Module 1

ACCOUNTING: AN INTRODUCTION
Module 1 - Accounting: an introduction
Learning outcomes:
At the end of this module, you should have an understanding of:

• What accounting is, and why it is important

• How to prepare a straightforward balance sheet
• How to prepare a simplified income statement
• How to prepare a simplified cash flow statement
• How to enter your transactions on an accounting worksheet
Module 1 - Accounting: an introduction

Overall objectives are:

• Introduce accounting and the three financial statements
• Introduce the accounting worksheet and the accounting
equation
Module 1 – Topics
1.1 What is accounting?

1.2 Objectives of the financial statements

1.3 Users and their needs

1.4 Separating your economic transactions from your personal transactions

1.5 Definitions and explanations used in this module

1.6 Illustrative example

1.7 Recording transactions using an accounting worksheet

1.8 Exercises
1.1 What is accounting?
Accounting supplies information which decision -makers rely on in the allocation of scarce
resources.

Prepare Users of the

Transactions Record the
financial financial
take place  transactions  
statements statements
1.1 What is accounting?
Accounting supplies information which decision -makers rely on in the allocation of scarce
resources.

Prepare Users of the

Transactions Record the
financial financial
take place  transactions  
statements statements
1.1 What is accounting?
Accounting supplies information which decision -makers rely on in the allocation of scarce
resources.

Prepare Users of the

Transactions Record the
financial financial
take place  transactions  
statements statements
1.1 What is accounting?
Accounting supplies information which decision -makers rely on in the allocation of scarce
resources.

Users of
Prepare financial
Transactions Record the
financial information
take place  transactions  
statements (financial
statements)
Financial statements

Balance sheet Income statement Cash flow statement

• Statement of financial position • Statement of Profit of Loss (or • How much cash was generated
• Snapshot of financial position Comprehensive income) by the business and how much
• Measures whether the business was utilized by the business
• What it owns, owes, and equity
(or capital) made a profit or loss
• Performance measure
1.2 Objectives of the financial statements:
Financial statements provide information that:
• Helps current or potential users to make a rational decision about their
investments or loan to the business
• Helps lenders decide whether or not to provide finance to the business
• Helps to assess the amount, timing and uncertainty of future cash flows
• Helps lenders to see whether or not the business can pay interest and repay
the loan
• Show the economic resources, rights and obligations of the enterprise, and
events that may affect them
Financial statements communicate
information

Preparers prepare
Users use the
the financial
financial statements
statements
Qualitative characteristics

• Understandability
• Relevance
• Reliability
• Comparability
• Faithful representation
1.3 Users and their needs
Business owners

Financial institutions

Financial Suppliers

statements Government

SME agencies

Credit agencies
1.4 Separating your economic transactions
from your personal transactions
Objectives, qualitative characteristics and users of financial
statements: Key points to remember

 The financial statements communicate the financial position

and performance of a business.
 Financial statements should be understandable, relevant,
reliable and comparable to be useful to users. In addition,
financial statements should be complete, neutral and free from
error.
 The person owning the business must keep their personal affairs
separate from the affairs of the business.
Quick quiz
1. What are the three financial statements? Can you give a
brief definition of each?

2. Name one user of the financial statements and what

would they use the financial statements for?

3. Name one qualitative characteristic of the financial

statements. Why is it important?
 1.5 Definitions and explanations used in
this module
Accounting Accounting policies are the specific principles, bases, conventions, rules and practices applied by a
policy business in preparing its financial statements. An example would be changing from one basis of
assigning cost to inventory to another.

Accrual The impact of events on assets and liabilities is recognised (recorded) in the accounting records in
basis of the period when the service is rendered or the sale (revenue) is earned and the expenses are
accounting recognised when incurred (also known as the matching principle).

Asset An asset is a resource controlled by the enterprise as a result of past events and from which
economic benefits are expected to flow to the enterprise.

