AMERICAN COLLEGE OF TECHNOLOGY

DEPARTMENT OF BUSINESS STUDIES

MBA PROGRAM
• Financial and Managerial Accounting

• Instructor
• Habtamu Gemeda(Ph.D. in Commerce, MSc in
Finance and Investment, BA in Accounting, HDP)
• Trainer and BDS Adviser @EDC-Ethiopia
• Consultant on Business, Investment, and
Management
• Expert in Company Formation and Organization
 COURSE DESCRIPTION
• This course emphasizes on gathering and use of financial
information to facilitate effective management decisions.
• It covers financial accounting reports, user needs, and
limitations of conventional statements.
• It also includes management accounting and cost
concepts and systems.
• It deals with financial statement analysis and techniques
of analysis.
• Furthermore, the course discusses about CVP analysis
and incremental analysis.
 COURSE OBJECTIVES
• By the end of this course students will be able to:
1. Analyze and interpreted financial statements
2. Use financial information for managerial decision
making
3. Use accounting information for planning and
controlling
4. Use financial information to measure organizational
performances
5. Make different decisions using relevant information
 COURSE CONTENTS
• Chapter 1: Accounting Information for Decision
Making

• Chapter 2: Financial Statement Analysis

• Chapter 3: Management Accounting Information

System
• Chapter 4: Cost-Volume-Profit (CVP) Analysis
• Chapter 5: Relevant Information for Decision Making
 CHAPTER 1: ACCOUNTING
INFORMATION FOR DECISION
MAKING
• Accounting plays an important role in our social and economic
system.
• Sound decisions by different groups are essential for efficient
distribution and use of scarce resources.
• Sound decisions require reliable information which is produced
by accounting system
• Understanding and using accounting information is an
important ingredient of any business undertaking.
• Basic understanding of accounting concepts helps us to become
an active participant in the business world.
 ACCOUNTING INFORMATION: A
MEANS TO AN END
• The primary objective of accounting is to produce and reliable
provide information that is useful in making good decisions.
• Good decision leads to prosperity and welfare of the society.
• Accounting is not an end, but rather it is a means to an end.
• The final product of accounting information is the decision that is
enhanced by the use of that information whether that
decision made by
• Owners
• Management
• Creditors
• Suppliers
• government bodies
• labor unions
THIS IS ACCOUNTING
Prosperous
Society

Good Decision

Useful Information

Accounting Judgments

Economic Activities
 ACCOUNTING AS AN INFORMATION
SYSTEM

Economic Accounting Financial Users

activities Cycle/Process statements Decisions
 The accounting
process

Accounting “links”
decision makers with
economic activities Accounting
Economic and with the results
activities information
of their decisions.

Actions
(decisions)
Decision makers
 WHAT IS ACCOUNTING?
• Accounting is an information system whereby economics
events are
• Identified
• Analyzed
• Recorded
• Classified
• Summarized
• Reported/communicated
• Interpreted to end users to enhance sound decision making
and informed judgments
• Accounting is a composite activity of:
• identifying,

• recording, and

• Communicating the economic events of an organization to

interested users.

• Accounting is the art and science of

• analyzing,

• recording,

• summarizing,

• evaluating and

• reporting, if necessary,

• Interpreting information about business transactions.

 ACCOUNTING IS THE LANGUAGE OF
BUSINESS!

How?
• Because accounting is widely used to describe all
types of business activities of
• Sole proprietorship-owned by one person
• Partnership-owned by two or more partners
• Corporation-owned by many shareholders
ACCOUNTING FROM A USER’S PERSPECTIVE

• Many people think of accounting as

simply a highly technical field practiced
only by professional accountants.
• In reality, nearly every one uses
accounting information daily to measure &
communicate economic events.
• Whether you manage a business, make
investments, or monitor how you receive &
use your money, you are working with
accounting concepts & accounting
information.
 Users of Accounting Information
Internal Users
Management Revenue
Offices
Human Resources Investors

There are two broad groups

of users of financial Labor Unions

Finance information: internal users

and external users.

