ACCOUNTING AND FINANCE

Transcription

1 ACCOUNTING AND FINANCE Michael Jones University of Bristol WILEY

2 Contents About the Author About the Book Acknowledgements xv xvii xxiii 1 INTRODUCTION TO ACCOUNTING AND FINANCE 1 Introduction 2 Nature of Accounting and Finance 2 Importance of Accounting and Finance 4 Financial Accounting and Management Accounting 5 Users of Accounts 7 Accounting Context 9 Types of Accountancy 13 Types of Accountant 18 Limitations of Accounting 21 Conclusion 21 Discussion Questions 23 SECTION A: FINANCIAL ACCOUNTING: THE TECHNIQUES 25 2 THE ACCOUNTING BACKGROUND 27 Introduction 28 Financial Accounting 28 Language of Accounting 30 The Process of Accounting 38 The Accounting Equation 38 Student Example 44 Why Is Financial Accounting Important? 48 Accounting Principles 49 Accounting Conventions 49 Conclusion 51 Discussion Questions 52 Numerical Questions 53 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

3 viii CONTENTS Appendix 2.3: Illustration of a Consolidated Statement of Cash Flows for Marks and Spencer plc 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 MAIN FINANCIAL STATEMENTS: THE INCOME STATEMENT (PROFIT AND LOSS ACCOUNT) 66 Introduction 67 Context 67 Definitions 69 Layout 71 Main Components 72 Profit 79 Listed Companies 82 Capital and Revenue Expenditure 82 Limitations 83 Interpretation 83 Conclusion 83 Discussion Questions 84 Numerical Questions 84 4 MAIN FINANCIAL STATEMENTS: THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 86 Introduction 87 Context 88 Definitions 89 Layout 90 Main Components 91 Limitations 103 Interpretation 104 Listed Companies 105 Conclusion 105 Discussion Questions 106 Numerical Questions 107 Appendix 4.1: Horizontal Format of Statement of Financial Position 108

4 CONTENTS ix 5 PREPARING THE FINANCIAL STATEMENTS 109 Introduction 110 Main Financial Statements 110 Trial Balance to the Income Statement (Profit and Loss Account) and the Statement of Financial Position (Balance Sheet) 112 Adjustments to Trial Balance 116 Comprehensive Example 124 Conclusion 128 Discussion Questions 128 Numerical Questions PARTNERSHIPS AND LIMITED COMPANIES 141 Introduction 142 Context 143 Partnerships 144 Limited Companies 150 Distinctive Accounting Features of Limited Companies 154 Accounting Treatment For Limited Companies 163 Limited Company Example: Stevens, Turner Ltd 165 Limited Companies: Published Accounts 170 Conclusion 175 Discussion Questions 176 Numerical Questions 177 Appendix 6.1: Example of an Income Statement (Profit and Loss Account) Using UK GAAP (Manchester United Ltd) 187 Appendix 6.2: Example of a Statement of Financial Position (Balance Sheet) Using UK GAAP (Manchester United Ltd) MAIN FINANCIAL STATEMENTS: THE STATEMENT OF CASH FLOWS 190 Introduction 191 Importance of Cash 192 Context 194 Cash and the Bank Account 194 Relationship between Cash and Profit 198 Preparation of Statement of Cash Flows 200 Conclusion 214 Discussion Questions 214 Numerical Questions 215

5 X CONTENTS Appendix 7.1: Main Headings for the Cash Flow Statement (Statement of Cash Flows) for Sole Traders, Partnerships and some Non-Listed Companies under UK GAAP 222 Appendix 7.2: Preparation of a Sole Trader's Cash Flow Statement Using the Direct Method Using UK Format 223 Appendix 7.3: Preparation of the Cash Flow Statement of Any Company Ltd Using the Indirect Method Using UK GAAP 224 Appendix 7.4: Example of Statement of Cash Flows (Cash Flow Statement) Using UK GAAP (Manchester United Ltd) INTERPRETATION OF ACCOUNTS 229 Introduction 230 Context 230 Overview 231 Importance of Ratios 233 Closer Look at Main Ratios 234 Worked Example 246 Report Format 254 Holistic View of Ratios 256 Performance Indicators 257 Limitations 258 Conclusion 259 Discussion Questions 260 Numerical Questions 261 Appendix 8.1: John Brown Plc 270 Appendix 8.2: The Cash Flow Ratio Using UK GAAP 272 SECTION B: FINANCIAL ACCOUNTING: THE CONTEXT REGULATORY AND CONCEPTUAL FRAMEWORKS 275 Introduction 276 Traditional Corporate Model: Directors, Auditors and Shareholders 277 Regulatory Framework 282 Regulatory Framework in the UK 288 Corporate Governance 293 Conceptual Framework 298 Conclusion 306 Selected Reading 306 Discussion Questions 308

