Accounting

Accounting 3e provides a very accessible and easy-to-follow introduction to accounting. It is intended as a core textbook for students studying accounting for the first time: either those following an undergraduate degree in a business school, or non-business studies students studying an accounting course. This includes students on both accounting and non-accounting degrees and also MBA students.

Designed to be both engaging and accessible to the student, Accounting 3e features:

• A lively presentational style integrating cartoons and soundbites
• 'Company Camera' boxes presenting financial data from a wide variety of international companies, such as Heineken, Nokia and Volkswagen.
• 'Real Life Nuggets' offering contemporary examples from the business press that give the body of the text a real-life resonance.
• End of chapter questions of escalating difficulty, together with accompanying answers, enabling the student to develop their understanding of the key concepts discussed in the text.
• A rich supporting website including solutions, extra question material and powerpoint slides for lecturers, multiple choice quizzes and an online glossary for students.

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 xv

About the Book xvii

Acknowledgements xxiii

1 INTRODUCTION TO ACCOUNTING 1

Introduction 2

Nature of Accounting 2

Importance of Accounting 4

Financial Accounting and Management Accounting 5

Users of Accounts 6

Accounting Context 8

Types of Accountancy 12

Types of Accountant 17

Limitations of Accounting 20

Conclusion 20

Discussion Questions 22

SECTION A: FINANCIAL ACCOUNTING: THE TECHNIQUES 23

2 THE ACCOUNTING BACKGROUND 25

Introduction 26

Financial Accounting 26

Language of Accounting 28

Student Example 36

Why Is Financial Accounting Important? 40

Accounting Principles 40

Accounting Conventions 41

Conclusion 43

Discussion Questions 44

Numerical Questions 45

Appendix 2.1: Illustration of a Consolidated Income Statement for Marks & Spencer plc 2010 46

Appendix 2.2: Illustration of a Consolidated Statement of Financial Position for Marks and Spencer plc 2010 48

Appendix 2.3: Illustration of a Consolidated Statement of Cash Flows for Marks and Spencer 2010 50

Appendix 2.4: Illustration of a Consolidated Income Statement for Volkswagen 2009 52

Appendix 2.5: Illustration of a Consolidated Balance Sheet (Statement of Financial Position) for Volkswagen 2009 53

Appendix 2.6: Illustration of a Consolidated Cash Flow Statement (Statement of Cash Flows) for Volkswagen 2009 55

3 RECORDING: DOUBLE-ENTRY BOOKKEEPING 57

Introduction 58

The Accounting Equation 59

Worked Example 64

Computers 76

Conclusion 76

Discussion Questions 77

Numerical Questions 77

4 MAIN FINANCIAL STATEMENTS: THE INCOME STATEMENT (PROFIT AND LOSS ACCOUNT) 83

Introduction 84

Context 84

Defi nitions 86

Layout 88

Main Components 89

Profi t 97

Listed Companies 100

Capital and Revenue Expenditure 100

Limitations 101

Interpretation 101

Conclusion 101

Discussion Questions 102

Numerical Questions 102

5 MAIN FINANCIAL STATEMENTS: THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 104

Introduction 105

Context 106

Definitions 107

Layout 108

Main Components 110

Limitations 121

Interpretation 122

Listed Companies 123

Conclusion 123

Discussion Questions 124

Numerical Questions 125

Appendix 5.1: Horizontal Format of Statement of Financial Position 126

6 PREPARING THE FINANCIAL STATEMENTS 127

Introduction 128

Main Financial Statements 128

Trial Balance to the Income Statement (Profi t and Loss Account) and the Statement of Financial Position (Balance Sheet) 130

Adjustments to Trial Balance 134

Comprehensive Example 142

Conclusion 146

Discussion Questions 146

Numerical Questions 147

7 PARTNERSHIPS AND LIMITED COMPANIES 159

Introduction 160

Context 161

Partnerships 162

Limited Companies 168

Distinctive Accounting Features of Limited Companies 172

Accounting Treatment For Limited Companies 181

Limited Company Example: Stevens, Turner Ltd 183

Limited Companies: Published Accounts 188

Conclusion 193

Discussion Questions 194

Numerical Questions 195

Appendix 7.1: Example of an Income Statement (Profit and Loss Account) using UK GAAP (Manchester United Ltd) 205

Appendix 7.2: Example of a Statement of Financial Position (Balance Sheet) using UK GAAP (Manchester United Ltd) 206

8 MAIN FINANCIAL STATEMENT: THE STATEMENT OF CASH FLOWS 208

Introduction 209

Importance of Cash 210

Context 212

Cash and the Bank Account 212

Relationship between Cash and Profi t 216

Preparation of Statement of Cash Flows 218

Conclusion 232

Discussion Questions 232

Numerical Questions 233

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 240

Appendix 8.2: Preparation of a Sole Trader’s Cash Flow Statement Using the Direct Method Using UK Format 241

Appendix 8.3: Preparation of the Cash Flow Statement of Any Company Ltd using the Indirect Method Using UK GAAP 242

Appendix 8.4: Example of Statement of Cash Flow (Cash Flow Statement) Using UK GAAP (Manchester United Ltd) 245