Balance The balance sheet is a snapshot of the business at a point in time. It shows what the business owns
sheet (known as assets) and what it owes (known as liabilities). The difference between what it owns
and what it owes represents the owner’s investment in the business (i.e., equity).
1.5 Definitions and explanations used in
this module cont.
Cash flow statement The cash flow statement shows how much cash was generated by the business
and how much cash was utilised by the business for the period under review.

Company A company is an organisation usually governed by a Companies Act (or similar

Act). A company can have many shareholders (i.e., owners). A company is a
legal, taxable and reporting entity.

Cost Cost is the amount which is paid to obtain goods or services (also known as
transaction cost or historical cost).

Cost of sales This refers to the cost of the items (or goods) acquired which were sold to
customers during the reporting period (also known as cost of goods sold).
 1.5 Definitions and explanations used in
this module cont.
Current asset Current assets are those assets which are expected to be used or sold in the normal course
of the business’s operating cycle, usually within 12 months of the balance sheet date. All
other assets should be classified as non-current assets.

Current liabilities Current liabilities are liabilities that will be paid either in the normal course of the
business’s operating cycle or within 12 months of the balance sheet date.

Drawings If a sole proprietor or partner withdraws cash from the business for personal use rather
than for business use, then this amount is treated as a reduction in equity and is termed
‘drawings’.

Expense In simple terms, expenses are decreases in assets as a result of supplying items for sale or
providing a service. A detailed definition is given in Module 2.
1.5 Definitions and explanations used in
this module cont.
Income Income encompasses both revenue and gains. An example of revenue would be the
sales of products. An example of a gain would be the increase in the value of a non-
current asset, for example land.

Income statement The income statement measures the activities of the business for a certain period by
calculating the revenue (such as sales made by selling a product) for the period under
review and deducting from that the expenses which have been incurred to make that
revenue.

Liability A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying future economic benefits.

Non-current assets These are assets which are not current assets.
 1.5 Definitions and explanations used in
this module cont.
Non-current liabilities These are obligations which must be repaid in a period exceeding one year.

Partnership This is an enterprise where there are two or more co-owners. An agreement between the
partners should be drawn up detailing how the profits are to be split and other
arrangements affecting their capital accounts. Although it is not recognised as a separate
legal or taxable entity, for accounting purposes, a partnership is a reporting entity.

Profit This is the remaining amount after all expenses have been deducted from revenue. For a
company, this is often referred to as retained earnings or retained income.

Reporting entity A reporting entity as an entity that is required, or chooses, to prepare financial statements,
and need not be a legal entity.
1.5 Definitions and explanations used in
this module cont.
Revenue Revenue is the proceeds from selling a product to customers or rendering a
service to clients.

Sole proprietor This is an enterprise where there is only one owner who is usually the
(or sole trader) manager. Although it is not recognised as a separate legal or taxable entity,
for accounting purposes, it is a reporting entity.
1.6 Illustrative example

Balance sheet Income statement Cash flow statement

• Statement of financial position • Statement of Profit of Loss (or • How much cash was generated
• Snapshot of financial position Comprehensive income) by the business and how much
• Measures whether the business was utilized by the business
• What it owns, owes, and equity
(or capital) made a profit or loss
• Performance measure
Illustrative example 1.1: Preparation of financial statements for March 20X0

After the COVID-19 breakout, Joe Ngibe saw there was an opportunity to start a business selling face
masks. He started the business on the 1 March 20X0 taking CU5,000 from his savings account. He
bought 1 000 masks at CU5.00 each and intends to sell them for CU10.00 each. He named his business
“Easy-on Masks”.

The business sells the masks outside various places such as schools and shopping malls.
At the end of the first month, he calculates that he sold 900 masks for cash as follows:
• 500 masks at CU10.00 each.
• 400 masks at CU7.50 each. He had to drop his selling price on these masks as the fabric was not
considered fashionable.
He also paid CU200 for travelling costs to sell his masks.

He decided to prepare financial statements to check on his financial position and determine whether
or not his business is successful.

