About the Author xv
About the Book xvii
Acknowledgements xxiii
1 Introduction to Accounting and Finance 1
Introduction 2
Nature of Accounting and Finance 2
Importance of Accounting and Finance 4
Financial Accounting and Management Accounting 5
Users of Accounts 7
Accounting Context 9
Types of Accountancy 13
Types of Accountant 18
Limitations of Accounting 21
Conclusion 21
Discussion Questions 23
Section A: Financial Accounting: The Techniques 25
2 The Accounting Background 27
Introduction 28
Financial Accounting 28
Language of Accounting 30
The Process of Accounting 38
The Accounting Equation 38
Student Example 44
Why is Financial Accounting Important? 48
Accounting Principles 49
Accounting Conventions 49
Conclusion 51
Discussion Questions 52
Numerical Questions 53
Appendix 2.1: Illustration of a Consolidated Income Statement for Marks & Spencer plc 2010 55
Appendix 2.2: Illustration of a Consolidated Statement of Financial Position for Marks and Spencer plc 2010 57
Appendix 2.3: Illustration of a Consolidated Statement of Cash Flows for Marks and Spencer plc 2010 59
Appendix 2.4: Illustration of a Consolidated Income Statement for Volkswagen 2009 61
Appendix 2.5: Illustration of a Consolidated Balance Sheet (Statement of Financial Position) for Volkswagen 2009 62
Appendix 2.6: Illustration of a Consolidated Cash Flow Statement (Statement of Cash Flows) for Volkswagen 2009 64
3 Main Financial Statements: The Income Statement (Profit and Loss Account) 66
Introduction 67
Context 67
Definitions 69
Layout 71
Main Components 72
Profit 79
Listed Companies 82
Capital and Revenue Expenditure 82
Limitations 83
Interpretation 83
Conclusion 83
Discussion Questions 84
Numerical Questions 84
4 Main Financial Statements: The Statement of Financial Position (Balance Sheet) 86
Introduction 87
Context 88
Definitions 89
Layout 90
Main Components 91
Limitations 103
Interpretation 104
Listed Companies 105
Conclusion 105
Discussion Questions 106
Numerical Questions 107
Appendix 4.1: Horizontal Format of Statement of Financial Position 108
5 Preparing the Financial Statements 109
Introduction 110
Main Financial Statements 110
Trial Balance to the Income Statement (Profit and Loss Account) and the Statement of Financial Position (Balance Sheet) 112
Adjustments to Trial Balance 116
Comprehensive Example 124
Conclusion 128
Discussion Questions 128
Numerical Questions 129
6 Partnerships and Limited Companies 141
Introduction 142
Context 143
Partnerships 144
Limited Companies 150
Distinctive Accounting Features of Limited Companies 154
Accounting Treatment for Limited Companies 163
Limited Company Example: Stevens, Turner Ltd 165
Limited Companies: Published Accounts 170
Conclusion 175
Discussion Questions 176
Numerical Questions 177
Appendix 6.1: Example of an Income Statement (Profit and Loss Account) Using UK GAAP (Manchester United Ltd) 187
Appendix 6.2: Example of a Statement of Financial Position (Balance Sheet) Using UK GAAP (Manchester United Ltd) 188
7 Main Financial Statements: The Statement of Cash Flows 190
Introduction 191
Importance of Cash 192
Context 194
Cash and the Bank Account 194
Relationship between Cash and Profi t 198
Preparation of Statement of Cash Flows 200
Conclusion 214
Discussion Questions 214
Numerical Questions 215
Appendix 7.1: Main Headings for the Cash Flow Statement (Statement of Cash Flows) for Sole Traders, Partnerships and some Non-Listed Companies under UK GAAP 222
Appendix 7.2: Preparation of a Sole Trader’s Cash Flow Statement Using the Direct Method Using UK Format 223
Appendix 7.3: Preparation of the Cash Flow Statement of Any Company Ltd Using the Indirect Method Using UK GAAP 224
Appendix 7.4: Example of Statement of Cash Flows (Cash Flow Statement) Using UK GAAP (Manchester United Ltd) 227
8 Interpretation of Accounts 229
