice: PE 1-4
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Statement of Owners Equity
11

The statement of owners


equity reports the changes in
the owners equity for a period
of time. It is prepared after the
income statement.

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Example 5
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Using the data for Chickadee Travel Service shown
in Example 4, prepare a statement of owners
equity for the current year ended April 30, 2009.
Adam Che Lini invested an additional $50,000 in
the business during the year and withdrew cash of
$30,000 for personal use.

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Follow My Example
edit Master title style
CHICKADEE TRAVEL SERVICE
STATEMENT OF OWNERS EQUITY
For the Year Ended April 30, 2009
Adam Cellini, capital, May 1, 2008 $ 80,000
Additional investment by owner during year $ 50,000
Net income for the year 55,550
$105,550
Less withdrawals 30,000
Increase in owners equity 75,550
Adam Cellini, capital, April 30, 2009 $155,550

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For Practice: PE 1-5
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Balance Sheet
11

The balance sheet reports


the amounts of a firms
assets, liabilities, and
owners equity at the end
of a specific period.

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The account form of balance


sheet lists the assets on the left
and the liabilities and owners
equity on the rightsimilar to
design of an account.

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The report form of balance


sheet presents the liabilities
and owners equity sections
below the assets section.

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Example
Using the data for Chickadee Travel Service shown in Example
Exercise 4 and 5, prepare the balance sheet as of April 30, 2009.

Follow My Example
CHICKADEE TRAVEL SERVICE
BALANCE SHEET
Assets April 30, 2009 Liabilities
Cash $ 53,050 Accounts payable $12,200
Accounts receivable 31,350
Supplies 3,350 Owners Equity
Land 80,000 Adam Cellini, capital 155,550
Total assets $167,750 Total liab. & owners eq. $167,750
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For Practice: PE 1-6 89
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Statement of Cash Flows
11

The statement of cash flows


consists of three sections:
(1) Operating activities
(2) Investing activities
(3) Financing activities

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The cash flows from


operating activities section
reports a summary of cash
receipts and cash payments
from operations.

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The cash flows from investing


activities section reports the cash
transactions for the acquisition and sale
of relatively permanent assets.

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The cash flows from financing


activities section reports the
cash transactions related to cash
investments by the owner,
borrowings, and cash
withdrawals by the owner.

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Example 7 11
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A summary of cash flows for Chickadee Travel Service for the
year ended April 30, 2009, is shown below.
Cash receipts:
Cash received from customers $251,000
Cash received from additional
investment of owner 50,000
Cash payments:
Cash paid for expenses 210,000
Cash paid for land 80,000
Cash paid to owner for personal use 30,000

The cash balance as of May 1, 2008, was $72,050.


Prepare a statement of cash flows for Chickadee
Travel Service for the year ended April 30. 2009. 96
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Follow My Example 11
ClickCHICKADEE
to edit Master title style
TRAVEL SERVICE
STATEMENT OF CASH FLOWS
For the Year Ended April 30, 2009
Cash flows from operating activities:
Cash received from customers $251,000
Deduct cash payments for expenses 210,000
Net cash flows from operating activities $ 41,000
Cash flows from investing activities:
Cash payments for purchase of land (80,000)
Cash flows from financing activities:
Cash received from owner as investment $ 50,000
Deduct cash withdrawals by owner 30,000
Net cash flows from financing activities 20,000
Net decrease in cash during year $(19,000)
Cash as of May 1, 2008 72,050
Cash as of April 30, 2009 $ 53,050
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For Practice: PE 1-7 97
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Interrelationships Among Financial Statements
11

The income statement and the statement


of owners equity are interrelated.
Net income or net loss
appears on both statements.

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The statement of owners equity and


the balance sheet are interrelated.
The owners capital at the end of the
period on the statement of owners
equity also appears on the balance
sheet as owners capital.
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The balance sheet and the statement


of cash flows are interrelated.

The cash on the balance sheet also


appears as the end-of-period cash on
the statement of cash flows.

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