Master of Business

Administration

MBA

Accounting (2)
Dr. Ashraf Ibrahim

Eslsca 45C
( March 2014 )

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 1

I. We spoke about:
The Accounting cycle beginning with document and ending with
financial statements:
II. The Financial statements consist of main
4 statements :
1- Income statement
2- Statement of Financial Position (Ex: Balance sheet)
3- Retained Earnings Statement
4- Cash Flow Statement.
Financial Analysis Folder Corporate Financial statement

Financial Accounting is measuring:

- when we talk about financial accounting: Accounting is
measuring the result of the operation and the financial position
of the firm
- When we talk about cost accounting : we are measuring product
cost.
- When we talk about Tax accounting : we are measuring Ta x
Pool )‫(الوعاء الضريبي‬
Any branch of accounting has its objective.

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 2

 Basics of Financial Accounting:
The company foundation: 07:25
Cash in the bank 100 ‫ رأس المال‬C 100

100 100

Buying the assets the cash will decrease

Land 5 ‫ رأس المال‬C 100
Building 10
Equipment 10
Furniture 5
Material 5
Cash 15
Inventory 50
100 100
Transaction 1:
A customer purchases 1/2 of the inventory (half cash & half
credit)
- the inventory will decrease by 25 (50-25)
- the Cash will increase by 30
- ( the profit gained is R/E 5)
Land 5 C 100
Building 10 (Owner's Equity) R / E 5
Equipment 10
Furniture 5
Material 5
Cash 45
Inventory (50-25 sold) 25
105 105
Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 3
Transaction 2 :
When the company buys Equipment with Loan from the bank
Land 5 C 100
Building 10 (Owner's Equity) R / E 5
(10 + 5 new) Equipment 15 Loan 5
Furniture 5
Material 5
Cash 45
Inventory 25

110 110
Transaction 3:
The customer wants to buy inventory costs 10 and will be sold by
15 on credit
- (the company sold the inventory)
then Inventory will decreased by 10
- A/R will increase by 15
- and the profit will increase the retained earnings by 5 (5 + 5
new from this transaction = 10
Land 5 C 100
Building 10 (Owner's Equity) R / E 10
( 5 + 5 New = 10)
Equipment 15 Loan 5
Furniture 5
Material 5
Cash 45
(25 - 10 sold) Inventory 15
A/R 15
115 115

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 4

 in the statement of financial position
this side ↑ called Assets, this other side ↑ called Liabilities & Owners Equity

Transaction 4:
The company will purchase inventory by 35 (one half cash and
second credit)
- then Inventory will increased by 35
- Cash will decrease by 20
- A/P will increase by 15
Land 5 C 100
Building 10 (Owner's Equity) R / E 10
( 5 + 5 New = 10)
Equipment 15 Loan 5
Furniture 5 A/P 15
Material 5
(45 - 20 ) Cash 25
(15 - 35 sold) Inventory 50
A/R 15
130 130

Watching this statement we can discover that this company is

financed from liabilities.

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 5

 III. What is accounting?
the objective of any branch of is measuring something, it depends
on the nature of this branch

The Accounting Cycle

Financial
Documents Statements

Recording
Journal

Ledger

Trial Balances

Accounting is a system (input, process and output)

the financial statement represents the output of the accounting
system
- Accounting is a system by which we recalled interpret the
result status of a business into numbers, by using an agreed ----
-----------------
The accountant is working based on international standards &
accounting principals.

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 6

IV. Accounting process serves several
purposes:
1- Providing a record of assets, amount owned to others and
money invested
2- Providing a report showing the financial position of an
organization, and the profitability of its operations
3- where is the financial position of the company in this
statement? it is very strong why
the assets owned by the company and the liabilities will be
asked from the company ( in case of bankrupting , we can
sell the assets and pay liabilities , and the rest will be for the
owners equity
4- Accounting provides a way of measuring an organization
effectiveness , how ?
- by measuring the profit as a percentage not number
- Helps stakeholders to monitor an organization
activities and performance
- Enable potential investors to evaluate the organization
and to make decisions
5- Accounting as an information system (input, process to have
output)
6- users of financial statements (stakeholders)
- Internal users (interested about your financial
statements: Management , employees.
- External users : shareholders (to monitor profit)
- Lenders & creditors: Are you going to pay your loan
- Regulatory Authorities: Taxes
- Customers
- potential investors
7- The Annual Report:
is a yearly output of the company
The financial statement is one of the annual report
components the Major and the most important output of the
accounting system is the annual report
it consists of the following:
Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 7
 - The chairman letter
- The Statement of financial Position (Ex: Balance Sheet)
- The income statement.
- The statement of Retained Earning
- The statement of Cash Flow
- The auditor's Report
- The footnotes

