FINANCIAL ACCOUNTING. Second Edition. Michael Jones. University of Bristol. WlLEY

Transcription

1 FINANCIAL ACCOUNTING Second Edition Michael Jones University of Bristol WlLEY

2 Contents About the Author About the Book Acknowledgements xiii xv xxi 1 INTRODUCTION TO ACCOUNTING 1 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 SECTION A: FINANCIAL ACCOUNTING: THE TECHNIQUES 21 2 THE ACCOUNTING BACKGROUND Financial Accounting 24 Language of Accounting 26 Student Example 34 Why Is Financial Accounting Important? 38 Accounting Principles 38 Accounting Conventions Numerical Questions 43 Appendix 2.1: Illustration of a Consolidated Income Statement for Marks & Spencer plc Appendix 2.2: Illustration of a Consolidated Statement of Financial Position for Marks and Spencer plc Appendix 2.3: Illustration of a Consolidated Statement of Cash Flows for Marks and Spencer plc

3 viii CONTENTS Appendix 2.4: Illustration of a Consolidated Income Statement for Volkswagen Appendix 2.5: Illustration of a Consolidated Balance Sheet (Statement of Financial Position) for Volkswagen Appendix 2.6: Illustration of a Consolidated Cash Flow Statement (Statement of Cash Flows) for Volkswagen RECORDING: DOUBLE-ENTRY BOOKKEEPING The Accounting Equation 57 Worked Example 62 Day Books and Ledgers 74 Computers Numerical Questions 80 Appendix 3.1: Complete Worked Example for Gavin Stevens 86 4 MAIN FINANCIAL STATEMENTS: THE INCOME STATEMENT (PROFIT AND LOSS ACCOUNT) Context 90 Definitions 92 Layout 93 Main Components 94 Profit 103 Listed Companies 106 Capital and Revenue Expenditure 106 Limitations 107 Interpretation Numerical Questions MAIN FINANCIAL STATEMENTS: THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) Context 112 Definitions 113 Layout 114 Main Components 116

4 CONTENTS ix Limitations 129 Interpretation 131 Listed Companies Numerical Questions 133 Appendix 5.1: Horizontal Format of Statement of Financial Position PREPARING THE FINANCIAL STATEMENTS Main Financial Statements 136 Trial Balance to the Income Statement (Profit and Loss Account) and the Statement of Financial Position (Balance Sheet) 138 Adjustments to Trial Balance 142 Comprehensive Example Numerical Questions PARTNERSHIPS AND LIMITED COMPANIES 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 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) MAIN FINANCIAL STATEMENT: THE STATEMENT OF CASH FLOWS Importance of Cash 223

5 x CONTENTS Context Cash and the Bank Account Relationship between Cash and Profit Preparation of Statement of Cash Flows Bank Reconciliation Statements Numerical Questions 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) INTERPRETATION OF ACCOUNTS 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 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 REGULATORY AND CONCEPTUAL FRAMEWORKS 310 Traditional Corporate Model: Directors, Auditors and Shareholders

6 CONTENTS xi Regulatory Framework Regulatory Framework in the UK Corporate Governance Conceptual Framework Selected Reading 11 MEASUREMENT SYSTEMS Overview Measurement Systems Deficiencies of Historical Cost Accounting Illustrative Example of Different Measurement Systems Real Life Selected Reading 12 THEANNUALREPORT Definition Context Multiple Roles Main Contents of the Annual Report Presentation Group Accounts Impression Management Selected Reading 13 CREATIVE ACCOUNTING Definition Managerial Motivation Methods of Creative Accounting Example Real Life Gase Studies

7 xii CONTENTS Creative Presentation 408 Controlling Creative Accounting Selected Reading Numerical Questions INTERNATIONAL ACCOUNTING Context 415 Divergent Forces 417 Classification 423 Country Snapshots 423 Convergent Forces Selected Reading Appendix 14.1: List of International Standards 439 Glossary of Key Accounting Terms 441 Appendix: Answers 465 Index 511