Financial Accounting 2e

About the Author xiii
<p>About the Book xv</p>
<p>Acknowledgements xxi</p>
<p>1 INTRODUCTION TO ACCOUNTING 1</p>
<p>Introduction 2</p>
<p>Nature of Accounting 2</p>
<p>Importance of Accounting 4</p>
<p>Financial Accounting and Management Accounting 5</p>
<p>Users of Accounts 6</p>
<p>Accounting Context 8</p>
<p>Types of Accountancy 12</p>
<p>Types of Accountant 15</p>
<p>Limitations of Accounting 18</p>
<p>Conclusion 18</p>
<p>Discussion Questions 20</p>
<p>SECTION A: FINANCIAL ACCOUNTING: THE TECHNIQUES 21</p>
<p>2 THE ACCOUNTING BACKGROUND 23</p>
<p>Introduction 24</p>
<p>Financial Accounting 24</p>
<p>Language of Accounting 26</p>
<p>Student Example 34</p>
<p>Why Is Financial Accounting Important? 38</p>
<p>Accounting Principles 38</p>
<p>Accounting Conventions 39</p>
<p>Conclusion 41</p>
<p>Discussion Questions 42</p>
<p>Numerical Questions 43</p>
<p>Appendix 2.1: Illustration of a Consolidated Income Statement</p>
<p>for Marks &amp; Spencer plc 2010 44 Appendix 2.2: Illustration of a Consolidated Statement of Financial</p>
<p>Position for Marks and Spencer plc 2010 46</p>
<p>Appendix 2.3: Illustration of a Consolidated Statement of Cash Flows for Marks and Spencer plc 2010 48</p>
<p>Appendix 2.4: Illustration of a Consolidated Income Statement for Volkswagen 2009 50</p>
<p>Appendix 2.5: Illustration of a Consolidated Balance Sheet (Statement of Financial Position) for Volkswagen 2009 51</p>
<p>Appendix 2.6: Illustration of a Consolidated Cash Flow</p>
<p>Statement (Statement of Cash Flows) for Volkswagen 2009 53</p>
<p>3 RECORDING: DOUBLE–ENTRY BOOKKEEPING 55</p>
<p>Introduction 56</p>
<p>The Accounting Equation 57</p>
<p>Worked Example 62</p>
<p>Day Books and Ledgers 74</p>
<p>Computers 78</p>
<p>Conclusion 79</p>
<p>Discussion Questions 79</p>
<p>Numerical Questions 80</p>
<p>Appendix 3.1: Complete Worked Example for Gavin Stevens 86</p>
<p>4 MAIN FINANCIAL STATEMENTS: THE INCOME STATEMENT (PROFIT AND LOSS ACCOUNT) 89</p>
<p>Introduction 90</p>
<p>Context 90</p>
<p>Definitions 92</p>
<p>Layout 93</p>
<p>Main Components 94</p>
<p>Profit 103</p>
<p>Listed Companies 106</p>
<p>Capital and Revenue Expenditure 106</p>
<p>Limitations 107</p>
<p>Interpretation 107</p>
<p>Conclusion 107</p>
<p>Discussion Questions 108</p>
<p>Numerical Questions 108</p>
<p>5 MAIN FINANCIAL STATEMENTS: THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 110</p>
<p>Introduction 111</p>
<p>Context 112</p>
<p>Definitions 113</p>
<p>Layout 114</p>
<p>Main Components 116</p>
<p>Limitations 129</p>
<p>Interpretation 131</p>
<p>Listed Companies 131</p>
<p>Conclusion 132</p>
<p>Discussion Questions 132</p>
<p>Numerical Questions 133</p>
<p>Appendix 5.1: Horizontal Format of Statement of Financial Position 134</p>
<p>6 PREPARING THE FINANCIAL STATEMENTS 135</p>
<p>Introduction 136</p>
<p>Main Financial Statements 136</p>
<p>Trial Balance to the Income Statement (Profi t and Loss Account) and the Statement of Financial Position (Balance Sheet) 138</p>
<p>Adjustments to Trial Balance 142</p>
<p>Comprehensive Example 154</p>
<p>Conclusion 158</p>
<p>Discussion Questions 158</p>
<p>Numerical Questions 159</p>
<p>7 PARTNERSHIPS AND LIMITED COMPANIES 172</p>
<p>Introduction 173</p>
<p>Context 174</p>
<p>Partnerships 175</p>
<p>Limited Companies 181</p>
<p>Distinctive Accounting Features of Limited Companies 185</p>
<p>Accounting Treatment For Limited Companies 194</p>
<p>Limited Company Example: Stevens, Turner Ltd 196</p>
<p>Limited Companies: Published Accounts 201</p>
<p>Conclusion 206</p>
<p>Discussion Questions 207</p>
<p>Numerical Questions 208</p>
