Accounting

Principles
Session (3)
Accounting in actions
 Doc Mahmoud Mohamed Badwi ‫ واذكر الله‬،‫صلي علي النبي من قلبك‬

Chapter (1): Accounting in actions

Financial Statements
❖ Companies prepare four financial statements:
1. Income Statement. .)‫بيان الدخل (قائمة الدخل‬ .1
2. Retained Earnings Statement. .‫بيان األرباح المحتجزة‬ .2
‫ز‬
.)‫(الميانية العمومية‬ ‫المال‬ ‫بيان المركز‬ .3
3. Statement of Financial Position (Balance sheet). ‫ي‬
.‫بيان التدفقات النقدية‬ .4
4. Statement of Cash Flows.
o Net income is needed to determine the ending balance in retained earnings.
o The ending balance in retained earnings is needed in preparing the balance sheet
o The balance sheet and income statement are needed to prepare statement of cash flows.

Income Statement Retained Earnings Statement

Revenue Beginning Retained Earnings XX
• Sales XX XX Add
Less • Net income XX
Expenses Less
• Rent Expenses XX • Dividends XX
• Cleaning Service XX Ending Retained Earnings XX
• Salary Expense XX
• Advertising XX
• Telephone Bill XX
• Utilities XX
Total Expenses XX
Net income XX

Balance Sheet
Assets Liabilities & Owner’s Equities
Cash XX Liabilities:
Account Receivable XX Note payable XX
Inventory XX Account payable XX
Equipment XX Total liabilities XX
Owner’s Equity:
Common stock XX
Retained Earnings XX
Total owner’s equity XX
Total Assets XX Total Lia & O. E XX

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Doc Mahmoud Mohamed Badwi ‫ واذكر الله‬،‫صلي علي النبي من قلبك‬

Cash Flows Statement

‫ يوضح المعلومات المتعلقة بالتدفقات النقدية الداخلة (المقبوضات) والتدفقات الخارجة (المدفوعات) ر‬:‫بيان التدفقات النقدية‬
.‫لفية زمنية محددة‬
• A cash flows statement: demonstrates information about the cash inflows (receipts) and
outflows (payments) for a specific period of time.
‫ يوضح بيان التدفقات النقدية اآلثار النقدية ألنشطة التشغيل واالستثمار‬،‫للشكة‬‫والدائني وغيهم زف تحليلهم للوضع النقدي ر‬
‫ز‬ ‫لمساعدة المستثمرين‬
‫ز‬ ‫ز‬ ‫ز‬ ‫ي‬
‫ر‬ ‫ر‬
.‫ والمبلغ النقدي يف نهاية الفية‬،‫صاف الزيادة أو النقص يف النقدية خالل الفية‬ ‫البيان‬ ‫يوضح‬ ،‫ذلك‬ ‫إل‬ ‫باإلضافة‬ ‫والتمويل ر‬
.‫للشكة‬
‫ي‬
• To help investors, creditors, and others in their analysis of a company’s cash position, the
statement of cash flows reports the cash effects of a company’s operating, investing, and
financing activities. In addition, the statement shows the net increase or decrease in
cash during the period, and the amount of cash at the end of the period.
.‫يقدم بيان التدفقات النقدية إجابات عىل األسئلة البسيطة والمهمة التالية‬
‫ من أين رأت النقد خالل ر‬.1
‫الفية؟‬
‫ لماذا تم استخدام النقد خالل ر‬.2
‫الفية؟‬
‫ر‬ ‫ز‬
‫ ما هو التغي يف الرصيد النقدي خالل الفية؟‬.3

• The statement of cash flows provides answers to the following simple but important
questions.
1. Where did cash come from during the period?
2. What was cash used for during the period?
3. What was the change in the cash balance during the period?

Cash Flows
Statement

Cash Flow from Cash Flow from Cash Flow from

Operating Investing Financing
Activities Activities Activities
Question (1):
Indicate whether the following items would appear on the income statement (IS), balance sheet
(BS), or retained earnings statement (RE).
1. Notes payable 1. Balance sheet
2. Advertising expense 2. Income statement
3. Common stock 3. Balance sheet
4. Cash 4. Balance sheet
5. Service revenue 5. Income statement
6. Dividends 6. Retained earnings

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Doc Mahmoud Mohamed Badwi ‫ واذكر الله‬،‫صلي علي النبي من قلبك‬

Question (2):
Presented below is selected information related to Flanagan Corporation at December 31, 2020.
Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
Required:
a. Determine the total assets of Flanagan at December 31, 2020.
b. Determine the net income that Flanagan reported for December 2020.
c. Determine the stockholders’ equity of Flanagan at December 31, 2020.
Solution

a. Total Assets= Equipment+ Cash+ Accounts Receivable

Total Assets= 10,000+ 8,000+ 9,000= $27,000

b. Net income

Income Statement
Revenue
• Service revenue $36,000
Less
Expenses
• Rent expense $11,000
• Salaries and wages expense 7,000
• Utilities expense 4,000
Total Expenses 22,000
Net income $14,000

c. Assets= Liabilities+ Owner’s Equity

Assets= Note Payable+ Account Payable+ Owner’s Equity
27,000= 16,500 + 2,000 + Owner’s Equity

Owner’s Equity= 27,000- 16,500- 2,000= $8,500

❖ Note:
It is not possible to determine the company’s stockholders’ equity in any other way, because
the beginning balance for stockholders’ equity is not provided.