6 CONTENTS xi 10 MEASUREMENT SYSTEMS 309 Introduction 310 Overview 310 Measurement Systems 313 Deficiencies of Historical Cost Accounting 315 Illustrative Example of Different Measurement Systems 315 Real Life 318 Conclusion 319 Selected Reading 319 Discussion Questions THE ANNUAL REPORT 321 Introduction 322 Definition 322 Context 323 Multiple Roles 324 Main Contents of the Annual Report 329 Presentation 348 Group Accounts 350 Impression Management 352 Conclusion 355 Selected Reading 356 Discussion Questions 357 SECTION C: MANAGEMENT ACCOUNTING INTRODUCTION TO MANAGEMENT ACCOUNTING AND FINANCE 361 Introduction 362 Context 363 Relationship with Financial Accounting 364 Relationship between Management Accounting and Finance 366 Overview 366 Cost Minimisation and Revenue Maximisation 374 Use of Computers and Impact of Digital Technology 375 Art not a Science 376 Changing Nature of Management Accounting 377 Conclusion 377 Selected Reading 377 Discussion Questions 379

7 xii CONTENTS 13 COSTING 380 Introduction 381 Importance of Cost Accounting 382 Types of Cost 383 Traditional Costing 387 Activity-Based Costing 393 Costing for Inventory Valuation 397 Different Costing Methods for Different Industries 401 Target Costing 405 Cost-Cutting 405 Conclusion 406 Discussion Questions 407 Numerical Questions PLANNING, CONTROL AND PERFORMANCE: BUDGETING 413 Introduction 414 Management Accounting Control Systems 414 Nature of Budgeting 415 Cash Budget 419 Other Budgets 420 Manufacturing Budgets 423 Comprehensive Budgeting Example 426 Behavioural Aspects of Budgeting 431 Responsibility Accounting 435 Conclusion 437 Discussion Questions 437 Numerical Questions PLANNING, CONTROL AND PERFORMANCE: STANDARD COSTING 443 Introduction 444 Nature of Standard Costing 445 Standard Cost Variances 446 Interpretation of Variances 455 Conclusion 456 Discussion Questions 457 Numerical Questions 458

8 CONTENTS xiii 16 SHORT-TERM DECISION MAKING 462 Introduction 463 Decision Making 463 Contribution Analysis 465 Decisions, Decisions 469 Throughput Accounting 475 Break-Even Analysis 477 Contribution Graph 481 Conclusion 483 Discussion Questions 484 Numerical Questions 484 SECTION D: BUSINESS FINANCE LONG-TERM DECISION MAKING: CAPITAL INVESTMENT APPRAISAL 491 Introduction 492 Nature of Capital Investment 492 Capital Investment Appraisal Techniques 496 Payback Period 498 Accounting Rate of Return 500 Net Present Value 504 Profitability Index 507 Internal Rate of Return (IRR) 507 Other Factors 512 Conclusion 512 Discussion Questions 513 Numerical Questions 514 Appendix 17.1: Present Value of 1 at Compound Interest Rate (1 + r) THE SOURCES OF FINANCE 518 Introduction 519 Nature of Sources of Finance 519 Long-Term Financing 521 Structure of the Business 534 Cost of Capital 534 Conclusion 537 Discussion Questions 538 Numerical Questions 539

9 xiv CONTENTS 19 THE MANAGEMENT OF WORKING CAPITAL 540 Introduction 541 Working Capital 541 Short-Term Financing 544 Conclusion 556 Discussion Questions 556 Numerical Questions 557 Glossary of Key Accounting and Finance Terms 559 Appendix: Answers 591 Index 645