Required: Prepare an income statement, balance sheet and cash flow statement for Joe Ngibe after
the above transactions.
Solution:

J Ngibe trading as Easy-on Masks

Income Statement for the month ended 31 March 20X0

( ) – indicates a minus
Calculation: CU
Revenue (sales of masks – all cash) (500 x CU10) + (400 x CU7.50) 8,000

Purchases 1 000 masks x CU5 5,000

Less: Closing inventory (masks 100 masks x CU5 (500)
unsold)
Cost of sales sold 900 masks which cost CU5 (4,500)
each
Gross profit 3,500

Travelling expenses (200)

Profit 3,300
J Ngibe trading as Easy-on Masks
Balance sheet as of 1 March 20X0

Assets CU
Current assets
Cash 5,000

Equity (Owner’s equity) 5,000

Explanation: On the 1 March, the business only owns one asset which
is cash. It does not owe amounts to anyone. The difference is
therefore CU5,000 which represents the owner’s interest in the
business.
 J Ngibe trading as Easy-on Masks
Balance sheet as of 31 March 20X0

Assets Calculation: CU
Current assets
Cash 5,000 + 8,000 (sales for cash) – 5,000 (cost of the
masks paid in cash) – 200 (travelling expenses – paid 7,800
cash)
Inventory Cost of masks not sold and still available for sale 500

8,300
Equity
Owner’s equity 5,000 + 3,300 (profit from the income statement which
belongs to the owner) 8,300
Explanation: On the 31 March, the business owns two assets (CU7,800 cash + CU500 Inventory). It does not owe amounts to
anyone. Owner’s equity of CU8,300 is the CU5,000 (original investment) plus the profit of the CU3,300 which belongs to the
owner. Note that the two parts of the balance sheet total to the same amount.
J Ngibe trading as Easy-on Masks
Balance sheet as of 31 March 20X0

CU CU
Assets Equity
Current assets
Cash 7,800 Owner’s equity 8,300
Inventory: Cost of masks not sold 500
8,300 8,300
Definitions:
• Resource controlled by the enterprise
Asset • As a result of past events, from which
• Economic benefits are expected to flow to the enterprise

• Assets expected to be used or sold

Current assets • In the normal course of the business’s operating cycle
• Usually within 12 months of balance sheet date

Non-current • All other assets should be classified as non-current assets

assets
Definitions:

Income • The income statement measures that activities of the

statement
business for a certain period.

Balance • The balance sheet is a snapshot of the business at a point

of time. It shows what the business owns (assets) and
what it owes (liabilities). The difference between assets

sheet and liabilities is equity. (A – L = E)

•A = L+E
Cash flow statement

Definition:
• The cash flow statement shows how much cash was
generated by the business and how much cash was
utilized by the business for the period under review.
Operating, investing and financing activities

Operating Investing Financing

Main income source for Activities related to the Activities with financial
the entity acquisition of non-current assets institutions and the owners
and other investments (not
included in cash and cash-
equivalents)
The cash flow statement
• It shows how the enterprise generates and uses cash.
• Information about cash flows is useful as it provides users with a basis to
generate cash and cash equivalents.
• It reveals the origin of resources and their use.

Cash flows are inflows and outflows of cash and cash equivalents.
Cash comprises bank notes and coins held physically or available in the bank.
Cash equivalents are highly liquid short-term investments, that are readily
convertible to known amounts of cash and which are subject to an insignificant
risk of change in value.
J Ngibe trading as Easy-on Masks
Cash Flow Statement for the month ended 31 March 20X0

CU
Profit per the income statement 3,300
Adjusted for: increase in inventory (500)
Cash generated from operations 2,800
Cash flow from financing activity
Owner’s contribution 5,000
Cash provided by financing activity 5,000
Net increase in cash 7,800
Cash on 1 March 20X0 -
Cash on 31 March 20X0 7,800
Cash flow movement for the month ended 31 March 20X0 CU
Cash received from customers 8,000
Less: Cash paid for masks (5,000)
3,000
Less: Cash paid for other expenses (200)
Cash generated from operations 2,800
Cash on 1 March 20X0 (or cash introduced by owner) 5,000
Cash on 31 March 20X0 7,800
Accounting has therefore provided useful
information to Joe Ngibe
Accounting supplies information which decision -makers rely on in the allocation of scarce
resources

Prepare Users of the

Transactions Record the
financial financial
take place  transactions  
statements statements
Illustrative example 1.2: Preparation of the financial statements for April 20X0
As the financial statements Joe Ngibe prepared for March 20X0 have shown that the business of selling
masks is profitable, he decided to expand his business by taking on an assistant to help sell the masks.

