CONTeNTS Introduction 1 01 Introduction to accounting 5 Objective 5 Learning outcomes 5 Key topics covered 5 Management issues 6 Introduction 6 Who and what is an accountant? 7 The two forms of accounting: financial accounting and management accounting 11 The financial accountant 12 Who are the users of financial accounting information? 15 The regulatory and conceptual framework 16 The qualitative characteristics of useful financial information 17 The regulatory framework 20 The standard-setting process 23 Types of business entity 23 The annual report and financial statements 26 The elements of financial statements 28 The articulation of the financial statements 37 A brief guide to some key problems and issues with financial statements 37 Comprehension questions 38 Exercises 39 Answers to comprehension questions 41 Answers to exercises 44 02 Accounting concepts and systems 50 Objective 50 Learning outcomes 50 Key topics covered 50 Management issues 51 Introduction 51 What is the purpose of the financial statements? 51 Statement of comprehensive income (income statement) 51 The statement of financial position (balance sheet) 54 The statement of cash flows 55
vi Contents Preparing a set of financial statements 57 The income statement: cost of sales working 62 Underlying concepts: measurement rules and fundamental accounting concepts 65 Three further property, plant and equipment issues 76 Recording accounting information 79 Comprehension questions 85 Exercises 85 Answers to comprehension questions 89 Answers to exercises 90 03 Financial analysis: Part I 96 Objective 96 Learning outcomes 96 Key topics covered 96 Management issues 97 Introduction 97 Financial statement analysis for investment purposes 98 Other users and their needs 99 Horizontal analysis and trend analysis 101 Vertical analysis 104 Ratio analysis 107 Key ratios 108 Weaknesses and limitations 145 Conclusion 146 Comprehension questions 147 Exercises 148 Answers to comprehension questions 151 Answers to exercises 154 04 Financial analysis: Part II 159 Objective 159 Learning outcomes 159 Key topics covered 159 Management issues 160 Introduction 160 The drive for information 161 Stakeholder management 162 Corporate social responsibility reporting 165 Earnings announcements, conference calls and investor presentations 166 Media relations: press releases and newspaper coverage 167 Social media and internet bulletins 170 Conclusion 171 Comprehension questions 171 Answers to comprehension questions 172
Contents vii 05 Business planning 175 Objective 175 Learning outcomes 175 Key topics covered 175 Management issues 175 Introduction 176 Why budget? 176 Business planning and control: the role of budgets 176 The budget-setting process 178 Practical budget-setting 180 The basic steps of preparing a budget 185 Budgeting in different types of organization 192 Limitations and problems with budgeting 194 Improving business planning and budgeting 198 Conclusion 201 Comprehension questions 201 Exercises 202 Answers to comprehension questions 203 Answers to exercises 205 06 Budgets and performance management 209 Objective 209 Learning outcomes 209 Key topics covered 209 Management issues 210 Introduction 210 Responsibility centres 211 The controllability principle 212 Profit-related performance measurement 212 Standard costing 216 Standard costing and variance analysis 218 Variance analysis 220 Performance management in investment centres 224 Which is the best measure: ROI or EVA? 226 Non-financial performance indicators 226 The balanced scorecard 227 Performance measurement in not-for-profit organizations 230 Value for money (VFM) as a public-sector objective 232 NPO performance measurement: an example 232 Behavioural aspects of performance management: gaming and creative accounting 235 External influences on performance 236 Performance management in modern business systems 237 Conclusion 239 Comprehension questions 239
viii Contents Exercises 239 Answers to comprehension questions 242 Answers to exercises 244 07 Cash flow 247 Objective 247 Learning outcomes 247 Key topics covered 247 Management issues 247 Introduction 248 Why does a business need cash? 248 What is cash flow? 248 How much cash does a business need? 250 Methods of establishing cash balances 254 Cash forecasting: the cash budget 259 Cash management: strategies for improving cash flow 263 Interpreting and analysing a cash-flow forecast 279 Conclusion 284 Comprehension questions 284 Exercises 285 Answers to comprehension questions 286 Answers to exercises 288 08 Pricing decisions 292 Objective 292 Learning outcomes 292 Key topics covered 292 Management issues 292 Introduction 293 The accountant s perspective costing and pricing 294 Absorption costing and full-cost-plus pricing 294 Problems with full-cost-plus pricing 298 Marginal-cost-plus pricing 299 Activity-based costing (ABC) pricing 300 Life-cycle costing and pricing 302 Conclusions: costing for pricing 304 The economist s perspective 304 The marketer s perspective 311 Combining the three perspectives: establishing an appropriate pricing strategy 314 Pricing strategies 315 Target pricing and target costing 320 Value engineering 321 Kaizen 321
Contents ix Conclusion 321 Comprehension questions 322 Exercises 322 Answers to comprehension questions 323 Answers to exercises 325 09 Investment decisions 327 Objective 327 Learning outcomes 327 Key topics covered 328 Management issues 328 Introduction 328 Investment appraisal the basics 329 Traditional evaluation techniques 330 Incorporating real-world complexities into investment appraisal 346 Investment appraisal within context 356 Taking a broader strategic view 361 Conclusion 362 Comprehension questions 363 Exercises 363 Answers to comprehension questions 366 Answers to exercises 368 10 Operational decisions 373 Objective 373 Learning outcomes 373 Key topics covered 373 Management issues 373 Introduction 374 Operational decision making 374 Cost volume profit analysis (CVP) 375 Relevant costing 388 Conclusion 400 Comprehension questions 401 Exercises 401 Answers to comprehension questions 403 Answers to exercises 405 Appendix A An introduction to double-entry bookkeeping 409 Appendix B International Accounting/Financial Reporting Standards (as at 02.04.2013) 429 Appendix C Example earnings announcements 432 Appendix D Discount tables 463 Appendix E Annuity factors 465 References 467 Index 471