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Then move the line to the left so that the text will occupy the full screen. ------------------------------------------------------------------------------------------------ INTRODUCTION TO MANAGEMENT ACCOUNTING Chapter 1 TEXT: INTRODUCTION ------------ NOTES: A Guide for Students Studying Accounting PROBLEMS: The Creation of ON GUARD INC. - 25 questions CASES: Using a Microcomputer -18 questions TEST: Chapter 1 - 21 questions Chapter 2 TEXT: ANALYSIS OF BUSINESS TRANSACTIONS --------------------------------- NOTES: Analysis, Chart of Accounts, Debits and Credits PROBLEMS: Analysis of Transactions - 30 questions CASES: Creating a Chart of Accounts - on a Microcomputer - 16 questions, 8 assignments TEST: Chapter 2 - 30 questions Chapter 3 TEXT: PROCESSING TRANSACTIONS ----------------------- NOTES: The Accounting Cycle PROBLEMS: Analysis of Transactions - 60 questions CASES: ON GUARD INC. Transactions - 15 questions, 11 transactions TEST: Chapter 3 - 29 questions Chapter 4 TEXT: THE ACCOUNTING CYCLE -------------------- NOTES: Adjusting Entries PROBLEMS: Adjusting Entries - 120 parts, 10 transactions CASES: ON GUARD Transactions -13 questions, 11 transactions TEST: Chapter 4 - 30 questions Chapter 5 TEXT: ANALYSIS OF FINANCIAL STATEMENTS -------------------------------- NOTES: Summary PROBLEMS: Analysis of Financial Statements - 13 problems CASES: Analysis - 34 questions, 11 adjusting entries TEST: Chapter 5 - 30 questions Chapter 6 TEXT: CONTROL OF CASH --------------- NOTES: Bank Reconciliation and Cash Flow Statement PROBLEMS: Bank Reconciliation and Cash Flow Problem CASES: 13 questions TEST: Chapter 6 - 30 questions TEST: Midterm #1 - 31 questions Chapter 7 TEXT: CONTROL OF SALES AND ACCOUNTS RECEIVABLE ---------------------------------------- NOTES: Uncollectible Accounts PROBLEMS: Accounts Receivable - 30 questions CASES: ON GUARD INC. Transactions - 21 questions, 16 transactions TEST: Chapter 7 - 30 questions Chapter 8 TEXT: CONTROL OF INVENTORY -------------------- NOTES: Inventory Errors, Perpetual and Periodic Inventory Systems PROBLEMS: Inventory - 11 problems CASES: ON GUARD INC. Transactions - 16 questions, 9 transactions TEST: Chapter 8 - 30 questions Chapter 9 TEXT: CONTROL OF NON-CURRENT ASSETS ----------------------------- NOTES: PROBLEMS: CASES: ON GUARD INC. Transactions - 15 questions, 8 transactions TEST: Chapter 9 - 30 questions Chapter 10 TEXT: CONTROL OF PURCHASES AND LIABILITIES ------------------------------------ NOTES: PROBLEMS: CASES: ON GUARD INC. Transactions - 12 questions, 3 transactions TEST: Chapter 10 - 30 questions Chapter 11 TEXT: CONTROL OF OWNER'S AND CREDITOR'S EQUITY ---------------------------------------- NOTES: PROBLEMS: CASES: TEST: Chapter 11 - TEST: Midterm # 2 - 20 questions Chapter 12 TEXT: PROFIT PLANNING --------------- NOTES: PROBLEMS: CASES: TEST: Chapter 12 - TEST: Final Review Test - 41 questions Chapter 13 TEXT: THE ACCOUNTING PROFIT GAME - PART 1 NOTES: PROBLEMS: CASES: TEST: Chapter 14 TEXT: THE ACCOUNTING PROFIT GAME - PART 11 NOTES: PROBLEMS: CASES: TEST: CHAPTER 1 INTRODUCTION TO THE ACCOUNTING ENVIRONMENT LEARNING OBJECTIVES ------------------- After studying this Introduction to the Accounting Environment, you should be able to: 1. Understand why you are studying Accounting. 2. Explain what Accounting is to a friend. 3. Understand who uses Accounting and why. 4. Understand how you will use Accounting after this course. 5 Understand what service an accountant renders. ------------------------------------------------------------------------- WHY DO WE STUDY ACCOUNTING? --------------------------- USERS OF ACCOUNTING INFORMATION ------------------------------- Very few of us will become accountants. But most of us will use accounting information, and need to understand it, all of our lives. DECISION MAKERS --------------- Anybody who makes decisions will probably end up using some kind of accounting information. A sole proprietorship is a business which has one person as the owner. Most small businesses are sole proprietorships. The owner of a business entity uses accounting information to help make decisions in running the business. We will see how later in this course. The management of any kind of business for profit or non-profit will use accounting information to aid in making business decisions. A partnership is a business entity that is owned by two or more individuals. The partners will use accounting information. A corporation is legally a separate and distinct business entity. Its owners are called stockholders. The