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Question (3):
Legal Services Inc. was incorporated on July 1, 2020. During the first month of operations,
the following transactions occurred.
1. Legal Services issued common stock in exchange for cash of $10,000.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Performed legal services for clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for client on account $2,000.
7. Paid monthly expenses: salaries $500, utilities $300, and advertising $100.
Instructions:
a. Prepare a tabular summary of the transactions.
b. Prepare the income statement, retained earnings statement, and balance sheet at July
31, 2020, for Legal Services Inc.
Solution
A Assets Liabilities Owner’s Equity
Office Common
May Cash A/R N/P A/P Revenue Expenses
Equipment Stock
1 +10,000 +10,000
2 -800 -800
3 +3,000 +3,000
4 +1,500 +1,500
5 +700 +700
6 +2,000 +2,000
-500 -500
7 -300 -300
-100 -100
Bal $10,500 $2,000 $3,000 $700 $3,000 $10,000 $3,500 $1,700
Bal $15,500 $15,500

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Doc Mahmoud Mohamed Badwi ‫ واذكر الله‬،‫صلي علي النبي من قلبك‬

B
Legal Services Inc. Legal Services Inc.
Income Statement Retained Earnings Statement
For the Month Ended July 31, 2020 For the Month Ended July 31, 2020
Revenue Owner’s capital, 1 July 0
• Service revenue $3,500 Add
Less • Net income 1,800
Expenses
• Rent expense 800 Owner’s equity, 31 July $1,800
• Salaries and wages 500
• Utilities expense 300
• Advertising expense 100
Total Expenses 1,700
Net income $1,800

Legal Services Inc.

Balance Sheet
July 31, 2020

Assets Liabilities & Owner’s Equities

Cash $10,500 Liabilities:
Account Receivable 2,000 Accounts payable $3,000
Equipment 3,000 Notes Payable 700
Owner’s equity:
Common Stock 10,000
Retained Earnings 1,800
Total Assets $15,500 Total Liabilities & Owner’s Equities $15,500

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Doc Mahmoud Mohamed Badwi ‫ واذكر الله‬،‫صلي علي النبي من قلبك‬

Question (4):
Holden Graham started the Graham CO; anew business that began operations on May 1 Graham
Co, completed the following transactions during its first month of operations.
• May 1 H. Graham invested $43000 cash in the company
• May 1 The company rented a furnished office and paid $2200 cash for May's rent
• May 3 the company purchased $1940 of office equipment on credit
• May 5 the company paid $750 cash for this month's cleaning services
• May 8 the company provided consulting services for a client and immediately collected
$5800 cash
• May 12 the company provided $2800 of consulting service for a client on credit
• May 15 the company paid $850 cash for an assistant's salary for the first half of this
month
• May 20 the company received $2800 cash payment for the service provided on May 12
• May 22 the company provided $4000 of consulting service on credit
• May 25 the company received $4000 cash payment for the service provided on May 22
• May 26 the company paid $1940 cash for the office equipment purchased on May 3
• May 27 the company purchased $85 of advertising in this month's local paper on credit,
cash payment is due June 1
• May 28 the company paid $850 cash for an assistant's salary for the second half of this
month
• May 30 the company paid $400 cash for this month's telephone bill
• May 30 the company paid $260 cash for this month's utilities
• May 31 H Graham withdraw $2000 cash from the company for personal use
Required:
A. Arrange the following assets, liability and equity as cash, account receivable, office
equipment, account payable, H Graham capital and withdraw, revenue and expenses
B. Show effects of the transactions on the accounts of the accounting equation by
recording increase and decrease in the appropriate columns.
C. Preparing income statement, statement of owner equity and balance sheet

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Doc Mahmoud Mohamed Badwi ‫ واذكر الله‬،‫صلي علي النبي من قلبك‬

A-B Assets Liabilities Owner’s Equity

Office Owner’s
May Cash A/R A/P Withdraw Revenue Expenses
Equipment Capital
1 +43000 +43000
1 -2200 -2200
3 +1940 +1940
5 -750 -750
8 +5800 +5800
12 +2800 +2800
15 -850 -850
20 +2800 -2800
22 +4000 +4000
25 +4000 -4000
26 -1940 -1940
27 +85 -85
28 -850 -850
30 -400 -400
30 -260 -260
31 -2000 -2000
Bal +46350 +1940 +85 +43000 -2000 +12600 -5395
Bal $48,290 $48,290

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Doc Mahmoud Mohamed Badwi ‫ واذكر الله‬،‫صلي علي النبي من قلبك‬

C
Income Statement Owner’s Equity Statement
Revenue Owner’s capital, 1 May 0
• Consulting service $12600 Add
(5800+ 2800+ 4000) • Investment by owner 43000
Less • Net income 7205
Expenses Less
• Rent Expenses $2200 • Drawing 2000
• Cleaning Service 750 Owner’s equity, 31 May $48205
• Salary Expense 1700
(850+850)
• Advertising 85
• Telephone Bill 400
• Utilities 260
Total Expenses $5395
Net income $7205

Balance Sheet
Assets Liabilities & Owner’s Equities
Cash $46,350 Liabilities:
Account Receivable 0 Account payable $85
Equipment 1,940 Owner’s equity:
Holden Graham capital $48,205
Total Assets $48,290 Total Liabilities & Owner’s Equities $48,290