On 1 April, he bought a further 2,000 masks made out of more fashionable material for CU8 each from
a supplier (MaskKits). MaskKits allowed him to pay only CU7,000 now and he had to pay the balance
on the 2 May.

His sales were as follows:

100 masks at CU7.50 for cash. These masks were the inventory unsold at 31 March 20x0.
1 200 masks at CU10.00 on credit. These sales were the new masks. Customers had only paid half of
the amount owing to him by the 30 April 20X0.

To display his masks, on the 30 April he bought a metal stand for CU5,000 from Metalco. He paid
CU2,500 immediately and the supplier allowed him to pay the balance in May.
Travelling expenses are CU200, he paid the assistant CU800 and took CU200 for his own use (all in
cash).
Required: At the end of April, prepare an income statement for the month of April, a balance sheet at
the end of April and a cash flow statement for the month of April.
J Ngibe trading as Easy-on Masks
Income Statement for the month ended 30 April 20X0
Calculation: CU
Revenue (sales of masks) (100 x CU7.50) + (1 200 x CU10) 12,750
Opening inventory 100 masks x CU5 500
Purchases 2 000 masks x CU8 16,000
16,500
Less: Closing inventory 800 masks x CU8 (6,400)
Check: sold 100 masks which cost CU5
Cost of sales
each + 1200 masks which cost CU8 each (10,100)
Gross profit 2,650
Operating expenses:
Travelling expenses (200)
Wages (800)
Total operating expenses (1,000)
Profit 1,650
J Ngibe trading as Easy-on Masks
Balance sheet as of 30 April 20X0

Assets CU
Fixed asset
Equipment

Current assets
Cash
Accounts receivable
Inventory
Total current assets

Equity
Owner’s equity

Liabilities
Current liabilities
Metalco
MaskKits
J Ngibe trading as Easy-on Masks
Balance sheet as of 30 April 20X0

Assets CU
Fixed asset
Equipment 5,000

Current assets
Cash 3,850
Accounts receivable 6,000
Inventory 6,400
Total current assets 16,250

21,250
Equity
Owner’s equity 9,750

Liabilities
Current liabilities
Metalco 2,500
MaskKits 9,000
21,250
Definition: liability

• A present obligation
• Arising from past events
Liability • The settlement of which is expected to result in an
outflow … of resources embodying future economic
benefits
J Ngibe trading as Easy-on Masks
Cash Flow Statement for the month ended 30 April 20X0
Calculation: CU
Profit per the income statement 1,650
Adjusted for:
(Increase) in inventory 6,400 (ending inventory) – (5,900)
500 (beginning inventory)
(Increase) in accounts receivable 6,000 (30 April) – 0 (31 March) (6,000)
Increase in trade payables (9,000 MaskKits) – 0 (31 March) 9,000
Cash generated from operations (1,250)
Cash flow from investing activities
Purchase of equipment (2,500)
Net cash used in investing activities (2,500)
Cash flow from financing activities
Drawings by owner (200)
Net cash used in financing activities (200)
Net (decrease) in cash (1,450) + (2,500) (3,950)
Cash on 1 April 20X0 7,800
Cash on 30 April 20X0 3,850
Financial statements: Key points to remember
 The financial statements represent a means to communicate the financial position of a
business (Balance Sheet) at a given date and the operating results (Income Statement) and
the cash flow (Cash Flow Statement) for a specified period.
 The balance sheet is a snapshot of the business at a point in time. It shows what the
business owns (known as assets) and what it owes (known as liabilities). The difference
between the assets and the liabilities represents the investment of the owner in the
business (known as capital or equity).
 The income statement measures whether the business has made profit or a loss for the
period under review.
 The cash flow statement shows how much cash was generated by the business and how
much cash was utilised by the business for the period under review.
 In addition to these three basic statements, a business will also usually prepare some
explanatory notes to accompany the financial statements.
 Transactions are measured and recorded using cost (also known as historical cost).
1.7 Recording the transactions
using an accounting worksheet