corporation hires people to run the business. These managers will use accounting information to aid in the decision process. GOVERNMENTAL AGENCIES --------------------- Governmental agencies require accounting information about all firms, usually in the form of financial statements. Governmental agencies also use accounting information to aid in the operation of the agency. Therefore the employees of governmental agencies must understand accounting information. The Internal Revenue Service requires all firms to report accounting information to help determine the amount of taxes to be paid. CREDITORS --------- All creditors use accounting information to evaluate a firm's abilitiy to repay its debts. The accounting information helps them decide if the firm should be loaned money or sold merchandise on account etc. PRESENT AND POTENTIAL INVESTORS ------------------------------- Investors use accounting information, as well as other information, to make decisions to invest, or decrease their investment in a propietorship, partnership or corporation. All decisions to buy or sell stock should be influenced by accounting information, as well as other information. EMPLOYEES AND UNIONS -------------------- Unions rely on some accounting information when negotiating union contracts. Employees should use accounting information about the company to determine their future in the company. Job applicants should use accounting information to determine the financial security and future potential for any company in which they are considering investing their employment future. WHAT DOES AN ACCOUNTING FIRM DO? ------------------------------- One certified public accounting firm in Los Angeles, Duitch, Poteshman,Franklin & Co., indicates that their services cover substantially all areas of finance, taxation, accounting and management. They list the following services: ANALYSIS AND PLANNING CONTROL AND REPORTING Budgeting & forecasting Audit examinations Cash flow projections & management Bankruptcy & reorganization Estate and trust planning Bulk financing packages Family entity planning Business management Income tax planning Entertainment industry serv. International tax planning Estate & fiduciary accounting & taxes Incorporation vs. partnership planning Lease vs. purchase analysis Financial statements Management consulting Income tax returns Multi-state tax strategy Landlord escalation audits Personal financial planning Music tour accounting Real estate structuring & transactions Retirement income planning Pension trust accounting & audit Strategic long-range planning Succession planning FORENSIC AND LITIGATION ADMINISTRATIVE & OPERATIONS SUPPORT Business dissolution Accounting personnel recruitment Commercial litigation Crisis management & disaster planning Expert testimony Management information systems Tax controversy representation Office systems & procedures Personnel policies & procedures The typical accounting services are: 1. Auditing Services 2. Tax Services 3. Financial Services 4. Management Advisory Services. AUDITING -------- An audit is an indepth examination of the information system to determine if, or to what extent, the managements financial statements fairly report the economic performance and financial condition of the company. The audit will include miscellaneous tests of the accounting records, usually verifying the accounts receivables, accounts payables,inventories, and other assets and liabilities. It also involves examining the internal control systems (including the computer information system ) to determine how they prevent fraud and errors in general. Any business seeking a loan or wishing to have its securities traded on a stock exchange usually must provide financial statements which are audited by a Certified Public Accountant (CPA). If you are provided financial statements which have not been audited by an independent CPA firm, you do not have any clue as to the correctness of the information. TAX SERVICES ------------ Expert advice on tax planning and the preparation of federal, state, and local tax returns are provided by CPAs. Tax planning helps to provide information on the tax impact of each financial decision. The tax consequences can be the most important factor in some types of decisions for a business, or an individual. The objective of tax planning and preparation is to use legal means to minimize the amount of taxes paid. FINANCIAL SERVICES ------------------ Accountants and CPA firms offer professional accounting and related services to individuals, companies and non-profit organizations. It may be more