Introduction 230
Context 230
Overview 231
Importance of Ratios 233
Closer Look at Main Ratios 234
Worked Example 246
Report Format 254
Holistic View of Ratios 256
Performance Indicators 257
Limitations 258
Conclusion 259
Discussion Questions 260
Numerical Questions 261
Appendix 8.1: John Brown Plc 270
Appendix 8.2: The Cash Flow Ratio Using UK GAAP 272
Section B: Financial Accounting: The Context 273
9 Regulatory and Conceptual Frameworks 275
Introduction 276
Traditional Corporate Model: Directors, Auditors and Shareholders 277
Regulatory Framework 282
Regulatory Framework in the UK 288
Corporate Governance 293
Conceptual Framework 298
Conclusion 306
Selected Reading 306
Discussion Questions 308
10 Measurement Systems 309
Introduction 310
Overview 310
Measurement Systems 313
Deficiencies of Historical Cost Accounting 315
Illustrative Example of Different Measurement Systems 315
Real Life 318
Conclusion 319
Selected Reading 319
Discussion Questions 320
11 The Annual Report 321
Introduction 322
Definition 322
Context 323
Multiple Roles 324
Main Contents of the Annual Report 329
Presentation 348
Group Accounts 350
Impression Management 352
Conclusion 355
Selected Reading 356
Discussion Questions 357
Section C: Management Accounting 359
12 Introduction to Management Accounting and Finance 361
Introduction 362
Context 363
Relationship with Financial Accounting 364
Relationship between Management Accounting and Finance 366
Overview 366
Cost Minimisation and Revenue Maximisation 374
Use of Computers and Impact of Digital Technology 375
Art not a Science 376
Changing Nature of Management Accounting 377
Conclusion 377
Selected Reading 377
Discussion Questions 379
13 Costing 380
Introduction 381
Importance of Cost Accounting 382
Types of Cost 383
Traditional Costing 387
Activity-Based Costing 393
Costing for Inventory Valuation 397
Different Costing Methods for Different Industries 401
Target Costing 405
Cost-Cutting 405
Conclusion 406
Discussion Questions 407
Numerical Questions 407
14 Planning, Control and Performance: Budgeting 413
Introduction 414
Management Accounting Control Systems 414
Nature of Budgeting 415
Cash Budget 419
Other Budgets 420
Manufacturing Budgets 423
Comprehensive Budgeting Example 426
Behavioural Aspects of Budgeting 431
Responsibility Accounting 435
Conclusion 437
Discussion Questions 437
Numerical Questions 438
15 Planning, Control and Performance: Standard Costing 443
Introduction 444
Nature of Standard Costing 445
Standard Cost Variances 446
Interpretation of Variances 455
Conclusion 456
Discussion Questions 457
Numerical Questions 458
16 Short-Term Decision Making 462
Introduction 463
Decision Making 463
Contribution Analysis 465
Decisions, Decisions 469
Throughput Accounting 475
Break-Even Analysis 477
Contribution Graph 481
Conclusion 483
Discussion Questions 484
Numerical Questions 484
Section D: Business Finance 489
17 Long-Term Decision Making: Capital Investment Appraisal 491
Introduction 492
Nature of Capital Investment 492
Capital Investment Appraisal Techniques 496
Payback Period 498
Accounting Rate of Return 500
Net Present Value 504
Profitability Index 507
Internal Rate of Return (IRR) 507
Other Factors 512
Conclusion 512
Discussion Questions 513
Numerical Questions 514
Appendix 17.1: Present Value of £1 at Compound Interest Rate (1 + r) 517
18 The Sources of Finance 518
Introduction 519
Nature of Sources of Finance 519
Long-Term Financing 521
Structure of the Business 534
Cost of Capital 534
Conclusion 537
Discussion Questions 538
Numerical Questions 539
19 The Management of Working Capital 540
Introduction 541
Working Capital 541
Short-Term Financing 544
Conclusion 556
Discussion Questions 556
Numerical Questions 557
Glossary of Key Accounting and Finance Terms 559
Appendix: Answers 591
Index 645