Assets = Liabilities + Equity

A=L+E
Illustrative example 1.3: Accounting worksheet for March

Solution:
Joe Ngibe trading as Easy-on-masks - Analysis of transactions for March 20X0
Assets = Liabilities + Equity

A = L + E

Description of Cash + Inventory = Liabilities Owner’s equity

transaction
1. Initial investment + 5,000 = + 5,000
2. Purchase of inventory - 5,000 + 5,000
3. Sales of masks + 8,000 (a) = + 8,000 (revenue)

4. Cost of masks sold - 4,500 (b) = - 4,500 (expense)

5. Travelling costs - 200 = - 200 (expense)
Balance 31 March 7,800 + 500 = 0 + 8,300
Illustrative example 1.4: Accounting worksheet for April
Joe Ngibe trading as Easy-on-masks - Analysis of transactions for April 20X0
Assets = Liabilities + Equity
Description of Cash + Accounts Inventory Equip- = Accounts Owner’s equity
transaction receivable ment payable
Beginning balances
6. Purchase of
inventory - cash -
7. Purchase inventory
- credit
8. Sales of masks for
cash +
9. Sales of masks for
credit
10. Customers paid +
11. Cost of masks sold
12. Purchase of stand
for cash and credit -
13. Travelling costs -
14. Paid assistant -
15. Withdrew cash
Balances 30 April
Illustrative example 1.4: Accounting worksheet for April
Solution: Joe Ngibe trading as Easy-on-masks - Analysis of transactions for April 20X0
Assets = Liabilities + Equity

Description of Cash + Accounts Inventory Equip- = Accounts Owner’s equity

transaction receivable ment payable
Beginning balances 7,800 + 500 = 8,300
6. Purchase of
inventory - cash - 7,000 + 7,000
7. Purchase inventory
- credit + 9,000 = + 9,000
8. Sales of masks for
cash + 750(a) = + 750 R
9. Sales of masks for
credit + 12,000(b) = + 12,000 R
10. Customers paid + 6,000 - 6,000
11. Cost of masks sold - 10,100(c) = - 10,100 E
12. Purchase of stand
for cash and credit - 2,500 + 5,000 = + 2,500
13. Travelling costs - 200 = - 200 E
14. Paid assistant - 800 = - 800 E
15. Withdrew cash - 200 = - 200 D
Balances 30 April 3,850 + 6,000 + 6,400(d) + 5,000 = 11,500 + 9,750
Recording the transactions on a worksheet: Key points to remember
 After each transaction, total assets must always equal total liabilities plus equity.
 Because the net effect of revenue less expenses is profit or loss which belongs to the
owner, the effect of a revenue transaction is added to owner’s equity and the effect of an
expense transaction is deducted from equity.
 Drawings is shown as a deduction from equity as the owner is reducing his or her
investment in the business by withdrawing cash.
1.7 Exercises
Exercise 1.1: Sole proprietor – balance sheet
Sipho Shange, who has a small business selling second-hand clothing, made the following list of
his assets and liabilities at 31 December 20X2. He is uncertain as to what amount his equity (i.e.
capital) is. All amounts are in currency units (CU).
CU
Cash in the till 5,970
Suppliers – for clothes he has purchased but not yet paid for 2,000
Clothes – which have not been sold 3,200
Wages owing 200
Amount owing to Easy Lending for money he borrowed to start his business – this
only has to be repaid in 18 months’ time 5,400
Table purchased on 31 December 20X2 to display the clothes 1,500
Customer who has yet to pay 300
Suggested solution to Exercise 1.1

Sipho Shange
Balance Sheet as of 31 December 20X2
CU CU
ASSETS LIABILITIES

EQUITY

TOTAL ASSETS TOTAL LIABILITIES + EQUITY

Suggested solution to Exercise 1.1 (1 page only)