efficient to have your company information processed on the CPA'a computer system than trying to do it manually, or investing in computer equipment and software. The CPA can provide advice on the selecting, installing and training of computer equipment and software, if your company wishes to set up its own accounting information system. MANAGEMENT ADVISORY (CONSULTING) SERVICES ----------------------------------------- Management will frequently retain the services of CPAs to recomend new computer hardware and software, how to improve their operations, the design and installation (and training) of a new accounting information system. Management typically finds that it is better to hire a CPA firm to perform specialized services than try to train or hire their own staff. Management will hire CPA firms to improve systems of inventory control, budgeting, or financial planning. Management may hire large CPA firms to analyze other companies which they are considering acquiring. The management advisory services area is the fastest growing service in many small CPA firms and most large CPA firms. PUBLIC ACCOUNTING ----------------- As you can see Public Accounting provides a varity of services for a fee, many of which do not appear to be accounting, but are services which use accounting. Professional accountants (CPA's) are licensed by individual states to practice accounting after they have satisfied a number of requirements. For example,typical requirements are completing a college degree in accounting, practising accounting for several years under the supervision of another CPA, and passing a uniform CPA exam developed and administered by the American Institute of Certified Public Accountants, which is the national professional organization of CPAs. Basically, public accounting consists of typical accounting services, auditing, tax preparation and planning, management information systems and management advisory services. We will discover what these typical accounting services are in this course. Auditing, tax preparation and planning, and management advisory services will be introduced in other more advanced courses. PRIVATE ACCOUNTING ------------------ Private accounting is the practice of accounting in one firm as an employee of the firm. An accountant working in a firm may be determining the cost of manufactoring products by the firm, internal auditing,taxation, budgeting, financial reporting and designing, installing and supervision the computerized accounting system, or providing special analysis for management. An accountant working in private accounting is not required to be a CPA. He may instead earn, by taking a written exam, a Certificate in Management Accounting (CMA) offered by the Institute of Management Accounting. The CMA shows that the accountant has met certain knowledge requirements. GOVERNMENTAL ACCOUNTING ----------------------- The federal, state,cities, counties,school districts and other governmental agencies employ accountants to help them perform their functions. The Internal Revenue Service, the Securities and Exchange Commission, the Interstate Commerce Commission employes accountants to help them perform their functions. ACCOUNTING STANDARDS -------------------- The American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standard Board (FASB),the Securities and Exchange Commission (SEC), and the American Accounting Association (AAA) have all worked to develop concepts and standards to be used for accounting financial reporting which are called GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). These standards represent the generally accepted methods as to how information should be recorded and financial statements prepared. In this text we shall study the accounting concepts and standards to understand and analyze transactions and learn how to use accounting information to make management and personal decisions. If you are going to live in the real world, you are going to use accounting information. Let us learn how to use accounting information correctly. THE GOAL OF AN ORGANIZATION ( OR INDIVIDUAL). Every organization, or sub-unit in an organization, ( or INDIVIDUAL), must have a goal, or purpose, to exist for more than a very limited period of time. The goals of an organization can ordinarily be determined by asking the following questions: Why does the organization exist? What is the organization's purpose? WHAT ARE ITS GOALS? WHAT ARE YOUR GOALS. ------------------- WE MUST HAVE A PURPOSE, OR GOAL. Your goal at this moment should be to learn what is on this page. One of your goals for the next