Business Financial Management and

Accounting
GST 05206
 MODULE ASSESMENTS
1.Class Activity 5%

2.Test 20%

3.Group Assignment 15%

4. Semester Exam 60%

Total 100%
 TOPICS TO BE COVERED
1. Financing Strategy
2. Introduction to Financial Statements
3. Ratio analysis
4. Break even Analysis
5. Business Management
 1.0 BUSINESS ACCOUNTING
Financial Accounting
The American Institute of Certified Public Accountant has defined
Financial Accounting as:
“the art of recording, classifying and summarizing in a significant

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manner and in terms of money, transactions and events which in
part at least of a financial character and interpreting the
results .”
Accounting is often called the language of business because the
purpose of accounting is to communicate or report the results of
business operations and its various aspects to various users of
accounting information.
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Therefore Accounting is the process of recording and summarizing
financial information in a useful way
1.1 Scope and objective of accounting
Let us go through the main objectives of Accounting:
1.To keep systematic records

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Accounting is done to keep systematic record of financial
transactions. The primary objective of accounting is to help small
business and entrepreneur to collect financial data and record them
systematically.
2. To ascertain the Profitability
With the help of accounting information recorded systematically ,
entrepreneurs can evaluate their business profits and losses
incurred during a specific accounting period of time.
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 Objective (Cont)
3. To ascertain the financial position of the business
A balance sheet or a statement of affairs indicates the financial position of a
company as on a particular date. With the help of that, we can easily
ascertain the soundness of any business entity

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4. To assist in decision Making
Making decision for future plan, one requires accurate financial statements
made from accurate and systematic recorded business transactions.
Accounting information gives right to the organization to make right
decision at right time for the future growth of the business.
5. To fulfill compliance of Law
Business entities such as companies, trusts, and societies are being run and
governed according to different legislative acts.
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1.2 Accounting terms
Assets:- resources owned by the business. Assets will benefit the
business for more than the immediate short term.
Assets are grouped into two;-

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(i)Fixed assets e.g. Building, land, Machinery
(ii)Current assets e.g. Cash on hand or at bank, Account
receivables, stock, Marketable securities.
Liabilities - creditors claims on total assets (obligations or debts of
the business).
ASSETS = LIABILITIES + STOCKHOLDERS'
EQUITY
Cost:- The amount of expenditure incurred on or attributable to a 7
specified article, product or activity.
Accounting terms (cont)
Expenses: A cost relating to the operations of an accounting
period.

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Revenue: Total amount received from sales of goods/services.
Capital: Generally refers to the amount invested in an
enterprise by its owner.
Liability: The financial obligation of an enterprise other than
owners’ funds.
Net Profit: The excess of revenue over expenses during a
particular accounting period.
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1.3 FINANCIAL STATMENTS
Financial statements are formal record of the financial activities of
an entity.

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Common financial statements include:-
a.Balance sheet.
b.Income statement/Profit or loss Account
c.Cash flow statement.

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1.3.1 Profit or Loss Account/Income
Statement
Income statement (commonly known as the profit and loss
statement).

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Is a summary of all activities involving income/sales and
expenses incurred in a given period of time. eg Quarter or
year.
The most common period is a year.
The income against expenditure, the difference is either a
profit (surplus) or a loss (deficit). 10
Income statement (cont)
Purpose of income statement
Its main purpose is to see if the business is operating in a profitable
condition or loss.

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This will help the owner of the business to check whether he/she is
advancing or not.
Income statement examines a particular period of time of the
business by considering all the expenses and income received in
that time-span and breaks it down until only net income remains.
It provides information regarding risk, financial flexibility, return on
investment and operating capabilities involved in a business
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Elements of Income Statement
Income statements have five main sections:-
1)Operating Revenue (Revenue/Sales)

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This comprises cash sales and credit sales.
2)Cost of goods Sold(COGS)
The direct costs attributable to goods produced and sold by
a business. It includes items such as material costs and
direct labor.
((Purchases + Opening stock)-Closing Stock)
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Income statement (Cont)
3) Gross profit
This is the difference between Total revenue and Cost of goods sold.
4) Expenses

