Accounting and Finance

Michael Jones is Professor of Financial Reporting and Director of the Financial Reporting and Business Communication Unit at the University of Bristol. He is also author of Accounting 3rd Edition, Financial Accounting 2nd Edition, Creative Accounting, Fraud and International Accounting Scandals and Management Accounting, all published by John Wiley and Sons Ltd.

• About the Author xvAbout the Book xviiAcknowledgements xxiii1 Introduction to Accounting and Finance 1Introduction 2Nature of Accounting and Finance 2Importance of Accounting and Finance 4Financial Accounting and Management Accounting 5Users of Accounts 7Accounting Context 9Types of Accountancy 13Types of Accountant 18Limitations of Accounting 21Conclusion 21Discussion Questions 23Section A: Financial Accounting: The Techniques 252 The Accounting Background 27Introduction 28Financial Accounting 28Language of Accounting 30The Process of Accounting 38The Accounting Equation 38Student Example 44Why is Financial Accounting Important? 48Accounting Principles 49Accounting Conventions 49Conclusion 51Discussion Questions 52Numerical Questions 53Appendix 2.1: Illustration of a Consolidated Income Statement for Marks & Spencer plc 2010 55Appendix 2.2: Illustration of a Consolidated Statement of Financial Position for Marks and Spencer plc 2010 57Appendix 2.3: Illustration of a Consolidated Statement of Cash Flows for Marks and Spencer plc 2010 59Appendix 2.4: Illustration of a Consolidated Income Statement for Volkswagen 2009 61Appendix 2.5: Illustration of a Consolidated Balance Sheet (Statement of Financial Position) for Volkswagen 2009 62Appendix 2.6: Illustration of a Consolidated Cash Flow Statement (Statement of Cash Flows) for Volkswagen 2009 643 Main Financial Statements: The Income Statement (Profit and Loss Account) 66Introduction 67Context 67Definitions 69Layout 71Main Components 72Profit 79Listed Companies 82Capital and Revenue Expenditure 82Limitations 83Interpretation 83Conclusion 83Discussion Questions 84Numerical Questions 844 Main Financial Statements: The Statement of Financial Position (Balance Sheet) 86Introduction 87Context 88Definitions 89Layout 90Main Components 91Limitations 103Interpretation 104Listed Companies 105Conclusion 105Discussion Questions 106Numerical Questions 107Appendix 4.1: Horizontal Format of Statement of Financial Position 1085 Preparing the Financial Statements 109Introduction 110Main Financial Statements 110Trial Balance to the Income Statement (Profit and Loss Account) and the Statement of Financial Position (Balance Sheet) 112Adjustments to Trial Balance 116Comprehensive Example 124Conclusion 128Discussion Questions 128Numerical Questions 1296 Partnerships and Limited Companies 141Introduction 142Context 143Partnerships 144Limited Companies 150Distinctive Accounting Features of Limited Companies 154Accounting Treatment for Limited Companies 163Limited Company Example: Stevens, Turner Ltd 165Limited Companies: Published Accounts 170Conclusion 175Discussion Questions 176Numerical Questions 177Appendix 6.1: Example of an Income Statement (Profit and Loss Account) Using UK GAAP (Manchester United Ltd) 187Appendix 6.2: Example of a Statement of Financial Position (Balance Sheet) Using UK GAAP (Manchester United Ltd) 1887 Main Financial Statements: The Statement of Cash Flows 190Introduction 191Importance of Cash 192Context 194Cash and the Bank Account 194Relationship between Cash and Profi t 198Preparation of Statement of Cash Flows 200Conclusion 214Discussion Questions 214Numerical Questions 215Appendix 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 222Appendix 7.2: Preparation of a Sole Trader’s Cash Flow Statement Using the Direct Method Using UK Format 223Appendix 7.3: Preparation of the Cash Flow Statement of Any Company Ltd Using the