few months should be to learn as much as you can in this course. Generally, the goal of an organization must be to RENDER SOME KIND OF SERVICE or TO SATISFY SOME KIND OF NEED, of an individual or group of individuals. In addition, the need must be satisfied in an environment which will attract the resources necessary to provide the product or service. The resources are people, materials, machines and finances. HOW DO WE REALIZE GOALS? ------------------------ What must be accomplished to realize these goals? There ordinarily is a series of events which when they occur in a coordinated pattern will lead to the accomplishment of the goal, or goals. Various things must happen in a coordinated pattern if the goals are to be realized. WE MUST HAVE A PLAN. Your plan at the moment should be to devote complete concentration on reading and understanding this Chapter. Your plan for this week should indicate what you are going to do every hour of the day. Your ten year plan should indicate what job you will be performing, that is, what need or service you will be satisfying ten years from now. A goal is realized when sub-goals have been accomplished in a coordinated pattern. We need money to attract other re- sources. We need people to make decisions. We need materials to be transformed into products. We need machines to transform materials into products. We need people to operate the machines. We need people to desire the products. Sub-goals are realized when a series of events have occurred in a coordinated plan. WE MUST HAVE A METHOD. How are you going to employ resources (people, materials, machines, and finances) in your plan to realize your goals? How are goals realized? A coordinated method, or series of methods, must be devised to employ the resources (people, mater- ials, machines, and finances) of the organization to cause the events to occur so that the goals may be realized. The method employed to cause an event, or series of events, to occur is generally referred to as a system. In some cases the system will simply aid or increase the probability of an event,or series of events, occurring. SYSTEMS ------- A system may consist of several sub-systems which each aid in the causing of separate series of events to accomplish several sub-goals. The sub-systems are integrated and coordinated into the total system to accomplish the goals of the organization. The system or sub-system may be an operating system or an information system. An operating system may consist of methods and procedures to transform and assemble materials into a pro- duct. These are the events necessary to realize one of the sub- goals of the company. An information system may consist of methods and procedures to transform and assemble data (relating to events) into useful information. THUS WE REQUIRE VARIOUS KINDS OF SYSTEMS TO AID IN THE CAUSATION OF EVENTS TO REALIZE OUR GOALS. INFORMATION SYSTEMS ------------------- An information system may be defined as the collection, classification, storage, retrieval and analysis of data according to the decision needs of others. It is possible to collect, classify, and store every single transaction or activity that happens within a company, and to retrieve it, or to retrieve it in any conceivable form for any type of analysis. But the cost must be compared with the value of the information (the use to which it will be put), and finally the potential effect on the operation as a whole. WE MUST HAVE INFORMATION. What information will you need to accomplish your goal? Where will you be able to acquire the information to make the correct decisions? Data is meaningless, and thus useless, unless interpreted, analyzed, and digested into information. Information does not exist without supporting data. Thus data becomes information when it is transformed to satisfy a management need. Therefore, an information system has the function of con- verting data into information to satisfy decision makers needs. To implement this function the following are generally required: 1. The identification of the decision makers whose needs are to be served. 2. A determination of the nature or types of decision problems faced by the decision makers. 3. A determination of the information required to aid the decision makers in solving these problems. 4. A determination of the data required to obtain the information needed. 5. A determination of how the data may be transformed into the required information. 6. The designing of an information system which will input the data and transform it into the information required by the decision makers to aid in their decision making process. 