Accounting

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

• About the Author xvAbout the Book xviiAcknowledgements xxiii1 INTRODUCTION TO ACCOUNTING 1Introduction 2Nature of Accounting 2Importance of Accounting 4Financial Accounting and Management Accounting 5Users of Accounts 6Accounting Context 8Types of Accountancy 12Types of Accountant 17Limitations of Accounting 20Conclusion 20Discussion Questions 22SECTION A: FINANCIAL ACCOUNTING: THE TECHNIQUES 232 THE ACCOUNTING BACKGROUND 25Introduction 26Financial Accounting 26Language of Accounting 28Student Example 36Why Is Financial Accounting Important? 40Accounting Principles 40Accounting Conventions 41Conclusion 43Discussion Questions 44Numerical Questions 45Appendix 2.1: Illustration of a Consolidated Income Statement for Marks & Spencer plc 2010 46Appendix 2.2: Illustration of a Consolidated Statement of Financial Position for Marks and Spencer plc 2010 48Appendix 2.3: Illustration of a Consolidated Statement of Cash Flows for Marks and Spencer 2010 50Appendix 2.4: Illustration of a Consolidated Income Statement for Volkswagen 2009 52Appendix 2.5: Illustration of a Consolidated Balance Sheet (Statement of Financial Position) for Volkswagen 2009 53Appendix 2.6: Illustration of a Consolidated Cash Flow Statement (Statement of Cash Flows) for Volkswagen 2009 553 RECORDING: DOUBLE-ENTRY BOOKKEEPING 57Introduction 58The Accounting Equation 59Worked Example 64Computers 76Conclusion 76Discussion Questions 77Numerical Questions 774 MAIN FINANCIAL STATEMENTS: THE INCOME STATEMENT (PROFIT AND LOSS ACCOUNT) 83Introduction 84Context 84Defi nitions 86Layout 88Main Components 89Profi t 97Listed Companies 100Capital and Revenue Expenditure 100Limitations 101Interpretation 101Conclusion 101Discussion Questions 102Numerical Questions 1025 MAIN FINANCIAL STATEMENTS: THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 104Introduction 105Context 106Definitions 107Layout 108Main Components 110Limitations 121Interpretation 122Listed Companies 123Conclusion 123Discussion Questions 124Numerical Questions 125Appendix 5.1: Horizontal Format of Statement of Financial Position 1266 PREPARING THE FINANCIAL STATEMENTS 127Introduction 128Main Financial Statements 128Trial Balance to the Income Statement (Profi t and Loss Account) and the Statement of Financial Position (Balance Sheet) 130Adjustments to Trial Balance 134Comprehensive Example 142Conclusion 146Discussion Questions 146Numerical Questions 1477 PARTNERSHIPS AND LIMITED COMPANIES 159Introduction 160Context 161Partnerships 162Limited Companies 168Distinctive Accounting Features of Limited Companies 172Accounting Treatment For Limited Companies 181Limited Company Example: Stevens, Turner Ltd 183Limited Companies: Published Accounts 188Conclusion 193Discussion Questions 194Numerical Questions 195Appendix 7.1: Example of an Income Statement (Profit and Loss Account) using UK GAAP (Manchester United Ltd) 205Appendix 7.2: Example of a Statement of Financial Position (Balance Sheet) using UK GAAP (Manchester United Ltd) 2068 MAIN FINANCIAL STATEMENT: THE STATEMENT OF CASH FLOWS 208Introduction 209Importance of Cash 210Context 212Cash and the Bank Account 212Relationship between Cash and Profi t 216Preparation of Statement of Cash Flows 218Conclusion 232Discussion Questions 232Numerical Questions 233Appendix 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 240Appendix 8.2: Preparation of a Sole Trader’s Cash Flow Statement Using the Direct Method Using UK Format 241Appendix 8.3: Preparation of the Cash Flow Statement of Any Company Ltd using the Indirect Method Using UK GAAP 242Appendix 8.4: Example of Statement of Cash Flow (Cash Flow Statement) Using UK GAAP (Manchester United Ltd) 2459 INTERPRETATION OF ACCOUNTS 247Introduction 248Context 248Overview 249Importance of Ratios 251Closer Look at Main Ratios 252Worked Example 264Report Format 272Holistic View of Ratios 274Performance Indicators 275Limitations 276Conclusion 277Discussion Questions 278Numerical