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These are all costs incurred in a given period of time e.g. Selling and
Distribution cost, Administrative cost, General expenses.
5) Net profit or loss
This is the difference between gross profit and expenses. If the
difference is positive its PROFIT.
If the difference is negative its LOSS.
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Income statement (Cont)
MADENGE AUTO WORKSHOP
Income statement for the year ending 31st March 20XX
Revenue/Income/sales
Cash sales XX
Credit sales XX

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Other Income XX
Total sales/Revenue XXXX
Subtract(-)
Cost of Goods sold (COGS)
Purchases XX
Opening stock XX
Minus closing stock (XX)
Cost of Goods Sold(COGS) (XXXX)
Gross profit XXXX
Less
Expenses
Selling expenses xx 14
Administrative expenses xx
Total Expenses (XXXX)
NET PROFIT XXXX
 Income statement(cont)
Problem 1. Prepare income statement for ETE WORKSHOP UNIT for
the year ending December 31, 2003 given the information below:
Advertising expenditures 68,000

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Beginning inventory 256,000
Ending inventory 248,000
Sales 3,210,000
Lease payments 52,000
Management salaries 240,000
Materials purchases 2,425,000
R&D expenditures 35,000
Repairs and maintenance costs 22,000
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Income Statement(cont)
Solution:-
Sales 3,210,000
Less Cost of goods sold(COGS)
Purchases 2,425,000

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Opening Stock 256,000
Closing stock (248,000) 2,433,000
Gross profit 777,000
Less Expenses
Management salaries 240,000
Advertising expenditure 68,000
Lease payments 52,000
R&D expenditure 35,000
Repair and Maintenance 22,000 (417,000) 16
Net profit 360,000
 Income statement (cont)
Task; Prepare an income statement for DIT Mechanical Workshop for the
year ending December 31, 2015 given the information below:
Utilities Expenses 17,090
Beginning inventory 63,210

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Management salaries 17,950
Advertising expenditures 12,930
Ending inventory 68,390
Gross Sales 462,720
Lease payments 39,270
Materials purchases 228,580
R&D expenditures 4,890 17
Repairs and maintenance costs 2,910
 Balance sheet
A statement of the financial position of an enterprise as at a given date.
A Balance Sheet is also described as a “Statement showing the Sources
and Application of Capital.
A Balance Sheet shows the nature and value of assets and the nature

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and the amount of liabilities at a given date.
ASSET
Is something that an entity owns or controls in order to derive
economic benefits from its use
Assets are the properties possessed by a business and the amount due
to it from others. The various types of assets are:

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Balance Sheet (Cont)
(a) Fixed Asset:
All assets that are acquired for the purpose of using them in
the conduct of business operations and not for reselling to earn

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profit are called fixed assets. These assets are not readily
convertible into cash in the normal course of business
operations. Examples are land and building, furniture,
machinery, etc.
(b) Current Assets:
All assets which are acquired for reselling during the course
of business are to be treated as current assets. Examples are
cash and bank balances, inventory, accounts receivables, etc 19
Balance Sheet (Cont)
Assets are also classified in the balance sheet as:
• Tangible & Intangible. Physical substances like property, plant,
equipments etc are tangible while Goodwill, determination, hard

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work etc are intangible assets
• Inventories balance includes goods that are held for sale in the
ordinary form, it maybe raw materials, finished goods and works
in progress
• Trade receivables that include all credit sales after deduction of
allowance for bad debts
• Cash and cash equivalent that include cash in hand and short term
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investments that are readily convertible into known amounts of
cash
 Balance sheet(Cont)
LIABILITY
A liability is an amount which a business is legally bound to pay. It is a
claim by an outsider on the assets of a business.
The liabilities of a business concern may be classified as:

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(a)Long term liabilities
The liabilities or obligations of a business which are not
payable within the next accounting period but will be
payable within next five to ten years are known as long term
liabilities. Public deposits, debentures, bank loan are the examples of
long term liabilities.
(b)Short term liabilities
All short term obligations generally due and payable within
one year are current liabilities. This includes trade creditors, bills 21
payable etc.
 Balance sheet(Cont)
A liability can also be classified in balance sheet as
• Trade and other payables: includes all liabilities due to
suppliers and contractors for credit purchases.