7. The programming of the system (writing a series of instructions for a computer ) so that the computer can accomplish the task of entering the data and transforming it into the information desired. MANAGEMENT INFORMATION SYSTEMS ------------------------------ A management information system (MIS) can be defined as "the combination of human and computer-based capital resources which results in the collection, storage, retrieval, communica- tion and use of data for the purpose of efficient management of operations...". Another, and possibly a more meaningful definition is, "A management information system, simply, is an organized method of providing each manager with all the data, and only that data, which he needs for decisions, when he needs it, and in a form which aids his understanding and stimulates his action." Possibly, the word data should be changed to information in the above definition to coincide with our previous distinction between data and information. In any case, it appears that a management information system is an organized method of providing the information desired to aid in making decisions. An advanced management information system (AMIS) has been defined as "A large-scale, COMPUTER BASED NETWORK with ON-LINE COMMUNICATION facilities that support the major decision-making activities in two or more departments within a corporation". The on-line communication facilities are used to input data and retrieve data for information retrieval purposes. Thus, as the marketing manager, we desire to know how many units of a product were sold to customer number 100 last month. We call the computer on a regular telephone and ask the question, and immediately receive the answer. We do not have to wait until we receive a periodic report, or request a special report to be run on the computer. We have the advantage of instant information and instant analysis of information. This type of information system is some times referred to as a manage- ment information retrieval system (MIRS). THE ACCOUNTING INFORMATION SYSTEM --------------------------------- Accounting may be defined as the designing, analyzing, reporting and auditing of information systems or models which transform data into information for the following purposes: 1. The over-all measurement of enterprise income. 2. As an aid to management decisions which involve quantitative factors. 3. As an aid to management planning of enterprise activities. 4. As an aid to management control and evaluation of enterprise activities. 5. As an aid to management's external report- ing requirements. An Accounting Information System (AIS) is a computerized information system which attempts to satisfy all the internal, as well as, external financial information needs of the enterprise. It attempts to accept the responsibility for providing the financial information requirements which aid management planning, control and decisions. EVERY ORGANIZATION OR INDIVIDUAL MUST HAVE THE FOLLOWING (you must have the following): 1. WE MUST HAVE GOALS. 2. WE MUST HAVE A PLAN TO SHOW US HOW TO ACCOMPLISH THESE GOALS. 3. WE MUST HAVE A METHOD OR SYSTEM TO PROVIDE INFORMATION. 4. WE MUST HAVE THE ABILITY TO ANALYZE INFORMATION TO HELP US MAKE THE CORRECT DECISIONS TO REALIZE OUR GOALS. 5. WE MUST HAVE CONTROLS TO DETERMINE IF WE ARE REALIZING OUR GOALS, AND TO HELP US ATTAIN OUR GOALS. BUSINESS GOALS -------------- The PRIMARY GOAL of most businesses is to make a profit. To make a profit they must be able to render some kind of service or satisfy some kind of need. BUSINESS PLAN ------------- To make a profit, or realize their goals, a business MUST have a comprehensive budget, or profit plan. BUSINESS SYSTEM --------------- To make a profit, a business must have a system. They will ordinarily have an ACCOUNTING INFORMATION SYSTEM or A MANAGEMENT INFORMATION SYSTEM, as well as, OPERATING SYSTEMS. The system will provide management with information to operate the business, such as, Financial Statements, Budgets, and Analysis. BUSINESS ANALYSIS ----------------- The business must have management personnel who have ex- perience in all phases of the business and training in analysis of Financial Statements, as well as, business trends and economic events. BUSINESS CONTROLS ----------------- The business must have the ability to evaluate their success in realizing their goals. An evaluation process is absolutely necessary to realize a profit. Thus the business must have some kind of CONTROL SYSTEM to evaluate performance. BUSINESS INFORMATION -------------------- ASSETS. A