Fundamental of Accounting -I Academic year 2024

CHAPTER ONE
INTRODUCTION TO ACCOUNTING AND BUSINESS
 Definition of Accounting.
☼What is accounting?
Accounting is the process of identifying, measuring, and communicating financial information about
an entity to permit informed judgments and decisions by users of the information. It is a system of
gathering financial information about a business and reporting this information to users.
1.1The nature of business and accounting
Accounting exists because Businesses and their economic activities exist. What is Business in this
context?
A Business is an organization in which basic resources (inputs) such as material and labor, are
assembled and processed to provide goods or services (outputs) to customers. It can be small sized or
very Large.

The objective of most businesses is to earn a profit. Profit is the difference between the amounts
received from customers for goods or services and the amounts paid for the inputs used to provide the
goods or services. In this text, we focus on businesses operating to earn a profit. However many of the
same concepts and principles also apply to not-for profit organizations such as hospitals, churches, and
government agencies.

TYPES OF BUSINESSES
Businesses operating in the economy about which financial information is summarized and reported
can be classified in different ways. One way of classifying is based on the activities in which they
could be engaged. Based on the activities in which they are engaged businesses can be classified in to
four:
1. Service giving businesses
2. Merchandising businesses
3. Manufacturing businesses
4. Construction firms

 Service giving firms are those businesses which provide services rather than products.
Examples of service giving businesses include; Ethiopian Airlines, Buses, Banks, Insurance
Companies, Abebech Hotel, etc…
 Merchandising businesses are those entities which sell the products they purchase from others
to customers. Examples of such firms include; MEWIT, AlsamPlc, OMEDAD, DIRE
Electronics, Amazon.com, etc…
 Manufacturing businesses are those organizations which changes/transforms inputs in to
products or finished goods that are sold to customers. Examples of such firms are: General
Motor Corporation, Lifan Motors, Abesha Cement factory, Mugar cement factory, Fincha sugar
factory, Bedel Brewery, Fafa food complex, etc…
 Construction businesses are firms whose activities are somehow similar to the manufacturing
firms because the process of conversion of raw materials to finished goods is available here

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too. Construction firms however have peculiar nature in that they are mostly engaged in long
term construction contracts such as construction of buildings, roads, bridges, dams, etc…
Examples of such firms include: MIDROC Construction, Sunshine Construction, Satcon
Construction, etc…
Looking at the form of ownership, any of the above organizations can fall under any of the following
three categories:
1. Sole proprietorship
2. Partnership
3. Corporations/Share Companies
 Proprietorship. A business owned by one person is generally a proprietorship. The owner is
often the manager/operator of the business. Small service-type businesses (plumbing
companies, beauty salons, and auto repair shops), farms, and small retail stores (antique shops,
clothing stores, and used-book stores) are often proprietorships. Usually only a relatively small
amount of money (capital) is necessary to start in business as a proprietorship. The owner
(proprietor) receives any profits, suffers any losses, and is personally liable for all debts of the
business.
There is no legal distinction between the business as an economic unit and the owner, but the
accounting records of the business activities are kept separate from the personal records and activities
of the owner.
 Partnership. A business owned by two or more persons associated as partners is a partnership.
In most respects, a partnership is like a proprietorship except that more than one owner is
involved. Typically a partnership agreement (written or oral) sets forth such terms as initial
investment, duties of each partner, division of net income (or net loss), and settlement to be
made upon death or withdrawal of a partner. Each partner generally has unlimited personal
liability for the debts of the partnership. Like a proprietorship, for accounting purposes the
partnership transactions must be kept separate from the personal activities of the partners.
Partnerships are often used to organize retail and service-type businesses, including
professional practices (lawyer, doctors, architects, and certified public accountants).
 Corporation. A business organized as a separate legal entity under state corporation law and
having ownership divided into transferable shares of stock is a corporation. The holders of the
shares (stockholders) enjoy limited liability; that is they are not personally liable for the debts
of the corporate entity. Stockholders may transfer all or part of their ownership shares to other
investors at any time(i.e., sell their shares). The ease with which ownership can change adds to
the attractiveness of investing in a corporation. Because ownership can be transferred without
dissolving the corporation, the corporation enjoys an unlimited life.

1.2The role of accounting in business

Accounting provides information to the managers to use in operating the business and also provides
information to other users in assessing the economic activities and condition of the business.
Hence Accounting can be defined as: an information system that provides information to users
about the economic activities and conditions of the business so that the users can make informed
decisions.

