Description
Book SynopsisFinancialAccounting provides a very accessible and easy-to-follow introduction to the subject. It is intended as a core textbook for students studyingfinancial accounting for the first time: either those following an undergraduate degree in a business school, or non-business studies students studying afinancial accounting course. This includes students on both accounting and non-accounting degrees and also MBA students. It provides a self-contained, introductory, one semester course covering the major aspects offinancial accounting. The book is also designed so that students can progress to more advanced follow-up coursesso iswell suited as an introduction for mainstream accounting graduates or MBA students as a basic text. It should be particularly useful in reinforcing the fundamental theory and practice of introductory financial accounting.
Table of ContentsAbout the Author xiii
About the Book xv
Acknowledgements xxi
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 15
Limitations of Accounting 18
Conclusion 18
Discussion Questions 20
SECTION A: FINANCIAL ACCOUNTING: THE TECHNIQUES 21
2 THE ACCOUNTING BACKGROUND 23
Introduction 24
Financial Accounting 24
Language of Accounting 26
Student Example 34
Why Is Financial Accounting Important? 38
Accounting Principles 38
Accounting Conventions 39
Conclusion 41
Discussion Questions 42
Numerical Questions 43
Appendix 2.1: Illustration of a Consolidated Income Statement
for Marks & Spencer plc 2010 44 Appendix 2.2: Illustration of a Consolidated Statement of Financial
Position for Marks and Spencer plc 2010 46
Appendix 2.3: Illustration of a Consolidated Statement of Cash Flows for Marks and Spencer plc 2010 48
Appendix 2.4: Illustration of a Consolidated Income Statement for Volkswagen 2009 50
Appendix 2.5: Illustration of a Consolidated Balance Sheet (Statement of Financial Position) for Volkswagen 2009 51
Appendix 2.6: Illustration of a Consolidated Cash Flow
Statement (Statement of Cash Flows) for Volkswagen 2009 53
3 RECORDING: DOUBLE-ENTRY BOOKKEEPING 55
Introduction 56
The Accounting Equation 57
Worked Example 62
Day Books and Ledgers 74
Computers 78
Conclusion 79
Discussion Questions 79
Numerical Questions 80
Appendix 3.1: Complete Worked Example for Gavin Stevens 86
4 MAIN FINANCIAL STATEMENTS: THE INCOME STATEMENT (PROFIT AND LOSS ACCOUNT) 89
Introduction 90
Context 90
Definitions 92
Layout 93
Main Components 94
Profit 103
Listed Companies 106
Capital and Revenue Expenditure 106
Limitations 107
Interpretation 107
Conclusion 107
Discussion Questions 108
Numerical Questions 108
5 MAIN FINANCIAL STATEMENTS: THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 110
Introduction 111
Context 112
Definitions 113
Layout 114
Main Components 116
Limitations 129
Interpretation 131
Listed Companies 131
Conclusion 132
Discussion Questions 132
Numerical Questions 133
Appendix 5.1: Horizontal Format of Statement of Financial Position 134
6 PREPARING THE FINANCIAL STATEMENTS 135
Introduction 136
Main Financial Statements 136
Trial Balance to the Income Statement (Profi t and Loss Account) and the Statement of Financial Position (Balance Sheet) 138
Adjustments to Trial Balance 142
Comprehensive Example 154
Conclusion 158
Discussion Questions 158
Numerical Questions 159
7 PARTNERSHIPS AND LIMITED COMPANIES 172
Introduction 173
Context 174
Partnerships 175
Limited Companies 181
Distinctive Accounting Features of Limited Companies 185
Accounting Treatment For Limited Companies 194
Limited Company Example: Stevens, Turner Ltd 196
Limited Companies: Published Accounts 201
Conclusion 206
Discussion Questions 207
Numerical Questions 208
Appendix 7.1: Example of an Income Statement (Profit and Loss Account) using UK GAAP (Manchester United Ltd) 218
Appendix 7.2: Example of a Statement of Financial Position (Balance Sheet) using UK GAAP (Manchester United Ltd) 219
8 MAIN FINANCIAL STATEMENT: THE STATEMENT OF CASH FLOWS 221
Introduction 222
Importance of Cash 223
Context 225
Cash and the Bank Account 225
Relationship between Cash and Profit 229
Preparation of Statement of Cash Flows 231
Bank Reconciliation Statements 245
Conclusion 246
Discussion Questions 247
Numerical Questions 248
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
Appendix 8.2: Preparation of a Sole Trader’s Cash Flow Statement Using the Direct Method Using UK Format 256
Appendix 8.3: Preparation of the Cash Flow Statement of Any Company Ltd using the Indirect Method Using UK GAAP 257
Appendix 8.4: Example of Statement of Cash Flows (Cash Flow Statement) Using UK GAAP (Manchester United Ltd) 260
9 INTERPRETATION OF ACCOUNTS 262
Introduction 263
Context 263
Overview 264
Importance of Ratios 266
Closer Look at Main Ratios 267
Worked Example 279
Report Format 287
Holistic View of Ratios 289
Performance Indicators 290
Limitations 291
Conclusion 292
Discussion Questions 293
Numerical Questions 294
Appendix 9.1: John Brown Plc 303
Appendix 9.2: The Cash Flow Ratio using UK GAAP 305
SECTION B: FINANCIAL ACCOUNTING: THE CONTEXT 307
10 REGULATORY AND CONCEPTUAL FRAMEWORKS 309
Introduction 310
Traditional Corporate Model: Directors, Auditors and Shareholders 311
Regulatory Framework 316
Regulatory Framework in the UK 318
Corporate Governance 323
Conceptual Framework 328
Conclusion 335
Selected Reading 336
Discussion Questions 337
11 MEASUREMENT SYSTEMS 338
Introduction 339
Overview 339
Measurement Systems 342
Deficiencies of Historical Cost Accounting 344
Illustrative Example of Different Measurement Systems 344
Real Life 347
Conclusion 348
Selected Reading 348
Discussion Questions 349
12 THE ANNUAL REPORT 350
Introduction 351
Definition 351
Context 352
Multiple Roles 353
Main Contents of the Annual Report 358
Presentation 375
Group Accounts 377
Impression Management 381
Conclusion 384
Selected Reading 385
Discussion Questions 386
13 CREATIVE ACCOUNTING 387
Introduction 388
Definition 390
Managerial Motivation 392
Methods of Creative Accounting 394
Example 401
Real Life 401
Case Studies 404
Creative Presentation 408
Controlling Creative Accounting 410
Conclusion 410
Selected Reading 411
Discussion Questions 412
Numerical Questions 413
14 INTERNATIONAL ACCOUNTING 414
Introduction 415
Context 415
Divergent Forces 417
Classification 423
Country Snapshots 423
Convergent Forces 430
Conclusion 437
Selected Reading 437
Discussion Questions 438
Appendix 14.1: List of International Standards 439
Glossary of Key Accounting Terms 441
Appendix: Answers 465
Index 511