Questions 279Appendix 9.1: John Brown Plc 288Appendix 9.2: The Cash Flows Ratio using UK GAAP 290SECTION B: FINANCIAL ACCOUNTING: THE CONTEXT 29110 REGULATORY AND CONCEPTUAL FRAMEWORKS 293Introduction 294Traditional Corporate Model: Directors, Auditors and Shareholders 295Regulatory Framework 300Regulatory Framework in the UK 302Corporate Governance 307Conceptual Framework 311Conclusion 319Selected Reading 320Discussion Questions 32111 MEASUREMENT SYSTEMS 322Introduction 323Overview 323Measurement Systems 326Deficiencies of Historical Cost Accounting 328Illustrative Example of Different Measurement Systems 328Real Life 331Conclusion 332Selected Reading 332Discussion Questions 33312 THE ANNUAL REPORT 334Introduction 335Definition 335Context 336Multiple Roles 337Main Contents of the Annual Report 342Presentation 359Group Accounts 361Impression Management 365Conclusion 368Selected Reading 369Discussion Questions 37013 CREATIVE ACCOUNTING 371Introduction 372Defi nition 374Managerial Motivation 376Methods of Creative Accounting 378Example 385Real Life 385Case Studies 388Creative Presentation 392Controlling Creative Accounting 394Conclusion 394Selected Reading 395Discussion Questions 39614 INTERNATIONAL ACCOUNTING 398Introduction 399Context 399Divergent Forces 401Classification 407Country Snapshots 407Convergent Forces 414Conclusion 420Selected Reading 420Discussion Questions 421Appendix 14.1: List of International Standards 422SECTION C: MANAGEMENT ACCOUNTING 42515 INTRODUCTION TO MANAGEMENT ACCOUNTING 427Introduction 428Context 429Relationship with Financial Accounting 430Overview 432Cost Minimisation and Revenue Maximisation 439Use of Computers and Impact of Digital Technology 441Art not a Science 442Changing Nature of Management Accounting 442Conclusion 442Selected Reading 443Discussion Questions 44416 COSTING 445Introduction 446Importance of Cost Accounting 447Types of Cost 448Traditional Costing 452Activity-Based Costing 458Costing for Inventory Valuation 462Different Costing Methods for Different Industries 466Target Costing 470Cost-Cutting 470Conclusion 471Discussion Questions 472Numerical Questions 47217 PLANNING, CONTROL AND PERFORMANCE: BUDGETING 478Introduction 479Management Accounting Control Systems 479Nature of Budgeting 480Cash Budget 484Other Budgets 485Manufacturing Budgets 488Comprehensive Budgeting Example 491Behavioural Aspects of Budgeting 496Responsibility Accounting 500Conclusion 502Discussion Questions 502Numerical Questions 50318 PLANNING, CONTROL AND PERFORMANCE: STANDARD COSTING 508Introduction 509Nature of Standard Costing 510Standard Cost Variances 511Interpretation of Variances 520Conclusion 521Discussion Questions 522Numerical Questions 52319 SHORT-TERM DECISION MAKING 527Introduction 528Decision Making 528Contribution Analysis 530Decisions, Decisions 534Throughput Accounting 540Break-Even Analysis 542Contribution Graph 546Conclusion 548Discussion Questions 549Numerical Questions 54920 STRATEGIC MANAGEMENT ACCOUNTING 554Introduction 555Nature of Strategic Management Accounting 557Assessment of Current Position of the Business 559Appraisal of Current Position of the Business 568Strategic Choice of Future Direction 573Conclusion 576Selected Reading 576Discussion Questions 577Numerical Questions 57821 LONG-TERM DECISION MAKING: CAPITAL INVESTMENT APPRAISAL 581Introduction 582Nature of Capital Investment 582Capital Investment Appraisal Techniques 586Payback Period 588Accounting Rate of Return 590Net Present Value 592Profi tability Index 595Internal Rate of Return (IRR) 595Other Factors 600Conclusion 600Discussion Questions 601Numerical Questions 602Appendix 21.1: Present Value of £1 at Compound Interest Rate (1 r) 60522 THE MANAGEMENT OF WORKING CAPITAL AND SOURCES OF FINANCE 606Introduction 607Nature of Sources of Finance 607Short-Term Financing 608Long-Term Financing 618Cost of Capital 623Conclusion 626Discussion Questions 627Numerical Questions 628Glossary of Key Accounting Terms 631Appendix: Answers 663Index 723