As an information system it consists of:

Inputs Processing Output

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Economic events Analyzing Information

Documents/vouchers Recording Interpreting
Data Summarizing
Reporting

In total Accounting can be described as the art/process of identifying, recording, and summarizing,
communicating and interpreting financial information to the users.
Who are the users of accounting information/data?
The users of accounting information of any business can be classified as:
1. Internal users
2. External users
 Internal users of accounting information are those individuals inside a company who plan,
organize, and run the business. These include marketing managers, production supervisors, finance
directors, and company officers. In running a business, internal users must answer many important
questions relating to the business, prices, costs, cash flows, dividend payments, etc…
To answer these and other questions, internal users need detailed information on a timely basis.
Managerial accounting provides internal reports to help users make decisions about their companies.
Examples are financial comparisons of operating alternatives, projections of income from new sales
campaigns, and forecasts of cash needs for the next year.

 External users are individuals and organizations outside a company who want financial
information about the company. The two most common types of external users are investors and
creditors. Investors (owners) use accounting information to make decisions to buy, hold, or sell
ownership shares of a company. Creditors (such as suppliers and bankers) use accounting
information to evaluate the risks of granting credit or lending money.
Taxing authorities (such as Revenue Bureaus and Ethiopian Revenue and Customer Authority) want to
know whether the company complies with tax laws. Regulatory agencies, want to know whether the
company is operating within prescribed rules. Customers are interested in whether a company will
continue to honor product warranties and support its product lines. Labor unions want to know
whether the owners can pay increased wages and benefits. The information needs of external users
vary considerably. Financial accounting answers these questions. It provides economic and financial
information for investors, creditors, and other external users.

1.1.3.1 Specializations in Accounting and Finance

The following are among the specified field in Accounting and Finance:
 Managerial Accounting: It is an Accounting information system which focuses on providing
information for internal users, especially for the management of the organization about the
costs, forecasts, product prices, plans to expand and possible investment plans.
 Financial Accounting: It is an Accounting Information System which focuses to provide
information mainly for external users about performance, financial positions, claims and cash
flows. It also focuses on providing relevant and reliable information for decision making needs
of investors, creditors, government agencies and others. It usually provides General Purpose
financial information.
 Auditing: It focuses on an independent review of records and assurance services.
 Tax Accounting: It mainly focuses on determining tax returns.
 Budgetary Accounting: It is concerned with financial plans and comparisons.

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 Accounting Systems: Designing procedures and systems for accounting and recording data.
 Corporate finance: It is mainly concerned with Financial Management and analysis, capital
budgeting for investment decisions
There are also other fields of specialization in finance and investments.

1.3 Accounting equation and elements of the equation

Well, in any organization the total resource owned by the organization is the same as the value of the
total investment on that organization. All the resources that an organization owns are usually named in
accounting, Assets. Therefore, Assets are what an organization owns as a whole. In the assets of the
business there are claims; which might be the claims of the creditors(an amount owed) or the claims of
the owners(residual equity).

The Assets are therefore, the total investments and the rights to these assets are either the rights
(claims) of the creditors or the rights (claims) of the owners. The claims of the creditors are described
in accounting as Liabilities and the claims of the owners are described as Owners’ equity/residual
equity.
The logical deduction from the above discussion results in the following equation which reveals the
relationship among assets, liabilities and owners’ equity.

ASSETS = LIABILITIES + OWNERS’ EQUITY

Notes About the above equation

 It is usually described as the basic accounting equation which provides the underlying
framework for recording and summarizing economic events. The three (Assets, Liabilities
and Owners’ Equity) are called elements of the accounting equation.
 The equation applies to all organizations regardless of their form, nature and regardless of
the activities in which they are engaged.
 Assets must be equal to the liabilities (amount owed or total debt) and the amount of residual
equity (owners’ equity or capital or stockholders’ equity).
 Liability is written before owners’ equity to reflect that the creditors have prior claims/rights
over the assets of the business than the owners. I.e. creditors are paid first up on liquidation.