Creditors

Securities
Marketing controlling bodies
External Users
Customers
 TYPES OF ACCOUNTING INFORMATION
❑The three types of Accounting Information
widely used in the business community are

1. Financial Accounting Information

2. Managerial Accounting Information
3. Tax Accounting Information
 FINANCIAL ACCOUNTING INFORMATION
❑Financial accounting information appears in financial statements
that are intended for external use.
❑Financial accounting information provides information about the financial
resources, obligations, & activities of an enterprise that is intended for use
primarily by external decision makers .
❑External Users of Accounting Information
▪ Investors
▪ Creditors
▪ Customers
▪ Government Agencies
▪ Labor Unions
▪ Suppliers
▪ Trade Associations
▪ General Public
 MANAGEMENT ACCOUNTING INFORMATION

❑Management accounting is the design and use of

accounting information system to achieve the
organization’s objectives by supporting decision
makers inside the enterprise.
✓ Internal Users of Accounting Information
▪ BODs, CEO, CFO
▪ Business unit managers
▪ Plant mangers
▪ Store managers
▪ Line supervisors
▪ Other employees and any level of management
 TAX ACCOUNTING INFORMATION
➢Tax Accounting is concerned with the
preparation of income tax returns.
➢Tax returns are based on financial accounting
information.
➢However, the information is adjusted/
reorganized to conform with income tax
reporting requirements.
➢Income tax planning is the most challenging
task of tax accounting.
 FINANCIAL ACCOUNTING VS. MANAGEMENT
ACCOUNTING

Financial Accounting Management Accounting

Provide information about the Provide information for
Purpose financial position and planning, evaluating, and
performance of the company. rewarding performance.
Balance sheet, income
Types of
statement, and statement of Various, non-standard reports.
Reports
cash flows.
Standards IFRS None
Reporting Usually, the company taken as A component of the company's
Entity a whole. value chain.
Time Usually a year, quarter, or a
Any period.
Periods month.
Investors, creditors, and other Management, employees,
Users
external parties. other value chain etc.
 Basic Functions of Accounting

The accounting process/cycle consists

1. Identifying-Business vs. non-business transactions
2. Analyzing- determine the effect of the transaction
3. Recording- enter data in original book of entry-Journalizing
4. Classifying-transfer to ledger- Posting
5. Summarizing- Prepare Trial balance
6. Reporting- prepare financial statements
7. Interpreting-provide additional information
 EXERCISES
1. The process of recording business transaction in journal is known
as______________
• Answer= Journalizing
2. The process of transferring business transaction recorded in journal to ledger
is____
• Answer= Posting
3. Original book of entry is known as___________
• Answer= Journal
4. An individual record used to summarize increase/decrease in a particular item
is______
• Answer= Account
5. A document that lists accounts and their balances on a particular time
is_______________
• Answer= Trial Balance
 THE ACCOUNTING EQUATION
ASSETS=EQUITIES

Assets = Liabilities + Stockholders’/Owners’ Equities

Economic Claims to
Resources Economic
Resources
 ASSETS
• Economic resources that have a future benefit
• Examples:
• Cash
• Accounts receivable
• Merchandise inventory
• Prepaid Rent
• Furniture
• Land
• Building
• Machineries
• Equipment
• Patent
• Goodwill
• Copy right
 CLAIMS TO ASSETS

• Liabilities: Debts • Owners’ equity:

payable to outsiders Owners’ claims to the
• Examples: assets of the business
• Salaries Payable • In a corporation,
• Notes Payable stockholders’ equity
• Accounts payable • Paid in Capital
• Bank loans • Common stock
• Mortgage Payable • Preferred stock
• Retained Earnings
THE ACCOUNTING EQUATION

Assets = Liabilities + Stockholders’ equity

Paid-in Retained
capital earnings
THE ACCOUNTING EQUATION

Stockholders’ equity

Paid-in capital Retained earnings

Common stock
+ Net income

- Dividends
THE ACCOUNTING EQUATION

Retained earnings
Revenues

+ Net income
- Expenses

- Dividends
 FINANCIAL STATEMENTS
Corporate type of organization prepares
1. Profit/Loss Account-Report Financial Performance
• Revenue-Costs and Expense= Profit/Loss
2. Statement of Retained Earning-report change is the amount
of retained earnings
• Net Income-Dividend
3. Statement of Cash Flow-report the cash inflow and outflow
• Operating Activities
• Investing Activities
• Financing Activities
4. Balance Sheet-shows assets, liabilities and capital
• Assets
• Liabilities
• Capital/shareholders Equity
 ILLUSTRATION: CONSIDER BUSINESS TRANSACTIONS OF ABC
COMPANY FOR THE FIRST MONTH OF ITS OPERATION IN 2020.