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• Short term borrowing that include Bank overdrafts, short
term bank loans etc
• Long term borrowing that include all loans which are to be
paid over a period that exceeds one year like leasing,
mortgages, bank loans, etc
• Current tax payable
• Notes payable
• Accrued expenses(expenses occurred but not yet paid) 22
 Balance Sheet(Cont)
Owner’s Equity:
Represents the owners investment in the business minus

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drawings from the business plus net income/ or minus net
loss.
Owners equity is viewed as residual claim on the business
asset.
Investment (capital) +- Profit or Loss – drawings = Owner’s
Equity
Asset = Liabilities + Owner’s Equity 23
 Balance sheet (Cont)
Equity is usually presented in the statement of financial
position under the following categories;
• Share capital: amounts invested by the owners in the entity

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• Retained Earnings: Total net profit or loss after distribution
to the owners in form of dividends
• Revaluation Reserve contains Net surplus of any upward
revaluation of property, plant and equipment recognized
directly in equity.

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 Balance sheet(cont)
BALANCE SHEET OF CIVIL CO LTD AS ON 30 TH MARCH 2016
Assets
Current Assets:
Cash xx
Stock/ Inventories xx
Accounts receivables xx
Total current Assets XX
Fixed Assets

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Machinery xx
Building xx
Office furniture xx
Total fixed Assets XX
Total Assets XXX
Liabilities
Current liabilities
Accounts payable xx
Accrued expenses xx
Total current liability XX
Long term liabilities
Bank Loan xx
Total liabilities XX
OWNERS EQUITY XX 25
TOTAL LIABILITY AND EQUITY XXX
 Balance sheet (Cont)
NOTE:
A balance sheet has four parts;-

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a)Heading
b)Assets
c)Liabilities
d)Owners Equity

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 Balance Sheet (cont)
Prepare a balance sheet for Food science students workshop for
the year ending March31, 2018
Accounts payable 39,000

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Accrued expenses 8,000
Cash 23,000
Fixed assets 298,000
Inventories 54,000
Long term debt 210,000
Net accounts receivable 38,000
Retained earnings 138,000 27

Short-term bank loan (notes payable) 18,000

 Balance sheet (Cont)
Food science bakery balance sheet as at 31 st March 218
Assets

Current assets
Cash 23,000
Account receivables 38,000

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Inventories 54,000
Total current Assets 115,000
Fixed assets 298,000
Total assets 413,000
Liabilities
Current liabilities
Accrued Expenses 8,000
Notes Payable 18.000
Accounts Payable 39,000
Long term debt 210,000 28
Retained Earning 138,000
Total liability and equity 413,000
 Balance sheet(cont)
Prepare the Balance sheet of MWANANZILA
AUTOWORKSHOP as at 31st December 2018
Stocks 300,000

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Debtors 200,000
Cash at bank 600,000
Cash on hand 100,000
Accounts payable 100,000
Long term loan 400,000
Notes payable 100,000
Capital 600,000 29
 CASH FLOW
A Cash flow statement shows inflow and outflow of cash and
cash equivalents from various activities of a business during a
specific period.

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The primary objective of cash flow statement is to provide
useful information about cash flows (inflows and outflows) of
an enterprise during a particular period under various heads. i.e.,
operating activities, investing activities and financing activities.

This information is useful in providing users of financial

statements with a basis to assess the ability of the enterprise to
generate cash and cash equivalents and the needs of the 30
enterprise to utilize those cash flows.
Cash Flow……
A cash flow statement presents information about the cash flows
associated with the company’s main operations and those associated

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with its investing and financing activities of the period.

A cash flow statement functions in conjunction with both the income

statement (performance dimension) and the balance sheet (financial
position)

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Benefits of Cash Flow
Cash flow statement provides the following benefits :
Enables users to evaluate changes in net assets of an enterprise,

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its financial structure (including its liquidity and solvency).
Cash flow information is useful in assessing the ability of the
enterprise to generate cash and cash equivalents.
It also helps in balancing its cash inflow and cash outflow,
keeping in response to changing condition.
Enables users to develop models to assess and compare the
present value of the future cash flows of different enterprises.

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Other benefits of Cash flow
• Ability to generate adequate cash flows is a
significant performance dimension.