Let’s have close look in to the above elements of the accounting equation.
Assets:
As it is described above, assets constitute what an organization owns. Which include; cash, supplies,
Receivables, inventories, furniture and fixtures, equipment and facilities, Building and land
Liabilities:
Liabilities are the amount owed to an organization. They constitute obligations involving future
sacrifices of assets/economic benefits. Liabilities are identified in accounting records by the suffix “…
payables”. Examples can be Accounts Payable, Note payable, Interest payables, Bonds payable, etc…
Owners’ Equity:
Owners’ equity represents the residual claim of the owner and is the referred as the rights of the
owners over the assets of the enterprises.
NB: Owner’s equity changes due to the following:
- Investment by owners: This constitutes assets that the owners put in to the business.

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- Revenues: This constitutes an increase in owners’ equity resulting from activities to generate
income.
- Expenses: this constitutes cost of assets or services used in generating revenue. For example:
payment of salary expense, payment of water/electric bill, consumption of supplies.
- Withdrawal: this is an amount which is taken out from the business by the owners for their
personal use.
The first two make the owners equity to increase and the later two make the owners equity to decrease.

1.4 Business Transactions and Accounting Equation

In the above section, we already discussed the basic accounting equation and the components of the equation. In
this section, we will discuss how the accounting system captures relevant data about transactions, classifies and
records data, and reports data in financial statements.

1.4.1. Business Transactions

Business transactions are an economic events or conditions about business enterprise that must be
recorded. Transactions may be identified as external or internal. External transactions involve
economic events between the company and some outside enterprise or party. For example, for Ambo
University, purchase of different equipment from a supplier, the payment of monthly rent to the house
owner, and collection of fee from students are external transactions. Internal transactions are
economic events that occur entirely within one company.
The equality of the basic equation must be preserved. Therefore, each transaction must have a dual
effect on the equation. For example, if an individual asset is increased, there must be a corresponding:
1. Decrease in another asset, or
2. Increase in a specific liability, or
3. Increase in owner’s equity.
It fo ows that two or more items could be affected when an asset is increased. For example, as one
asset in increased Br. 20,000, another asset could decrease Br. 12,000, and a specific liability could
increases Br.8, 000. Note also that any change in an individual liability or ownership claim is subject
to similar analysis.
Transaction Analysis
Assume that Mr. Bona establishes a sole proprietorship to be known as xyz clinic.
Transaction (1)- Investment by owner: Mr. Bona decide to open a clinic. On September 1, 2012, he
invests Br.15, 000. This transaction results in an equal increase in assets and owners equity.
In this case, there is an increase in the asset Cash, Br.15, 000, and an equal increase in the owner’s
equity, Mr. Bona’s, capital, Br.15, 000.

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The effect of this transaction on the basic equation is:

Assets = Liabilities + owner’s equity
Cash = Mr. Bona’s Capital,
(1) + Br. 15,000 = +Br.15, 000 Investment
Observe that the equality of the basic equation has been maintained. Note also that the source of the
increase in owner‘s equity is indicated, To make clear that the increase is an investment rather than
revenue from operations.
Transaction (2)- purchase of equipment for cash: XYZ clinic purchases Laboratory equipment for
Br.7,000 cash. This transaction results in an equal increase and decrease in total assets, though the
composition of assets is changed: cash is decreased Br. 7,000, and the asset Equipment is increased Br.
7,000. Both the specific effect of this transaction and the cumulative effect of the first two transactions
are:
Assets = Liabilities + Owner’s Equity
Mr. Bona’s
Cash + Equipment = Capital
Old Bal. 15,000 15,000
(2) -7,000 + 7,000 ______
New Bal. 8,000 + 7,000 =
15,000 15,000
Observe that total assets are still Br. 15,000 and Bona’s equity also remains at Br. 15,000, the amount
of his original investment.
Transaction (3)- Purchase of supplies on credit: XYZ clinic purchase different office supplies from
ABC supply company for Br.1,600. ABC Company agrees to allow XYZ clinic to pay this bill on
October, a month later. This transaction is often referred to as a purchase on account or a credit
purchase. Assets are increased by this transaction because of the expected future benefits of using the
supplies, and liabilities are increased by the amount due ABC Company. The asset supplies is
increased Br.1, 600, and the liability accounts payable is increased by the same amount. The effect on
the equation is:

