The Meaning Of Company Accounts

The Meaning of Company Accounts first appeared in 1971 and quickly achieved recognition among managers, financial and non-financial alike. It is now seen as the standard text in the subject. It aims to help anyone using company accounts to gain a firm grasp of what they mean and how they relate to business activities.Throughout the book, ideas are developed in a logical, structured sequence, involving a high degree of reader participation, while at the same time being extremely flexible. The workbook approach, including examples to be worked through, enables readers to achieve understanding of topics they may previously have found difficult.This new eighth edition has been thoroughly revised to ensure that the text and appendices are current. It includes up-to-date references of both international and UK accounting standards.

Preface

viii

The Authors

x

Acknowledgements

x

SECTION 1: BACKGROUND AND STRUCTURE

Development of accounting

1

(1)

`A true and fair view'

2

(1)

Fundamental accounting concepts

2

(1)

The accounting task

3

(1)

Profit and loss account and balance sheet

4

(1)

Profit and loss account classification

5

(1)

Balance sheet classification

5

(1)

Cash flow statement

6

(1)

Disclosure in annual reports

7

(1)

Modern requirements

8

(1)

Auditors' report

9

(1)

Summary

10

(1)

Problems

10

(9)

SECTION 2: ANALYSING PERFORMANCE

Introduction

19

(1)

Overview

20

(1)

Return on investment

20

(2)

Pyramid of ratios

22

(2)

Ratio calculation

24

(1)

Performance ratios (profitability)

25

(2)

Performance ratios (asset turnover)

27

(2)

Standards for comparison

29

(1)

Comparing different companies' results

30

(3)

The need for caution

33

(1)

Different viewpoints

34

(1)

Summary

34

(1)

Problems

35

(6)

SECTION 3: FINANCIAL AND STOCK MARKET RATIOS

Introduction

41

(1)

Ratio calculation

42

(1)

Financial status ratios

43

(2)

Stock market ratios

45

(2)

Debt: short-term or long-term?

47

(1)

Summary

48

(1)

Problems

49

(6)

SECTION 4: RECORDING BUSINESS TRANSACTIONS

Basic transactions and company accounts

55

(1)

Impact of transactions on accounts

56

(5)

Balance sheet changes: columnar analysis

61

(5)

Books of account: cash and ledger accounts

66

(2)

The accounting records and double-entry bookkeeping

68

(3)

Information flows

71

(1)

Double-entry bookkeeping

72

(1)

Stages in preparing published accounts

73

(1)

Summary

74

(1)

Problems

75

(16)

SECTION 5: MEASURING PROFIT OR LOSS

Profit measurement

91

(2)

Accrual accounting

93

(8)

Measuring and recognizing sales revenue (turnover)

101

(2)

Treatment of expenditures

103

(1)

Measuring `revenue investments'

103

(2)

More complex aspects of measuring profit

105

(1)

Summary

106

(1)

Problems

107

(8)

SECTION 6: VALUING STOCK

Stock in accounts

115

(1)

Trading stock

116

(2)

Flow of goods assumptions

118

(1)

Manufacturing stock

119

(2)

Long-term contracts

121

(1)

Summary

122

(1)

Problems

123

(6)

SECTION 7: FIXED ASSETS AND DEPRECIATION

Capital expenditure

129

(1)

Presentation in published accounts

130

(1)

Depreciation

131

(1)

Useful life and residual value

132

(3)

Methods of depreciation

135

(2)

Varying depreciation charges

137

(2)

Leasing fixed assets

139

(1)

Revaluing fixed assets

140

(1)

Summary

140

(1)

Problems

141

(8)

SECTION 8: CAPITAL STRUCTURE

Capital employed

149

(1)

Ordinary shareholders' funds

150

(1)

Issues of ordinary shares

151

(2)

Loans

153

(1)

Gearing

154

(3)

Preference share capital

157

(1)

Summary

158

(1)

Problems

159

(12)

SECTION 9: GROUP ACCOUNTS

Investments in equity

171

(1)

Group accounts

172

(2)

Inter-company transactions

174

(1)

Acquisitions

175

(1)

Goodwill and intangible assets

176

(1)

Minority interests

177

(1)

Mergers

178

(3)

Non-consolidated subsidiaries

181

(1)

Associates

181

(1)

Joint ventures

182

(1)

Summary

182

(1)

Problems

183

(8)

SECTION 10: COMPANY TAXATION

Total taxation

191

(1)

UK corporation tax

191

(1)

Other taxes

192

(1)

Accounting for tax

192

(1)

Adjustments to accounting profits

193

(1)

Deferred tax

194

(2)

Summary

196

(1)

Problems

197

(6)

SECTION 11: CASH FLOW STATEMENTS

Why profit and cash may differ

203

(1)

Cash flow statements

204

(1)

Alternative formats

205

(1)

Interpreting Tesco's cash flows

206

(1)

Key aspects of cash flow

207

(1)

Deriving a cash flow statement

208

(2)

Summary

210

(1)

Problems

211

(12)

SECTION 12: INTERNATIONAL ACCOUNTING

Context

223

(1)

UK/US balance sheet formats

224

(1)

Differences in UK/US accounting practices

225

(1)

UK/US terminology

225

(1)

UK versus international accounting

226

(1)

Multinationals

227

(1)

Foreign currency translation

228

(2)

Summary

230

(1)

Problems

231

(8)

SECTION 13: INFLATION ACCOUNTING

Background

239

(1)

Problems with historical money cost accounts

240

(1)

Two contrasting methods of `inflation accounting'

240

(1)

Measuring the rate of inflation

241

(1)

Historical money cost accounting

241

(1)

Constant purchasing power (CPP) accounting

242

(2)

Current cost accounting (CCA)

244

(2)

Summary

246

(1)

Problems

247

(4)

SECTION 14: INTERPRETING COMPANY ACCOUNTS

Introduction

251

(1)

Accounting matters requiring special attention

252

(2)

Financial analysis and economic reality

254

(2)

Disclosure and accounting conventions

256

(1)

Comparisons over time and between companies

256

(1)

Analysis of Tesco's 2004 accounts

257

(15)

Summary

272

(35)

APPENDICES

1. Synonyms

273

(1)

2. Acronyms and abbreviations

274

(1)

3. UK and international accounting standards

275

(1)

4. UK Retail Prices Index

276

(1)

A. Post-war series

B. Annual averages 1960-2004

C. Annual rates of increase since 1960

5. Companies Act 1985. Schedule 4 (abbreviated)

277

(5)

General rules

Balance sheet formats

Profit and loss account formats

6. Bibliography

282

(1)

7. Analysis forms (to photocopy)

283

(8)

SOLUTIONS

To the second group of problems at the end of each section

291

(16)

Index

307

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The Meaning Of Company Accounts

Summary

Table of Contents

Supplemental Materials