business has things of value. These are called ASSETS. CASH is an ASSET. The right to receive money from customers for services or products, ACCOUNTS RECEIVABLE, is an ASSET. Goods available for sale, INVENTORY, is an ASSET. SUPPLIES are ASSETS. All of the above are called CURRENT ASSETS because they are cash or could very easily be converted into cash if needed. NON-CURRENT ASSETS. These are things that we would ordinarily need to operate the business and ordinarily would not convert into cash readily. LAND is a NON-CURRENT ASSET. BUILDINGS are NON-CURRENT ASSETS. EQUIPMENT IS A NON-CURRENT ASSET. The above are typical things of value owned by a business, CURRENT ASSETS and NON-CURRENT ASSETS. Who has a legal interest in these ASSETS? There are two groups who have a legal interest in all company assets, the OWNERS and the CREDITORS. OWNERS INTEREST. In a corporation the owners interest is repre- sented by their original investment called CAPITAL STOCK and by past profits which have not been distributed to the stock hold- ers, called RETAINED EARNINGS. CREDITORS INTEREST. There may be many creditors who have an interest in the business. The most common is SUPPLIERS who have sold merchandise to the business on credit. These SUPPLIERS have a legal right to receive payment for their merchandise at some time in the future, usually 10 to 30 days. This interest of suppliers is called ACCOUNTS PAYABLE. There usually are other creditors represented by NOTES PAYABLE, MORTGAGE PAYABLE, SALARIES PAYABLE etc. A BASIC CONTROL SYSTEM ---------------------- Every business has ASSETS, with interests of OWNERS and CREDITORS. Therefore, we can say that: ASSETS = OWNERS INTEREST + CREDITORS INTEREST We recognize that the owners and the creditors are the only ones who have any interest in the business. Thus there is a balance on the two sides of the equation, like a teter-totter. ASSETS OWNERS AND CREDITORS EQUITY ----------------------------/\----------------------------- or ASSETS = OWNERS EQUITY + CREDITORS EQUITY or A = OE + L (Liabilities) or OE = A - L or L = A - OE On the bases of this formula we can design a system to keep track of the ASSETS, OWNERS EQUITY AND CREDITORS EQUITY. This is a basic formula that must always be true, unless some kind of fraud or serious errors have occurred. On the basis of this formula we can prepare a basic FINANCIAL STATEMENT called the BALANCE SHEET. Which , as its name infers must always balance, that is, A = OE + L. The following is an example of a BALANCE SHEET; ON-GUARD INC. BALANCE SHEET As of December 31, 2003 Assets Liabilities and Stockholders Equity ______________________________________________________ CURRENT ASSETS CURRENT LIABILITIES Cash 12,760 Accounts Payable 5,000 Accounts Receivable 50,000 Salaries Payable 4,000 Total Current Assets 62,760 Total Current Lia. 9,000 Land 10,000 Notes Payable 5,000 Buildings, 45.000 Mortgage Payable 50,000 Less Depreciation ( 1,350) Equipment 60,000 Less Depreciation ( 1,410) Total Liabilities 64,000 Stockholders Equity Common Stock 100,000 Retained Earnings 11,000 _______ ________ Total Liabilities and Total Assets 175,000 Stockholder's Eq. 175,000 INCOME. The RETAINED EARNINGS are increased by INCOME. INCOME results from various sources, such as, the sale of products, the rendering of services, the receipt of interest or the receipt of rent. EXPENSES. Expenses decrease RETAINED EARNINGS. EXPENSES result from the normal operating of the business. For example, COST OF GOODS SOLD is an EXPENSE. SALES SALARIES is an EXPENSE. OFFICE SUPPLIES USED is an EXPENSE. REPAIRS and MAINTENANCE EXPENDI- TURES are EXPENSES. Paying UTILITY bills causes an EXPENSE. All of these examples are EXPENSES and decrease the inter- est of the owners by decreasing the RETAINED EARNINGS. PROFITS. Profits are the results of INCOME less all EXPENSES. If the INCOME is greater than the EXPENSES the RETAINED EARNINGS will have a net increase. If the EXPENSES are greater than the INCOME the RETAINED EARNINGS will decrease. A change in the RETAINED EARNINGS represents a change in OWNERS EQUITY. NET INCOME is the difference between INCOME and EXPENSES. THE INCOME STATEMENT -------------------- The INCOME STATEMENT presents the results of the operation of the business for a CERTAIN PERIOD OF TIME, such as, a MONTH or YEAR. It provides information concerning the firms PROFITABIL- ITY. The following is an example of an INCOME STATEMENT: ON GUARD, INC. INCOME STATEMENT For the MONTH ending December 31, 2003 REVENUES Professional Service Fees $ 50,638 OPERATING EXPENSES Salaries Expense $ 24,438 Utility