1. Record necessary journal entries

2. Post to ledger
3. Prepare trial balance
4. Prepare adjusting entries
5. Prepare closing entries
6. Prepare post closing trial balance
7. Prepare profit/loss account
8. Prepare statement of retained earnings
9. Prepare statement of cash flow
10.Prepare balance sheet
Business transactions of ABC Company for the first month of its operation in 2020
1. Jan. 1, received Br. 2,000,000 from sale of common stock.
2. Jan. 5, purchased for cash a building for Br. 1, 500,000(50% of value for land
and 50% of value for building).
3. Jan.7, received Br. 1,000,000 in cash from sell of preferred stock.
4. Jan. 10, purchased supplies for Br.50,000 promising to pay the amount after a
week
5. Jan.17, the company provide a service for Br.500,000, receiving 50% the amount
in cash and the rest for credit.
6. Jan 17, Paid for office supplies purchased on Jan 10
7. Jan.20, paid Br. 60,000 for insurance service.
8. Jan.22 purchased supplies for Br.40,000 on credit
9. Jan. 25, paid salaries expenses of Br. 50,000.
10. Jan. 26, purchased for cash a machine for Br. 50,000
11. Jan. 30, Br. 30,000 of office supplies used in operations.
 Date Description Post Ref. Debit Credit
2020 Jan1 Cash 2,000,000
Common Stock 2,000,000
5 Land 750,000
Building 750,000
cash 1,500,000
7 Cash 1,000,000
Preferred Stock 1,000,000

10 Supplies 50,000
Account Payable 50,000
17 Cash 250,000
Account Receivable 250,000
Service Revenue 500,000
17 Account Payable 50,000
Cash 50,000
20 Prepaid Insurance 60,000
Cash 60,000

22 Supplies 40,000
Account Payable 40,000
25 Salaries Expense 50,000
cash 50,000
26 Machinery 50,000
Cash 50,000
30 Supplies Expense 30,000
Supplies 30,000
 TRIAL BALANCE
Account Debit Credit
Cash 1,540,000
Account Receivable 250,000
Supplies 60,000
Prepaid insurance 60,000
Land 750,000
Building 750,000
Machineries 50,000
Account Payable 40,000
Income Tax Payable 126,000
Common stock 2,000,000
Preferred stock 1,000,000
Service revenue 500,000
Salaries Expense 50,000
Income Tax Expense 126,000
Supplies Expense 50,000
Total 3,666,000.00 3,666,000.00
 ABC COMPANY
PROFIT/LOSS ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 2020
• Revenue
• Service Revenue---------------------------------------------500,000
• Total Revenues----------------------------------------------------------------500,000
• Deduct: Expenses
• Salaries expense-----------------------------50,000
• Supplies expense----------------------------30,000
• Total Expenses---------------------------------------------------------------80,000
• Profit before interest and tax-------------------------420,000
• Deduct: Interest expense--------------------------------0
• Profit before tax------------------------------------------420,000
• Deduct: Income Tax(30%)-----------------------------126,000
• Net Income------------------------------------------------------------------294,000
 ABC COMPANY
STATEMENT OF RETAINED EARNING
FOR THE YEAR ENDED DECEMBER 31, 2020
Retained Earning, January 1, 2020 --------------------0
Net income-----------------------------------------------294,000
Change in Retained Earnings-------------------------294,000
Deduct: Dividend-----------------------------------------0
Retained Earning, December 31, 2020-------------294,000
 ABC COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2020
• Cash flow from operating activities
• Cash received from customers……………………………….250,000
• Deduct: Cash paid for expenses…………………………….160,000
• Net cash flow from operating activities…………………….90,000

• Cash flow from investing Activities

• Cash received from sale of assets……………………………0
• Deduct: Cash payment for acquisition of assets………1,550,000
• Net cash flow from investing activities…………………(1,550,000)

• Cash flow from financing Activities

• Cash received from loan and investments………………3,000,000
• Deduct: Cash payments for loan and owners……………0
• Net cash flow from financing activities…………………….3,000,000

• Net Cash flow during 2020…………………………….1.540,000

• Add: Beginning Cash Balance…………………………….0
• Ending Cash Balance……………………………………1,540,000
 ABC COMPANY
BALANCE
DECEMBER 31, 2020
• Assets • Liabilities
• Current Assets • Current Liabilities
• Cash and Equivalents…1,540,00 • Notes Payable………0
• Notes Receivable……………0 • Account payable……40,000
• Account Receivable………250,00 • Salaries payable…….0
• Supplies……………………..60,000 • Income Tax Payable..126,000
• Prepaid Insurance………….60,000 • Long term liabilities
• Total Current Assets….1,910,000 • Notes payable…………0
• Long term Assets • Mortgage payable……..0
• Land……………………..750,000 • Total Liabilities……….166,000
• Building…………………750,000
• Machineries…………….50,000
• Stockholders Equity
• Equipment……………..0
• Common stock…….2,000,000
• Preferred stock…….1,000,000
• Total Long term Assets1,550,000
• Retained Earnings……294,000
• Total Assets…………3,460,000 • Total Liabilities and Shareholders Equity…3,460,000
 THANK YOU SO MUCH

• Textbook and Reading

• Williams, Haka, Bettner and Carcello,
Financial and Managerial Accounting -The
Basis for Business Decisions; 18th edition, Tata
McGraw-Hill Edition