8- The Accounting assumptions or principals:

Separate entity (what does it mean)
A corporation ( ‫ ) شركة مساهمة‬has a separate entity from its
owners.
Do not concern assumption: nobody knows when his
company will end , (it is an assumption it is remaining for
long, but we divide its life into periods)
9- Stable monitor unit assumption: ( the accountant look the
numbers not as currency or money, but as number
10- Fixed Period Assumption: Information prepared and
reported periodically (means yearly), for evaluation purpose
I have to prepare information periodically (quarterly,
monthly, yearly (one physical year)

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 8

V. Accounting principals :
1- Historical Cost:
Transactions are recorded as their historical cost, I cannot
evaluate except in case of merging, selling the company
2- Revenue recognition: ‫مبدأ االعتراف باإليراد‬
When the accountant recognizes that there is a sale, when there is
a reasonable assurance of collection, substantial completion of the
transaction )‫ (الفاتورة راحت والبضاعة راحت‬but the collection is not
completed, doesn't matter (it is a case of credit sales).
3- Matching
We are matching (Ex: revenues and expenses or expenses &
revenues must be recognized for the same period to measure the
profit or pay the tax of the same period)

4- Full disclosure principle )‫ (مبدأ اإلفصاح الكامل‬:

Major information about the business is disclosed in a clear and
understandable way.
5- Objectivity principle: any transaction should be documented at
the exact time and date it happened.
6- Stability principle: use the same method
7- Conservatism principle: ‫مبدأ الحيطة والحذر‬
Worst case scenario (expected loss and expense ) , not reserve
VI. Accrual Basis of Accounting :
Accrual Basis
Records revenues and expenses in the periods when they
are earned or incurred
Assume that your company sold 1000 unit (with 2000 LE at
the period (one half cash and the second is credit) , when i
will recall the sales here i will use the 2000 is not necessary
to be collected or not , same for the expenses, is not
necessary to be paid profit , you are asked to measure your
profit , to pay your tax

• Cash Basis
Records revenues when cash is received, and expenses
when cash is paid.

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 9

 Record revenue when cash is received, according to this case
we will put only 1000 LE.
Governmental organizations are following this base,
because they are not asked to calculate profit

VII. The Annual Report :

• Corporations that have shareholders must prepare an Annual
Report and make it available to the corporation's
shareholders.
• The Annual Report is the communication tool between the
company and the stakeholders
• The basic purpose of the Annual Report is to let the
shareholder's know how the company is doing.
• The Annual Report contains information such as :
- Basic financial statements( 4 statement)
- Management's opinion of the past year's
operations(footnotes)
- And the corporation's future prospects (chairman
letter).
VIII. The Income Statement:
• It is a relationship between revenues or sales & expenses
• Financial document showing a company's income / revenues
and expenses over a given period (like one fiscal year).
• Also known as the Earnings Statement or Statement of
Operations.
• There are 3 function in each company:
- Operations
- Sales & Marketing
- Administration

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 10

 Income Statement
Sales 1000
-
Cost of Goods Sold CGS 500
)‫(تلكفة االنتاج المباع‬

Gross Profit GP 500

-
Sales & Admin S&A 200

Operating Profit OP 300

+

‫دخل أو خسائر من جهات أخرى‬ Others 100

+ / - Others income or losses
(Like selling a machine with 0
value on books, in case of
profit it will be capital)
PS: Come from a non core
business source
Earnings Before Interest & Tax E B I T 400
-

Interest I 50

Earnings before Tax EBT 350

-

Tax T 50

Net Income (Net In Profit) NI 300

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 11

 • The income statement is a financial document showing a
company's income revenue and expenses over a given period (one
year, one month, 3 months) but should be ------
• Revenue or sales: what is charged to customer for goods or
services ‫ما تقبضه من العميل نظير تقديم سلعة او خدمة‬
• Cost or Expenses: What The company pays in order to generate
sales (without expenses like salaries, and material prices, you will
not have revenue)
IX. The Balance Sheet(Statement of financial position):
• A balance sheet is a snapshot of a business’ financial condition at
a specific moment in time, usually at the close of an accounting
period.
• A balance sheet comprises assets, liabilities, and owners’ or
stockholders’ equity.