Expense 522 Office Supplies Expense 3,350 Insurance Expense 400 Advertising Expense 200 Repairs Expense 175 Depreciation Expense -Building 1,350 Depreciation Expense-Equipment 1,410 Miscellaneous Expense 32 Total Operating Expenses 31,877 OTHER EXPENSES Interest Expense 2,111 _______ NET INCOME BEFORE TAXES 16,650 Income Tax Expense 5,650 ______ NET INCOME (LOSS) $ 11,000 DEPRECIATION. Depreciation is an expense. It represents the consumption of an asset. For example, if we buy a car for $10,000 which has a useful life of 5 years, we would charge $2000 (1/5 of cost) as a depreciation expense each year. In the above Income Statement the net profit or NET INCOME is 11,000. The RETAINED EARNINGS in the BALANCE SHEET (see above) has increased by exactly $11,000. Therefore, the RETAINED EARNINGS on December 1,2003 must have been zero. The business was started on December 1, 2003 so it had no prior earnings. WHAT HAPPENED TO THE CASH? -------------------------- On December 1,2003 the owners (stockholders ) invested $100,000 in this company to start a new business called ON GUARD, INC. On December 31, 2003 the BALANCE SHEET reports that the new business (after only one month in business ) has only $12,760. What happened to the difference, $87,240? THE CASH FLOW STATEMENT ----------------------- The purpose of the CASH FLOW STATEMENT or STATEMENT OF CASH FLOW is to provide information about the cash receipts and cash expenditures of the enterprise. There are THREE SOURCES OF CASH for the business:INVESTMENT ACTIVITIES, FINANCIAL ACTIVITIES, and OPERATING ACTIVITIES. CASH INFLOW from operating activities is not equal to the net income of the business. Because INCOME includes revenue that has not been collected (example: sales on account). Also EXPEN- SES will include costs that have not as yet been paid (example: merchandise purchased on account which has already been sold.) The following STATEMENT OF CASH FLOW will show us what happened to ON GUARD'S cash: ON GUARD, INC. STATEMENT OF CASH FLOW For the Month Ending December 31, 2003 CASH FLOWS FROM OPERATIONS Net Income $ 11,000 Expenses not Affecting Cash Depreciation Expense-Building 1,350 Depreciation Expense-Equipment 1,410 Changes in Certain Working Capital items Increases in Accounts Receivable (50,000) Increases in Current Liabilities 9,000 _______ Cash Provided by Operations (27,240) CASH PROVIDED BY INVESTMENT ACTIVITIES Addition to Plant & Equipment (115,000) _______ Cash Used by Investment Activities (115,000) CASH PROVIDED BY FINANCIAL ACTIVITIES Addition to Long Term Debt 50,000 Increase in Notes Payable 5,000 _______ Cash Provided by Financial Activities 55,000 _______ NET CHANGE IN CASH (87,240) Cash at Beginning of Month 100,000 _______ CASH, END OF MONTH 12,760 If you study this STATEMENT OF CASH FLOW carefully, you will begin to understand what has happened to the $87,240 cash. The amounts in ( ) means a decrease in cash. Can you explain why each item in the report has increased or decreased cash? UNDERSTANDING FINANCIAL STATEMENTS ---------------------------------- FINANCIAL STATEMENTS are the results of RECORDING, CLASSIFY- ING,and SUMMARIZING large quantities of business data. Most of this effort will be done automatically by the computer. At this time we are primarily concerned with interpreting, analyzing FINANCIAL STATEMENTS and making decisions based upon information provided by the computer. SUMMARY ------- An organization, or an individual, must have GOALS and a PLAN to be successful. We must have a method, or SYSTEM, to provide INFORMATION. We must have the ABILITY TO ANALYZE the INFORMATION to help us make the correct DECISIONS. We must have CONTROLS to determine if we are realizing our goals, and to help us to attain these goals. The ACCOUNTING INFORMATION SYSTEM will aid us in management PLANNING, CONTROL, AND DECISIONS. Understanding these techniques will aid you in your planning, controlling, and making decisions in your personal lives. In the Chapter 5 we will learn how to analyze FINANCIAL STATEMENTS and try to make decisions based upon our analysis. For example, would you invest in On Guard, Inc.? Is the company making a good profit for the stockholders? If there were 1000 stock shares outstanding for On Guard, Inc., How much would you pay for one share? How are you going to invest assets to build your estate for retirement? What information would we need to make these decisions? How would you analyze the FINANCIAL STATEMENTS? In the next chapter, we will analyze business transactions to determine how they affect assets, creditors equity and owners equity. END