FINANCIAL ACCOUNTING Second Edition Michael Jones University of Bristol WlLEY
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 18 18 20 SECTION A: FINANCIAL ACCOUNTING: THE TECHNIQUES 21 2 THE ACCOUNTING BACKGROUND 23 24 Financial Accounting 24 Language of Accounting 26 Student Example 34 Why Is Financial Accounting Important? 38 Accounting Principles 38 Accounting Conventions 39 41 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
viii CONTENTS 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 56 The Accounting Equation 57 Worked Example 62 Day Books and Ledgers 74 Computers 78 79 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 90 Context 90 Definitions 92 Layout 93 Main Components 94 Profit 103 Listed Companies 106 Capital and Revenue Expenditure 106 Limitations 107 Interpretation 107 107 108 Numerical Questions 108 5 MAIN FINANCIAL STATEMENTS: THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 110 111 Context 112 Definitions 113 Layout 114 Main Components 116
CONTENTS ix Limitations 129 Interpretation 131 Listed Companies 131 132 132 Numerical Questions 133 Appendix 5.1: Horizontal Format of Statement of Financial Position 134 6 PREPARING THE FINANCIAL STATEMENTS 135 136 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 154 158 158 Numerical Questions 159 7 PARTNERSHIPS AND LIMITED COMPANIES 172 173 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 201 206 207 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 221 222 Importance of Cash 223
x CONTENTS Context Cash and the Bank Account Relationship between Cash and Profit Preparation of Statement of Cash Flows Bank Reconciliation Statements Numerical Questions 225 225 229 231 245 246 247 248 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 262 263 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 291 292 293 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 310 Traditional Corporate Model: Directors, Auditors and Shareholders 311 309
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 316 318 323 328 335 336 337 338 339 339 342 344 344 347 348 348 349 350 351 351 352 353 358 375 377 381 384 385 386 387 388 390 392 394 401 401 404
xii CONTENTS Creative Presentation 408 Controlling Creative Accounting 410 410 Selected Reading 411 412 Numerical Questions 413 14 INTERNATIONAL ACCOUNTING 414 415 Context 415 Divergent Forces 417 Classification 423 Country Snapshots 423 Convergent Forces 430 437 Selected Reading 437 438 Appendix 14.1: List of International Standards 439 Glossary of Key Accounting Terms 441 Appendix: Answers 465 Index 511