Assets = Liabilities + Owner’s equity

Cash+ Supplies+ Equipment= Accounts Mr. Bona’s

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Payable + capital
Old Bal. Br.8,000 - Br.7,000 - Br.15,000
TRAN-3 - +Br.1,600 - +Br.1,600 -
New Bal. Br.8,000 Br.1,600 Br.7,000 Br.1,600 Br.15,000
Br.16,600 Br.16,600
Total assets are now Br.16, 600. This total is matched by a Br.1, 600 creditor’s claim and a Br.15, 000
ownership claims.
Transaction (4) - Services rendered for cash: XYZ clinic receives Br.1, 200 cash from patient for
medical services it has provided. This transaction represents the principal revenue-producing activity
of XYZ clinic. Recall that revenue increases owner’s equity. Both assets and owners equity are, then,
increased by this transaction: In this case, cash is increased Br. 1,200, and Mr. Bona’s, Capital, is
increased Br. 1,200. The new balances in the equation are:
Assets = Liabilities + Owner’s equity
Cash+ Supplies+ Equipment= Accounts Mr. Bona’s
Payable + capital
Old Bal. Br.8,000 Br.1,600 Br.7,000 Br.1,600 Br.15,000
TRAN4 + 1,200 - - +1,200 Service Revenue
NewBal. Br.9,200 Br.1,600 Br.7,000 Br.1,600 Br.16,200
Br.17,800 Br.17,800
The two sides of the equation balance at Br.17,800. Note that owner’s equity is increased when
revenues are earned. The source of the increase in owner’s equity is indicated as service revenue.
Service revenue is included in determining XYZ clinic net income.
Transaction (5) Purchase of Advertising on Credit: XYZ clinic receives a bill for Br.250 from the
Addis Admas News paper for advertising the opening of its business but postpones payment of the bill
until a later date. This transaction results in an increase in liability and a decrease in owner’s equity.
The specific items involved are Accounts payable and Mr. Bona’s, Capital. The effect on the equation
is:
Assets = Liabilities + Owner’s equity
Cash+ Supplies+ Equipment= Accounts Mr. Bona’s
Payable + Capital
Old Bal. Br.9,200 Br.1,600 Br.7,000 Br.1,600 Br.16,200

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TRAN- - - - + 250 -250 Advertising

5 Expense
New Bal. Br.9,200 Br.1,600 Br.7,000 Br.1,850 Br.15,950
Br.17,800 Br.17,800
The two sides of the equation still balance at Br. 17,800. Observe that owner’s equity is decreased
when the expense is incurred, and the specific cause of the decrease (advertising expense) is noted.
Expenses do not have to be paid in cash at the time they are incurred. The cost of advertising is
considered an expense is included in determining net income.
Transaction (6)- Services Rendered for Cash and Credit: XYZ clinic provides Medical services of
Br.3, 500 for customers. Cash amounting to Br.1,500 is received from customers, and the balance of
Br.2,000 is billed to customers on account. This transaction results in an equal increase in assets and
owner’s equity. Three specific items are affected: Cash is increased Br. 1,500; Accounts Receivable is
increased Br.2,000; and Mr. Bona’s, Capital is increased Br.3,500. The new balances are as follows:

₤ Assets Liabilities
Account Owner’s Equity
Cash + Accounts +Supplies + Payable Mr. Bona’s,
Equipment = + Capital
Receivable

Old Br.9,200 Br.7,000 Br.1,850 Br.15,950

Br.1,600 ______ _________ +3,500
bal. +1,500+2,000 Br.7,000 Br.1,850 Service revenue
______ Br.19,450
Tran. Br.10,700 + Br.2,000 +
6 Br.1,600
New 21,300 21,300
bal

Why increase owner’s equity by Br.3500 when only Br.1,500 has been collected? Because of the
inflow of assets resulting from the earning of revenues does not have to be in the form of cash.
Remember that owner’s equity is increased when revenues are earned, and in XYZ clinic case that is
when the service is provided.
Transaction (7)- Payment of Expenses: Expenses paid in cash for September are store rent, Br.600,
salaries of employees, Br.900, and utilities, Br.200. these payments result in an equal decrease in

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assets and owner’s equity. Cash is decreased Br.1,700 and Mr Bona’s, Capital is decreased by the
same amount. The effect of these payments on the equation is:
Assets Liabilities + Owner’s Equity
Cash + Receivable +Supplies + Account Mr Bona’s,
Equipment = Payable + Capital

Old Br.10,700 Br.2,000 Br.7,000 Br.1,850 Br.19,450

bal Br.1,600 -600 Rent
Tran.7 -1,700 expense
-900 Salaries
______ ______ ______ ________ ______ + expense
New Br.9,000 + Br.2,000 + -200 Utilities
bal Br.1,600 + Br.7,000 Br.1,850 expense
Br.17,750