9 INTERPRETATION OF ACCOUNTS 247

Introduction 248

Context 248

Overview 249

Importance of Ratios 251

Closer Look at Main Ratios 252

Worked Example 264

Report Format 272

Holistic View of Ratios 274

Performance Indicators 275

Limitations 276

Conclusion 277

Discussion Questions 278

Numerical Questions 279

Appendix 9.1: John Brown Plc 288

Appendix 9.2: The Cash Flows Ratio using UK GAAP 290

SECTION B: FINANCIAL ACCOUNTING: THE CONTEXT 291

10 REGULATORY AND CONCEPTUAL FRAMEWORKS 293

Introduction 294

Traditional Corporate Model: Directors, Auditors and Shareholders 295

Regulatory Framework 300

Regulatory Framework in the UK 302

Corporate Governance 307

Conceptual Framework 311

Conclusion 319

Selected Reading 320

Discussion Questions 321

11 MEASUREMENT SYSTEMS 322

Introduction 323

Overview 323

Measurement Systems 326

Deficiencies of Historical Cost Accounting 328

Illustrative Example of Different Measurement Systems 328

Real Life 331

Conclusion 332

Selected Reading 332

Discussion Questions 333

12 THE ANNUAL REPORT 334

Introduction 335

Definition 335

Context 336

Multiple Roles 337

Main Contents of the Annual Report 342

Presentation 359

Group Accounts 361

Impression Management 365

Conclusion 368

Selected Reading 369

Discussion Questions 370

13 CREATIVE ACCOUNTING 371

Introduction 372

Defi nition 374

Managerial Motivation 376

Methods of Creative Accounting 378

Example 385

Real Life 385

Case Studies 388

Creative Presentation 392

Controlling Creative Accounting 394

Conclusion 394

Selected Reading 395

Discussion Questions 396

14 INTERNATIONAL ACCOUNTING 398

Introduction 399

Context 399

Divergent Forces 401

Classification 407

Country Snapshots 407

Convergent Forces 414

Conclusion 420

Selected Reading 420

Discussion Questions 421

Appendix 14.1: List of International Standards 422

SECTION C: MANAGEMENT ACCOUNTING 425

15 INTRODUCTION TO MANAGEMENT ACCOUNTING 427

Introduction 428

Context 429

Relationship with Financial Accounting 430

Overview 432

Cost Minimisation and Revenue Maximisation 439

Use of Computers and Impact of Digital Technology 441

Art not a Science 442

Changing Nature of Management Accounting 442

Conclusion 442

Selected Reading 443

Discussion Questions 444

16 COSTING 445

Introduction 446

Importance of Cost Accounting 447

Types of Cost 448

Traditional Costing 452

Activity-Based Costing 458

Costing for Inventory Valuation 462

Different Costing Methods for Different Industries 466

Target Costing 470

Cost-Cutting 470

Conclusion 471

Discussion Questions 472

Numerical Questions 472

17 PLANNING, CONTROL AND PERFORMANCE: BUDGETING 478

Introduction 479

Management Accounting Control Systems 479

Nature of Budgeting 480

Cash Budget 484

Other Budgets 485

Manufacturing Budgets 488

Comprehensive Budgeting Example 491

Behavioural Aspects of Budgeting 496

Responsibility Accounting 500

Conclusion 502

Discussion Questions 502

Numerical Questions 503

18 PLANNING, CONTROL AND PERFORMANCE: STANDARD COSTING 508

Introduction 509

Nature of Standard Costing 510

Standard Cost Variances 511

Interpretation of Variances 520

Conclusion 521

Discussion Questions 522

Numerical Questions 523

19 SHORT-TERM DECISION MAKING 527

Introduction 528

Decision Making 528

Contribution Analysis 530

Decisions, Decisions 534

Throughput Accounting 540

Break-Even Analysis 542

Contribution Graph 546

Conclusion 548

Discussion Questions 549

Numerical Questions 549

20 STRATEGIC MANAGEMENT ACCOUNTING 554

Introduction 555

Nature of Strategic Management Accounting 557

Assessment of Current Position of the Business 559

Appraisal of Current Position of the Business 568

Strategic Choice of Future Direction 573

Conclusion 576

Selected Reading 576

Discussion Questions 577

Numerical Questions 578

21 LONG-TERM DECISION MAKING: CAPITAL INVESTMENT APPRAISAL 581

Introduction 582

Nature of Capital Investment 582

Capital Investment Appraisal Techniques 586

Payback Period 588

Accounting Rate of Return 590

Net Present Value 592

Profi tability Index 595

Internal Rate of Return (IRR) 595

Other Factors 600

Conclusion 600

Discussion Questions 601

Numerical Questions 602

Appendix 21.1: Present Value of £1 at Compound Interest Rate (1 r) 605

22 THE MANAGEMENT OF WORKING CAPITAL AND SOURCES OF FINANCE 606

Introduction 607

Nature of Sources of Finance 607

Short-Term Financing 608

Long-Term Financing 618

Cost of Capital 623

Conclusion 626

Discussion Questions 627

Numerical Questions 628

Glossary of Key Accounting Terms 631

Appendix: Answers 663

Index 723

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