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• Cash flow information clarifies the
dynamics of short-term liquidity and long-term
solvency.
• Cash flow information is an essential input
for economic decision models.
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Cash flow (Cont)
Cash flows from operating activities are primarily derived
from the main activities of the enterprise.
Cash Inflows from operating activities

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Cash receipts from sale of goods and the rendering of
services.
Cash receipts from royalties, fees, commissions and other
revenues.
Cash Outflows from Operating Activities
Cash payments to suppliers for goods and services.
Cash payments to and on behalf of the employees.
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Cash Flow (cont)
Cash payments to an insurance
Cash payments of income taxes
Cash Inflow from Investing Activities.

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Cash receipt from disposal of fixed assets including intangibles.
 Cash receipt from the repayment of advances or loans made to
third parties (except in case of financial enterprise).
Cash receipt from disposal of shares, warrants or debt instruments
of other enterprises except those held for trading purposes.
 Interest received in cash from loans and advances.
Dividend received from investments in other enterprises.
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 Cash flow (Cont)
Cash Outflows from investing activities
Cash payments to acquire fixed assets.
 Cash payments to acquire shares, warrants.
 Cash advances and loans

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Cash Inflow from Financing activities
Sale of stock
Issuance of debt, such as bonds
Donor contributions restricted to long-term use
Cash outflow from Financing Activities
Repurchase of company stock
Repayment of debt
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Payment of dividends
Cash flow (Cont.)
The cash flow statement are mostly presented using the direct method because
it is easy to read it only lists all of the major operating cash receipts and

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payments during the period by source.
In other words, it lists where the cash inflows came from, usually customers,
and where the cash outflows went, typically employees, vendors, etc.
After all of the sources are listed, the total cash payments are then subtracted
from the cash receipts to compute the net cash flow from operating activities.
Then the investing and financing activities added to arrive at the net cash
increase or decrease.
Let’s take a look at how this report is formatted and structured.
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Cash flow (Cont.)
Cash flows from operating activities
Cash receipts from customers XX
Cash paid to suppliers (XX)
Cash paid to employees (XX)
Cash generated from operations XXX
Interest paid (XX)

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Income taxes paid (XX)
Net cash from operating activities XXXX
Cash flows from investing activities
Purchase of property, plant, and equipment (XX)
Proceeds from sale of equipment XX
Net cash used in investing activities (XXXX)
Cash flows from financing activities
Proceeds from issuance of common stock XX
Proceeds from issuance of long-term debt XX
Principal payments under capital lease obligation (XX)
Dividends paid (XX)
Net cash used in financing activities XXXX 38
Cash at the end of the period XXXX
Users of Financial
statements
The following are users of financial statements…
i. Prospective Investors
ii.Landers

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iii.Employees and their representatives
iv.Customers
v.The general public
vi.Managers
vii.Shareholders
viii.Governments
ix.Competitors 39

x.Financial institutions
Users Cont.…….
Investors
Investors will be interested in profit levels and past performance to ensure
that not only is the investment safe but that it will produce a good return.

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Landers
Lenders will be concerned again with profit levels and liquidity ratios to
satisfy themselves that the firm has both the ability and resources to repay
any loan granted albeit in the short, medium or long-term.
Suppliers
Need financial statements to assess the credit worthiness of a business and
ascertain whether to supply goods on credit or not.
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Users Cont.….
Employee and their Representative
Employees and their representatives will be concerned with levels of profit. This
will possibly indicate job security and can form the basis for bargaining for

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improvements in pay and conditions.
Customers
For customers the price paid for the final product would be a key consideration.
They will also desire that the company will be in existence for after sales service and
warranty. Customers will look to all aspects of the final accounts to determine its
financial stability.
Financial institutions
Banks and others 41
Users Cont.….
General public
The general public will want to see all the financial statements in order to determine whether or
not the business has the resources to be environmentally friendly and can service sustainability
in all its forms in the future.

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Employees
They use financial statements for assessing the company’s profitability and its consequence on
their future remuneration and job security.
Competitors
Compare their performance with rival companies to learn and develop strategies to improve
their competitiveness
Governments
It require financial statements to determine the correctness of tax declared in the tax returns. It
also keeps track of economic process through analysis of financial statements from different
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sectors of the economy.