Assets Liabilities

Owner Equity

𝐀𝐬𝐬𝐞𝐭𝐬 = 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬 + 𝐎𝐰𝐧𝐞𝐫𝐬’ 𝐄𝐪𝐮𝐢𝐭𝐲

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 12

 Current assets Fixed assets Intangible assets
this group of assets are in Or Long Term
the form of cash or will Assets.
turn into cash within this You bought it to
year Except )‫(كمبياالت‬ make benefits for
prepaid expenses : or paid more than one
it but you didn't receive the year
transaction or the service
yet
Resources that a firm control to get benefit for the business now
and in the future

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 13

 Current Liabilities Long Term Liabilities
Short term obligations Should Should be paid in more
be paid this year than one year
‫قروض و سندات‬
Obligations that a firm control should pay now and in
the future

The loan itself is a liabilities, its interest is expenses

• The owner's Equity
Is the owners claims to the assets of the corporation:
Capital, retained earning ) ‫(حجزتها منه‬.
That's why if we sell the assets, and we pay the liabilities, the rest
should go to the owner's equity:–

C A 450

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 14

 CSH Owner Equity 430
A/C
Inventory

F A 415 Total Liabilities 435

Land STL
Building LTL
Machinery
Total Assets 865 Total Liabilities and 665
Owner Equity

Retained Earnings Statement 2007 ‫قائمة األرباح المحتجزة‬

‫أرباح محتجزة‬ R . E. on 1 / 1 / 2007 100

)‫( يعني أرباح اتحققت ولم توزع‬ +
Net Income 700
-
‫أرباح محتجزة‬ Dividends 200
‫ اخر السنة تتحول للسنة القادمة‬R. E. 31/ 12 / 2007 600

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 15

 The accounting period could be month quarter, a year
You have to know from where the cash came and where it goes
From where is the cash flow generated?
The source of cash in your company is from Operating activities:
like
 Cash sales
 Cash received from customer
 Cash paid to supplier
 Salaries paid
 Any other cash used

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 16

 Classification of Cash Flows :
In the cash flow we have 3 categories / or must include 3 sections:

Investing Activities:
Is any activity you do to increase or decrease the long term
assets.
Financing Activities:
Is any activity you do to increase or decrease the Long
term liabilities, or Owner Equity. like loans
Operating Activities:
Is any Cash Transaction affected or related to the income
statement.
 Cash sales
 Cash received from customer ‫مرتبطة بالميبعات‬
 Cash paid to supplier
 Salaries paid
 Any other cash used

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 17

The cash Flow statement helps investors
with questions about
• the company’s ability to generate positive cash flows.
As every activity has cash in & cash out the net cash could be
positive or negative (+ or - )
‫يعني اللي خرج أكتر من اللي دخل‬
• Ability to meet its obligations and to pay dividends.
If you so not have cash, from you will cover
• Needs for external financing.
If the Net cash is negative ( - ), you will need loan
• Investing and financing transactions for the period.
From where you brought your money, and where you spent it
• Provide information on the “utilization” of cash.
What did you do with your cash.
• Provide information on the “utilization” of cash.
What did you do with your cash.
• Reports the cash inflows and out flows generated from:
1- Operating activities.
2- Investments.
3- Financing.

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 18

 Company Name
Statement of Cash Flows
Period Covered

Cash flows from operating activities:

[List of individual inflows and outflows]
Net cash provided (used) by operating activities $ ###

Cash flows from investing activities:

[List of individual inflows and outflows]
Net cash provided (used) by investing activities ###

Cash flows from financing activities:

[List of individual inflows and outflows]
Net cash provided (used) by financing activities ###

Net increase (decrease) in Cash $ ###

Cash (and equivalents) balance at beginning of period ###

Cash (and equivalents) balance at end of period $ ###

balance at beginning of period ) ‫( أي كاش كان في البنك أول السنة او في الخزينة‬

1st section: Cash Flow from operating activities with Individual

inflow or outflow = Net cash provided by the
operating activities

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 19

 2nd section: IE purchasing or selling equipment (long term assets
‫أي حاجة ليها عالقة باألصول الثابتة‬
Non current assets = Long term assets