Br. 19,600 Br.19,600

The two sides of the equation now balance Br.19,600. Three lines are required in the analysis to
indicate the different types of expenses that have been incurred.
Transaction (8)- Payment of Accounts Payable: XYZ pays its Addis Admas News paper advertising
bill of Br.250 in cash. In analyzing the effect of this transaction, we must recall that the bill has
previously been recorded in Transaction (5) as an increase in Accounts payable and a decrease in
owner’s equity. Thus, this payment “on account” decreases both assets and liabilities. In this case, the
asset Cash and the liability Accounts payable are decreased by Br.250. the effect of this transaction on
the equation is:
Assets Liabilities + Owner’s Equity
Cash + Receivable +Supplies + Account Mr. Bona’s ,
Equipment = Payable + Capital

Old Br.9,000 Br.2,000 Br.7,000 Br.1,850 Br.17,750

bal Br.1,600 -250
Tran.8 -250 ________ ______ + ________
______ ______ ______ Br.7,000 Br.1,600 17,750
New
Br.8,750 + Br.2,000 +
bal
Br.1,600 +
Br.19,350
Br. 19,350

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Observe that the payment of a liability related to an expense that has previously been recorded does
not affect owner’s equity.
Transaction (9)- Receipt of Cash on Account: The sum of Br.600 in cash is received from customers
who have previously been billed for services in Transaction (6). This transaction does not change total
assets, but it changes the composition of XYZ clinic assets. Cash is increased Br.600 and Accounts
Receivable is decreased Br. 600. The new balances are:
Assets Liabilities Owner’s Equity
Cash + Receivable +Supplies + + Mr. Bona’s,
Equipment = Account Capital
Payable +
Old Br.8,750 Br.2,000 Br.7,000 Br.1,600 Br.17,750
bal Br.1,600
Tran.9 +600 -600 ________ ______ + ________
______ ______ Br.7,000 Br.1,600 17,750
New ______
bal Br.9,350 + Br.1,400 +
Br.1,600 +Br. 19,350 Br.19,350
Note that a collection on account for services previously billed and recorded does not affect owner’s
equity. Revenue was already recorded in Transaction (6) and should not be recorded again.
Transaction (10) - Withdrawal of cash by owner-Mr. Bona withdraws Br.1, 300 in cash from the
business for his personal use. This transaction results in an equal decrease in assets and owner’s
equity. Thus, both cash and Mr. Bona, capital is decreased by Br.1,300, as shown below:
Assets Liabilities + Owner’s Equity
Cash + Receivable +Supplies + Account Mr Bona’s,
Equipment = Payable + Capital

Old bal Br.9,350 Br.1,400 Br.1,600 Br.7,000 Br.1,600 Br.17,750

Tran.10 -1,300 -1,300
______ ______ ______ ________ ______ + ________
New bal Br.8,050 + Br.1,400 + Br.1,600 + Br.7,000 Br.1,600 16,450

Br. 18,050 Br.18,050

Observe that the effect of a cash withdrawal by the owner is the opposite of the effect of an investment
by the owner. Owner’s drawings do not represent expense. Like owner’s investment, they are not
included in determining net income.

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Summary of Transactions
The transactions of XYZ Clinic are summarized in the following table to show their cumulative effect
on the basic accounting equation.
Assets Liabilities Owner’s equity
Trans Cash + Account Supplies + Equipment Account Mr. Bona’s
action Receivable = payable + Capital
+
1 Br. 15,000 +Br.15,000 Investment
+
2 -_7,000 +Br.7,000 ________
8,000 7,000 15,000
3 _________ + Br.1,600 = _______ +Br.1,600 ________
_ + 1,600 + 7,000 1,600 15,000
4 +1,200 ________ =_________ + ________ +1,200 Service
9,200 + 1,600 + 7,000 1,600 16,200 revenue
= +
5 _______ _______ ________ +250 -250 Advertisi
9,200 + 1,600 + 7,000 1,850 15,950 ng
= + expense
6 +1,500 +2,000 _______ _________ _________ +3,500 Service
10,70 2,000 1,600 + 7,000 1,850 19,450 revenue

7 0 -1,700 + = + -600 Rent Exp.