<p>Appendix 7.1: Example of an Income Statement (Profit and Loss Account) using UK GAAP (Manchester United Ltd) 218</p>
<p>Appendix 7.2: Example of a Statement of Financial Position (Balance Sheet) using UK GAAP (Manchester United Ltd) 219</p>
<p>8 MAIN FINANCIAL STATEMENT: THE STATEMENT OF CASH FLOWS 221</p>
<p>Introduction 222</p>
<p>Importance of Cash 223</p>
<p>Context 225</p>
<p>Cash and the Bank Account 225</p>
<p>Relationship between Cash and Profit 229</p>
<p>Preparation of Statement of Cash Flows 231</p>
<p>Bank Reconciliation Statements 245</p>
<p>Conclusion 246</p>
<p>Discussion Questions 247</p>
<p>Numerical Questions 248</p>
<p>Appendix 8.1: Main Headings for the Cash Flow Statement (Statement of Cash Flows) for Sole Traders, Partnerships and some Non–Listed Companies under UK GAAP 255</p>
<p>Appendix 8.2: Preparation of a Sole Trader s Cash Flow Statement Using the Direct Method Using UK Format 256</p>
<p>Appendix 8.3: Preparation of the Cash Flow Statement of Any Company Ltd using the Indirect Method Using UK GAAP 257</p>
<p>Appendix 8.4: Example of Statement of Cash Flows (Cash Flow Statement) Using UK GAAP (Manchester United Ltd) 260</p>
<p>9 INTERPRETATION OF ACCOUNTS 262</p>
<p>Introduction 263</p>
<p>Context 263</p>
<p>Overview 264</p>
<p>Importance of Ratios 266</p>
<p>Closer Look at Main Ratios 267</p>
<p>Worked Example 279</p>
<p>Report Format 287</p>
<p>Holistic View of Ratios 289</p>
<p>Performance Indicators 290</p>
<p>Limitations 291</p>
<p>Conclusion 292</p>
<p>Discussion Questions 293</p>
<p>Numerical Questions 294</p>
<p>Appendix 9.1: John Brown Plc 303</p>
<p>Appendix 9.2: The Cash Flow Ratio using UK GAAP 305</p>
<p>SECTION B: FINANCIAL ACCOUNTING: THE CONTEXT 307</p>
<p>10 REGULATORY AND CONCEPTUAL FRAMEWORKS 309</p>
<p>Introduction 310</p>
<p>Traditional Corporate Model: Directors, Auditors and Shareholders 311</p>
<p>Regulatory Framework 316</p>
<p>Regulatory Framework in the UK 318</p>
<p>Corporate Governance 323</p>
<p>Conceptual Framework 328</p>
<p>Conclusion 335</p>
<p>Selected Reading 336</p>
<p>Discussion Questions 337</p>
<p>11 MEASUREMENT SYSTEMS 338</p>
<p>Introduction 339</p>
<p>Overview 339</p>
<p>Measurement Systems 342</p>
<p>Deficiencies of Historical Cost Accounting 344</p>
<p>Illustrative Example of Different Measurement Systems 344</p>
<p>Real Life 347</p>
<p>Conclusion 348</p>
<p>Selected Reading 348</p>
<p>Discussion Questions 349</p>
<p>12 THE ANNUAL REPORT 350</p>
<p>Introduction 351</p>
<p>Definition 351</p>
<p>Context 352</p>
<p>Multiple Roles 353</p>
<p>Main Contents of the Annual Report 358</p>
<p>Presentation 375</p>
<p>Group Accounts 377</p>
<p>Impression Management 381</p>
<p>Conclusion 384</p>
<p>Selected Reading 385</p>
<p>Discussion Questions 386</p>
<p>13 CREATIVE ACCOUNTING 387</p>
<p>Introduction 388</p>
<p>Definition 390</p>
<p>Managerial Motivation 392</p>
<p>Methods of Creative Accounting 394</p>
<p>Example 401</p>
<p>Real Life 401</p>
<p>Case Studies 404</p>
<p>Creative Presentation 408</p>
<p>Controlling Creative Accounting 410</p>
<p>Conclusion 410</p>
<p>Selected Reading 411</p>
<p>Discussion Questions 412</p>
<p>Numerical Questions 413</p>
<p>14 INTERNATIONAL ACCOUNTING 414</p>
<p>Introduction 415</p>
<p>Context 415</p>
<p>Divergent Forces 417</p>
<p>Classification 423</p>
<p>Country Snapshots 423</p>
<p>Convergent Forces 430</p>
<p>Conclusion 437</p>
<p>Selected Reading 437</p>
<p>Discussion Questions 438</p>
<p>Appendix 14.1: List of International Standards 439</p>
<p>Glossary of Key Accounting Terms 441</p>
<p>Appendix: Answers 465</p>
<p>Index 511</p>