Main Street Store, Inc.

Statement of Cash Flows

For the Year Ended August 31, 20XX

Cash flows operating activities:

Net income…………………………………….18,000

Add(deduct) items not affecting cash:

Depreciation expense……………………….4,000

Increase in accounts receivable………………80,000

Increase in merchandise inventory……………(170,000)

Increase in current liabilities………………….. 67,000

Net cash used by operating activities……….. 161,000

Cash flows investing activities:

Cash paid for equipment………………………..40,000

Cash flows from financing activities:

Cash received from issue of long-term debt……50,000

Cash received from sale of common stock……..190,000

Payment of cash dividend on common stock……. 5,000

Net cash provided by financing activities………. 235,000

Net increase in cash for the year………………………… 34,000

Good record keeping by a business is not only wise but is required by law. Legal and financial questions may be raised by various agencies, banks, and employees. The questions may be accurately answered when written records of business proceedings are kept. By recording daily transactions, the owner can learn from mistakes and avoid errors in the future. Even if profits are not distributed to shareholders, any organization needs a P&L to account for its activities to see whether it is being efficiently and honestly run.

1.What are the main business statements?

2.What do they show?

T E X T 5

Read the following two texts and be ready to differentiate between financial and managerial accounting.

FINANCIAL ACCOUNTING

The classification of financial accounting transactions reflects the concern with two major interests in financial accounting. The first is addressed to the analysis of the profitability of the business. This is done normally on a yearly basis by comparing the sale and the purchase transactions and establishing the difference, with either a loss or a profit for the year. A profit will be shown when sale transactions are greater the purchase transactions during the year; a loss will be shown in the reverse case. In financial accounting, the operating cycle is conventionally treated as a period of one year. This suggests that the profit or loss is a short-term analysis of business activities.

The second major interest in financial accounting is directed to the analysis of those transactions having a long-term impact on the firm. These transactions include, on the one hand, investment transactions by which the firm acquires assets of potential use for more than one accounting period, and, on the other hand, financial transactions by which the firm obtains funds for use for more than one year.

Financial accounting brings together investment and financial transactions in a statement of the financial status, or structure, of the enterprise which is commonly known as the balance sheet.

T E X T 6

MANAGERIAL ACCOUNTING

Managerial accounting (MA) involves using economic and financial information to plan and control many of the activities of the entity, and to support the management decision-making process. Cost-accounting is a subset of managerial accounting that relates primarily to the determination and accumulation of product, process, or service costs.

Managerial accounting is concerned with providing information to managers – that is, to those who are inside an organization and who are charged with directing and controlling its operations. We can identify major differences between financial and managerial accounting:

1.MA focuses on providing data for internal uses by the manager.

2.MA places more emphasis on the future.

3.MA is not governed by generally accepted accounting principles.

4.MA emphasizes the segments of an organization, rather than just looking at the organization as a whole.

5.MA is not mandatory.

As with financial accounting, managerial accounting and cost accounting have special terminology or, as many would say, jargon. Most of the terms relate to different types pf costs. There are different costs for different purposes. Costs used for valuing inventory are different from the costs that should be considered when analyzing a product modification or potential new product. The cost classifications most frequently encountered are: product cost, period cost, direct cost, indirect cost, variable cost, fixed cost, controllable cost, noncontrollable cost, opportunity cost, etc.

Managerial accounting is in its infancy. Historically, it has played a secondary role to financial accounting, and in many organizations it still is little more than a by-product of the financial reporting process. However, the events of the last decades have shown the development of managerial accounting, and it is becoming widely recognized as a field of expertise separate from financial accounting.

T E X T 7

THE ACCOUNT

The raw data of accounting are the business transactions. A business may engage in thousands of transactions during a period of time. The data in these transactions must be classified and summarized before becom­ing useful information. Making the accountant's task somewhat easier is the fact that most business transactions are repetitive in nature and can be classified into groups having common characteristics.

An account is an element in an accounting system that is used to classify and summarize money measurements of business activities of a similar nature. An account is set up whenever it is necessary to provide useful information about a particular business item. The number of accounts in a company’s accounting system depends on the information needed by those interested in the business.

Accountants may differ on the account title (or name) they give for the same item. The account title should be logical to help the accountant group similar transactions into the same account. Once an account is given a title, that same title must be used throughout the accounting records.

Accounts may take on a variety of formats. Some accounts are printed, and entries are written in by hand; others are on magnetic tape, and "invisible" entries are encoded by a computer. Every account format must provide for increases and decreases in the item for which the account was established. Once a business event is recognized as a business transaction, it is analyzed to determine its increase or decrease effect on the assets, liabilities, owner’s equity, revenues, or expenses of the business. These increase or decrease effects are then translated into debits and credits. Then the account balance (the difference between the increases and decreases) can be determined.

In each business transaction is the activity that is recorded. The total dollar amount of debits must equal the total dollar amount of credits. The accounting requirement that each transaction must be recorded by an entry that has equal debits and credits is called the double-entry procedure, or duality. This double entry procedure keeps the accounting equation – Assets = Liabilities+ Owner’s equity -- in balance.

To understand how the increases and decreases in an account are recorded, accountants use the T-account, which derives its name from the fact that it looks like the letter T. The title (name) of the item accounted for, such as cash, is written across the top of the T. Increases are recorded on one side of the vertical line of the T, and decreases on the other side, depending on the type of account. A T-account appears as follows:

Title of account

Debit Credit

The accountant uses the term debit (or charge) instead of saying "place an entry on the left side of the T-account" and credit for "place an entry on the right side of the T-account". Thus, for any account, the left side is the debit side, and the right side is the credit side. A synonym for «debit an account» is «charge an account».

1. What is an account?

2. When is an account set up?

3. What does the number of accounts depend on?

4. What must every account format provide for?

5. What is debit?

6. What is credit?

T E X T 8

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