______ _______ -900 Salaries
________ _ _______ ________ _ -200 exp
9,000 2,000 1,600 + 7,000 = 1,850 17,750 Utility
8 -250 +_______ _______ ________ -250
+ ______ exp.
8,750 2,000 1,600 + 7,000 = 1,600 17,750
9 +600 +-600 ________ _______ + ______ ______
9,350 1,400 1,600 + 7,000 = 1,600 17,750
10 -1,300 + + -1,300 Drawings

Br.8,050 Br.1,400 + Br.1,600 + Br.7,000 = Br.1,600 + Br.16,450

Br.18, 050 Br.18,050

1.5 Financial Statements

After transactions are identified, recorded, and summarized, four financial statements are prepared
from the summarized accounting data:

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1. An income statement presents the revenues and expenses and resulting net income or net loss
of a company for a specific period of time.
2. An owner’s equity statement summarizes the changes in owner’s equity for a specific period
of time.
3. A balance sheet reports the assets, liabilities, and owner’s equity of a business’s enterprise at
a specific date.
4. A statement of cash flow summarizes information concerning the cash inflows (Receipts) and
outflow (payments) for a specific period of time. The statement of cash flows consists of three
sections: (1) operating activities, (2) investing activities, and (3) financing activities.
 Income Statement
The income statement for XYZ Clinic is prepared from the data appearing in the owner’s equity column of the
table above. The heading of the statement identifies the company, the type of statement, and the time period
covered by the statement. Note that the primary focus of the income statement is on reporting the success or
profitability of the company’s operations over a specified period of time. To indicate that it applies for a period
of time, the income statement is dated “for the Month Ended September 30, 2012.”

XYZ Clinic
Income statement
For the Month Ended September 30, 2012
Revenues:
Service revenue Br. 4,700
Expenses:
Salary expense 600
Rent expense 900
Advertising expenses 250
Utilities expense 200
Total expenses 1,950
Net income Br.2, 750
On the income statement, revenues are listed first, followed by expenses finally net income (or net
loss) is determined. Note that investment and withdrawal transactions between the owner and the
business are not included in the measurement of net income. For example, the withdrawal by Mr Bona
of cash from XYZ Clinic was not regarded as a business expense, as explain earlier.
XYZ Clinic
Owner’s Equity Statement
For the Month Ended September 30,2012

Mr. Bona’s, Capital, September 1 Br.-0-

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Add: Investments Br.15,000

Net income 2,750
Less: Drawings 1,300
Mr.Bona’s, Capital, September 30 Br.16,450

Data for the preparation of the owner’s equity statement are obtained from the owner’s equity column
of the tabular summary and from the income statement. The heading of this statement identifies the
company, the type of statement, and the time period covered by the statement. The time period is the
same as that covered by the income statement and therefore is dated “for the month ended September
30,2012.” The beginning owner’s equity amount is shown in the first line of the statement, then, the
owner’s investments, net income, and the owner’s drawings are identified in the statement. The
information provided by this statement indicates the reasons why owner’s equity has increased or
decreased during the period.

XYZ Clinic
BalanceSheet
September30, 2012Assets:
Cash Br.8,050
Account receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets Br.18,050
Liabilities and Owner’s equity:
Liabilities
Account payable Br.1,600
Owner’s equity
Mr.Bona’s, capital 16,450
Total liabilities and owner’s equity Br.18,050

The balance sheet for XYZ Clinic is prepared from the column headings and the month-end data shown in the
last line of tabular summary. The heading of a balance sheet must identify the company, the statement, and the
date. To indicate that the balance sheet is at a specific date, it is dated “September 30, 2012.” Observe that the
assets are listed at the top, followed by liabilities and owner’s equity. Total assets must equally total liabilities
and owner’s equity.

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XYZ Clinic
Statement of Cash Flows
For the Month Ended September 30, 2012
Cash flows from operating activities:
Cash receipts from revenues Br.3,300
Cash payments for expenses (1,950)
Net cash provided by operating activities 1,350
Cash flows from investing activities:
Purchase of equipments (7,000)
Cash flows from financing activities:
Investment by owner Br.15, 000
Drawings by owner (1,300) 13,700
Net increase in cash 8,050
Cash at the beginning of the period 0
Cash at the end of the period Br.8,050

The primary purpose of a statement of cash flows is to provide financial information about the cash
receipts and cash payments of an enterprise for specific period of time. To achieve this purpose and to
aid investors, creditors, and others in their analysis of cash, the statement of cash flows reports (1) the
cash effects of a company’s operations during a period, (2) its investing transactions, (3) its financing
transactions, (4) the net increase or decrease in cash during the period, and (5) the cash amount at the
end of the period.

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