Sipho Shange
Balance Sheet as of 31 December 20X2
CU CU
ASSETS LIABILITIES
Non-current assets Non-current liabilities
Equipment 1,500 Easy Lending 5,400

Current assets Current liabilities

Inventory 3,200 Wages owing 200
Accounts receivable 300 Suppliers 2,000
Cash 5,970 2,200
9,470
Total liabilities 7,600

EQUITY
Balance 31 December 20X2 3,370(a)

TOTAL ASSETS 10,970 TOTAL LIABILITIES + EQUITY 10,970

(a) Balancing figure
Exercise 1.2: Sole proprietor - worksheet
Ms Carmen Diaz started a small business on the 1 January 20X1 with 60,000CU she received as an inheritance at the end of
the previous year. The money was deposited into a separate bank account. Her business, “Hot Hot-Dogs”, sells hot dogs
from a small kiosk outside a school. At the end of the first month, she wanted to see if her business was successful or not.

The following are her transactions for January 20X1 (which were all processed through her bank account).
1. She purchased:
5 100 hot dog rolls at CU1 each 5,100
5 100 sausages at CU5 each 25,500
Butter, tomato and mustard sauce 780
2. She paid:
Rent for the kiosk 2,000
Wages paid to an assistant 3,000
Fuel used for heating water 620
3. She withdrew 10,000CU for her personal use.
4. She sold 5 000 hot dogs for 10CU each.
5. Her uncle, Mr Ruiz, lent her 5,000CU which she paid into her bank account.
6. Although she had rolls and sausages over at the end of the month, she was confident she could use them in the
following month as she could store them in her freezer until required.
 Ms Carmen Diaz trading as Hot Hot-Dogs
Accounting worksheet for the month ended 31 January 20X1

Solution:
Analysis of transactions for January 20X1
Assets = Liabilities + Equity

Description of transaction Cash/Bank + Inventory = Loan + Owner’s equity

Hot dog rolls Sausages

Paid-in capital
1. Purchase of inventory
Purchase of inventory
Purchase of condiments
2. Paid rent
Paid wages
Paid fuel
3. Drawings
Sales
4. Cost of rolls sold
Cost of sausages sold
5. Loan from uncle
Balances 31 January
Ms Carmen Diaz trading as Hot Hot-Dogs
Worksheet for the month ended 31 January 20X1

Solution:
Analysis of transactions for January 20X1
Assets = Liabilities + Equity
Description of Cash/Bank + Inventory = Loan + Owner’s
transaction equity
Hot dog Sausages
rolls
Paid in capital 60,000 = 60,000
Ms Carmen Diaz trading as Hot Hot-Dogs
Worksheet for the month ended 31 January 20X1

Solution:
Analysis of transactions for January 20X1
Assets = Liabilities + Equity

Description of Cash/Bank + Inventory = Loan + Owner’s equity

transaction
Hot dog rolls Sausages
Paid in capital 60,000 = 60,000
1 Purchase of inventory - 5,100 + 5,100
Purchase of inventory - 25,500 + 25,500
Purchase of
condiments - 780 = - 780 E
 Ms Carmen Diaz trading as Hot Hot-Dogs
Worksheet for the month ended 31 January 20X1
Solution:
Analysis of transactions for January 20X1
Assets = Liabilities + Equity
Description of Cash/Bank + Inventory = Loan + Owner’s
transaction equity
Hot dog Sausages
rolls
Paid-in capital 60,000 = 60,000
1. Purchase of inventory - 5,100 + 5,100

Purchase - inventory - 25,500 + 25,500

Purchase -condiments - 780 = - 780 E
2. Paid rent - 2,000 = - 2,000 E
Paid wages - 3,000 = - 3,000 E
Paid fuel - 620 = - 620 E
3. Drawings - 10,000 = - 10,000 D
Sales + 50,000 = + 50,000 R
4. Cost of rolls sold - 5,000 = - 5,000 E
Cost of sausages sold - 25,000 (b) = - 25,000 E
5. Loan from uncle + 5,000 = + 5,000
Balances 31 January 68,000 + 100 + 500 = 5,000 63,600
Ms Carmen Diaz trading as Hot Hot-Dogs
Income Statement for the month ended 31 January 20X1
Calculation: CU
Sales – all cash 5 000 hotdogs at CU10 each 50,000