3rd section: Loan taken or repaid

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 20

 Examples: the following activities are investing, financing or
operating Activity
1. Purchasing new equipment: is cash out operation, is
Investing Activity (because you are increasing your investors)
2. Selling old equipment: is cash in operation, it is Investing
activity , by selling old equipment it means you are decreasing
your investments
3. Borrowing Loan: is cash in operation, it is Financing
Activity is increasing the owner equity.
4. Repaying a Loan: is cash out operation, it is Financing
Activity .
5. Purchase securities of another company:
This transaction is cash out, it is investing Activity .
6. Receiving Dividends from other companies as a coupon: is
cash In, either operating or Investing Activity.
) ‫(انت مشتري أسهم في شركة تانية والشركة وزعت نصيب‬
Explanation: If you purchase securities of another company, this
transaction is investing.
Receiving dividends from this company, is Cash in (here we can
consider it operating because it appears in the income statement as
previously they name it “other sundry income” , now they may
consider it Investing because it comes from investing (both are
acceptable)
7. Question Your company achieved 200 Net income, the
management decided to declare dividends 50 % , & 50 % will be
retained earnings.
Dividends will be 100. (is is cash in or out)
It will be considered as: (Operating, investing or financing
operation) & Justify your answer.
(Dividends here is cash out, it is Financing Activity because it
will reflect on the owners Equity)
Explanation: Allocating dividends will decrease the R/E
(retained earnings) which we will add to the owners Equity,
here the owners Equity increase or decrease with the dividends.

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 21

 Test Bank 35:00

3. The payment of a liability causes an increase in owners' equity.

Answer: False
The payment of the liability is A / P will decrease by 30 for example,
and cash will decrease by 30 )‫(هاتدفع الدين من الكاش‬
What is the relation of the owner’s Equity
So the payment of the liabilities cause an decrease of the owners equity

FA Owner Equity

CA LTL

A/P
Cash

Total Assets 1000 Total Liabilities 1000

and Owner Equity

5. The purchase of an asset such as office equipment, for cash will cause
owners' equity to decrease.
Answer: False
Total Assets will increase & decrease the cash, the total will be the
same.
7. If a company purchases equipment by issuing a note payable, its total
assets will not change.
Answer: Falses
The equipment will increase, the assets will increase.

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 22

5. Owner's equity in a business may decrease by
A) Investments of cash by owners
B) Profits from operating the business
C) Losses from unprofitable operation of the business
D) Repaying a loan to a commercial bank
Answer: C

11. If total assets equal $180,000 and total liabilities equal $135,000, the
total owners' equity must equal:
A) $ 315,000.
B) $ 45,000.
C) Can not be determined from the information given.
D) Some other amount.
Answer: B
Assets = Liabilities + Owners Equity
180,000 = 135000 + --------
Owners Equity = Assets – Liabilities
180-135 = 45

14. If total assets equal $315,000 and total owners' equity equal $90,000,
then total liabilities must equal:
A) $405,000.
B) $225,000.
C) Can not be determined from the information given.
D) Some other amount.
Answer: B
315-190 = 225

16. If a company purchases equipment for $70,000 cash:

A) Total assets will increase by $70,000.
B) Total assets will decrease by $70,000.
C) Total assets will remain the same.
D) The company's total owners' equity will decrease.
Answer: C

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 23

 The
Docum
ents
Acco
untin
g 18. If a company purchases equipment for $65,000 by issuing a note
payable:
Cycle A) Total assets will increase by $65,000.
B) Total assets will decrease by $65,000.
C) Total assets will remain the same.
D) The company's total owners' equity will decrease.
Answer: A

19. The owner of Maine Lobster Restaurant purchased a new car for his
daughter who is away at college at a cost of $39,000 and reported this
amount as Delivery Vehicle in the restaurant's balance sheet. The
reporting of this item in this manner violated the:
A) Cost principle.
B) Business entity concept
C) Objectivity principle.
D) Going-concern assumption.
Answer: B
Objectivity principle.
‫الموضوعية‬
Any transaction should be documented

20. If a company pays $17,000 for an expense with cash:

A) Total assets will decrease.
B) Retained earnings will decrease.
C) Owners' equity will decrease.
D) All three of the above statements are true.
Answer: D
This means total assets will decrease,
And at the same time, total expenses will increase,
Which will decrease the profit.
And the RE will decrease
AS the RE is added to the owners Equity,
So the Owner Equity will decrease.

Accounting ( D .Ashraf Ibrahim) (Lec.02) Page 24