Indirect Method Using UK GAAP 224Appendix 7.4: Example of Statement of Cash Flows (Cash Flow Statement) Using UK GAAP (Manchester United Ltd) 2278 Interpretation of Accounts 229Introduction 230Context 230Overview 231Importance of Ratios 233Closer Look at Main Ratios 234Worked Example 246Report Format 254Holistic View of Ratios 256Performance Indicators 257Limitations 258Conclusion 259Discussion Questions 260Numerical Questions 261Appendix 8.1: John Brown Plc 270Appendix 8.2: The Cash Flow Ratio Using UK GAAP 272Section B: Financial Accounting: The Context 2739 Regulatory and Conceptual Frameworks 275Introduction 276Traditional Corporate Model: Directors, Auditors and Shareholders 277Regulatory Framework 282Regulatory Framework in the UK 288Corporate Governance 293Conceptual Framework 298Conclusion 306Selected Reading 306Discussion Questions 30810 Measurement Systems 309Introduction 310Overview 310Measurement Systems 313Deficiencies of Historical Cost Accounting 315Illustrative Example of Different Measurement Systems 315Real Life 318Conclusion 319Selected Reading 319Discussion Questions 32011 The Annual Report 321Introduction 322Definition 322Context 323Multiple Roles 324Main Contents of the Annual Report 329Presentation 348Group Accounts 350Impression Management 352Conclusion 355Selected Reading 356Discussion Questions 357Section C: Management Accounting 35912 Introduction to Management Accounting and Finance 361Introduction 362Context 363Relationship with Financial Accounting 364Relationship between Management Accounting and Finance 366Overview 366Cost Minimisation and Revenue Maximisation 374Use of Computers and Impact of Digital Technology 375Art not a Science 376Changing Nature of Management Accounting 377Conclusion 377Selected Reading 377Discussion Questions 37913 Costing 380Introduction 381Importance of Cost Accounting 382Types of Cost 383Traditional Costing 387Activity-Based Costing 393Costing for Inventory Valuation 397Different Costing Methods for Different Industries 401Target Costing 405Cost-Cutting 405Conclusion 406Discussion Questions 407Numerical Questions 40714 Planning, Control and Performance: Budgeting 413Introduction 414Management Accounting Control Systems 414Nature of Budgeting 415Cash Budget 419Other Budgets 420Manufacturing Budgets 423Comprehensive Budgeting Example 426Behavioural Aspects of Budgeting 431Responsibility Accounting 435Conclusion 437Discussion Questions 437Numerical Questions 43815 Planning, Control and Performance: Standard Costing 443Introduction 444Nature of Standard Costing 445Standard Cost Variances 446Interpretation of Variances 455Conclusion 456Discussion Questions 457Numerical Questions 45816 Short-Term Decision Making 462Introduction 463Decision Making 463Contribution Analysis 465Decisions, Decisions 469Throughput Accounting 475Break-Even Analysis 477Contribution Graph 481Conclusion 483Discussion Questions 484Numerical Questions 484Section D: Business Finance 48917 Long-Term Decision Making: Capital Investment Appraisal 491Introduction 492Nature of Capital Investment 492Capital Investment Appraisal Techniques 496Payback Period 498Accounting Rate of Return 500Net Present Value 504Profitability Index 507Internal Rate of Return (IRR) 507Other Factors 512Conclusion 512Discussion Questions 513Numerical Questions 514Appendix 17.1: Present Value of £1 at Compound Interest Rate (1 + r) 51718 The Sources of Finance 518Introduction 519Nature of Sources of Finance 519Long-Term Financing 521Structure of the Business 534Cost of Capital 534Conclusion 537Discussion Questions 538Numerical Questions 53919 The Management of Working Capital 540Introduction 541Working Capital 541Short-Term Financing 544Conclusion 556Discussion Questions 556Numerical Questions 557Glossary of Key Accounting and Finance Terms 559Appendix: Answers 591Index 645