Purchases – hot dog rolls 5 100 hot dog rolls at CU1 each 5,100
Purchases - sausages 5 100 sausages at CU5 each 25,500
Total cost of purchases 30,600
Less: Cost of rolls not sold 100 x CU1 (100)
Less: Cost of sausages not sold 100 x CU5 (500)
Cost of selling 5 000 hotdogs (30,000)
Gross profit 20,000
Less: Other expenses
Rent for the kiosk 2,000
Wages paid to an assistant 3,000
Fuel used for heating water 620
Butter, tomato and mustard 780 (6,400)

Profit 13,600
Ms Carmen Diaz trading as Hot Hot-Dogs
Balance Sheet as of 31 January 20X1
Calculation: CU
Equity
Beginning balance 60,000
Profit for the month 13,600
73,600
Less drawings (10 000)
Ending balance 63,600

Liability
Loan from Mr Ruiz 5,000
68,600

Assets
Current assets
Cash 60,000 – 5,100 – 25,500 – 2,000 – 3,000
– 620 – 780 - 10,000 + 50,000 + 5,000 68,000
Inventory (100 x 1CU) rolls + (100 x 5CU) sausages 600
68,600
Ms Carmen Diaz trading as Hot Hot-Dogs
Cash Flow Statement for the month ended 31 January 20X1
CU
Profit for January 13,600
(Increase) in inventory (600)
Cash generated from operations 13,000

Cash flows from financing operations

Payment to equity (capital) 60,000
Payment to loan 5,000
Owner’s drawings (10,000)
Net cash used in financing operations 55,000

Net increase in bank 68,000

Bank balance at beginning of January 20X1 -
Bank balance at end of January 20X1 68,000
Exercise 1.3: Cash flow statement
At the end of 20X5, Patrick Ngwenya trading as Karibu Enterprises extracted the following
information from his financial records:

• an increase in inventories of 15,000 CU

• accounts payable decreased by 8,000 CU
• a new bank loan of 20,000 CU
• repayment of a previous loan of 5,000 CU
• purchase of new machinery for 6,000 CU
• profit as shown in the income statement is 4,500 CU
• cash balance on December 31st last year was 2,200 CU
Patrick Ngwenya trading as Karibu Enterprises
Cash Flow Statement for the year ending 31 December 20X5 (in CUs)
20X5
Profit for the year
(Increase) Decrease in Accounts receivable
(Increase) Decrease in Inventories
Increase (Decrease) in Accounts payable
Net cash generated from operations
Cash flows resulting from investing activities
Sale (purchase) of non-current assets
Net cash used in investing activities
Cash flows from financing operations
Receipt (Payment) of bank loan
(Repayment) of loan
Net cash used in financing activities
Net increase (Decrease) in cash
Cash at the beginning of the period, 1 January
Cash at the end of the period, 31 December
Patrick Ngwenya trading as Karibu Enterprises
Cash Flow Statement for the year ending 31 December 20X5 (in CUs)
20X5
Profit for the year 4,500
(Increase) Decrease in Accounts receivable 0
(Increase) Decrease in Inventories (15,000)
Increase (Decrease) in Accounts payable (8,000)
Net cash generated from operations (18,500)
Cash flows resulting from investing activities
Sale (purchase) of non-current assets (6,000)
Net cash used in investing activities (6,000)
Cash flows from financing operations
Receipt (Payment) of bank loan 20,000
(Repayment) of loan (5,000)
Net cash used in financing activities 15,000
Net increase (Decrease) in cash (9,500)1
Cash at the beginning of the period, 1 January 2,200
Cash at the end of the period, 31 December (7,300)2
https://www.youtube.com/watch?v=XUOESB7q_oo
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