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Accounting and Finance: An Introduction 8th edition

Accounting and Finance: An Introduction 8th edition

Eddie McLaney | Peter Atrill

(2015)

Additional Information

Book Details

Abstract

Accounting and Finance: An Introduction, now in its eighth edition, contains all the information you need to start your business career. With its use of practical techniques and real-world examples, this best-selling text teaches you the basics of understanding and using financial information. This comprehensive guide covers financial accounting, management accounting and financial management in a single text, and provides you with the tools to make informed, successful business decisions.

 

Key Features

 

  • Up-to-date coverage, including the latest IFRSs and corporate governance content plus a discussion of financing and dividend policies
  • Accessible step-by-step approach helps you master the subject one step at a time  
  • New real world examples provide opportunities to apply and develop techniques
  • Progress checks, activities and exercises reinforce learning
  • Focus on decision-making prepares you for careers in business

 

 

Eddie McLaney is Visiting Fellow in Accounting and Finance at Plymouth University.

 

Peter Atrill is a freelance academic and author working with leading institutions in the UK, Europe and SE Asia. He was previously Head of Accounting and law and Head of Business and Management at the Plymouth University Business School


Table of Contents

Section Title Page Action Price
Cover Cover
Title page iii
Copyright iv
Brief contents v
Contents vii
Preface xxi
How to use this book xxiii
Acknowledgements xxv
1 Introduction to accounting and finance 1
Introduction 1
Learning outcomes 1
What are accounting and finance? 2
Who are the users of accounting information? 2
The conflicting interests of users 4
How useful is accounting information? 5
Evidence on the usefulness of accounting 6
Providing a service 7
Further qualities 8
Weighing up the costs and benefits 9
Accounting as an information system 11
Management accounting and financial accounting 13
Scope of this book 15
The changing face of accounting 16
Why do I need to know anything about accounting and finance? 17
Accounting for business 18
What is the purpose of a business? 18
What kinds of business ownership exist? 19
Sole proprietorship 19
Partnership 20
Limited company 21
How are businesses organised? 22
How are businesses managed? 25
The quest for wealth creation 27
Meeting the needs of other stakeholders 27
Balancing risk and return 29
Reasons to be ethical 31
Not-for-profit organisations 32
Summary 33
Key terms 35
References 35
Further reading 35
Review questions 36
Part 1 Financial accounting 37
2 Measuring and reporting financial position 39
Introduction 39
Learning outcomes 39
The major financial statements - an overview 40
The statement of financial position 44
Assets 44
Claims 47
The effect of trading transactions 50
Classifying assets 52
Current assets 53
Non-current assets 53
Classifying claims 55
Current liabilities 55
Non-current liabilities 55
Statement layouts 56
Capturing a moment in time 58
The role of accounting conventions 58
Business entity convention 58
Historic cost convention 59
Prudence convention 60
Going concern convention 60
Dual aspect convention 61
Money measurement 62
Goodwill and brands 62
Human resources 63
Monetary stability 64
Valuing assets 64
Non-current assets 65
Non-current assets with finite lives 65
Non-current assets with indefinite useful lives 65
Fair values 66
The impairment of non-current assets 67
Inventories 69
Meeting user needs 70
Self-assessment question 2.1 71
Summary 71
Key terms 73
Further reading 73
Review questions 74
Exercises 74
3 Measuring and reporting financial performance 77
Introduction 77
Learning outcomes 77
The income statement 78
Different roles 79
Income statement layout 80
Gross profit 81
Operating profit 81
Profit for the period 81
Further issues 82
Cost of sales 82
Classifying expenses 83
Recognising revenue 85
Long-term contracts 86
Continuous and non-continuous services 88
Recognising expenses 88
When the expense for the period is more than the cash paid during the period 89
When the amount paid during the period is more than the full expense for the period 91
Profit, cash and accruals accounting 93
Depreciation 94
Calculating the depreciation expense 94
Depreciation method 96
Impairment and depreciation 100
Depreciation and asset replacement 101
Depreciation and judgement 101
Costing inventories 103
Inventories - some further issues 107
Trade receivables problems 108
Doubtful debts 110
Uses and usefulness of the income statement 112
Self-assessment question 3.1 113
Summary 114
Key terms 115
Further reading 116
Review questions 117
Exercises 117
4 Accounting for limited companies (1) 121
Introduction 121
Learning outcomes 121
The main features of limited companies 122
Legal nature 122
Perpetual life 122
Limited liability 124
Legal safeguards 125
Public and private companies 125
Taxation 127
The role of the Stock Exchange 128
Managing a company 128
Financing limited companies 129
Equity (the owners' claim) 129
The basic division 129
Share capital 130
Reserves 132
Bonus shares 134
Share capital jargon 136
Borrowings 137
Raising share capital 138
Withdrawing equity 139
The main financial statements 142
The income statement 143
The statement of financial position 145
Dividends 145
Accounting for groups of companies 146
Self-assessment question 4.1 150
Summary 151
Key terms 153
Further reading 153
Review questions 154
Exercises 154
5 Accounting for limited companies (2) 159
Introduction 159
Learning outcomes 159
The framework of annual financial reports 160
The directors' duty to account 161
The need for accounting rules 161
Sources of accounting rules 164
The growing authority of the IASB 164
Adopting IFRSs 165
Presenting the financial statements 167
Fair representation 167
Statement of financial position 168
Statement of comprehensive income 169
Statement of changes in equity 171
Statement of cash flows 172
Notes 173
General points 173
The need for a conceptual framework 173
The IASB framework 174
The auditors' role 175
Segmental financial reports 176
Segmental reporting rules 177
Segmental disclosure 178
Segmental reporting problems 179
Corporate governance 180
Strengthening the framework of rules 181
The UK Corporate Governance Code 182
Management commentary 184
Directors' report 184
Strategic report 185
Creative accounting 187
Creative accounting methods 188
Checking for creative accounting 193
Creative accounting and economic growth 194
Self-assessment question 5.1 195
Summary 195
Key terms 197
References 197
Further reading 198
Review questions 199
Exercises 199
6 Measuring and reporting cash flows 201
Introduction 201
Learning outcomes 201
The statement of cash flows 202
Why is cash so important? 203
The main features of the statement of cash flows 205
A definition of cash and cash equivalents 205
The relationship between the main financial statements 206
The layout of the statement of cash flows 207
Cash flows from operating activities 207
Cash flows from investing activities 208
Cash flows from financing activities 208
Net increase or decrease in cash and cash equivalents 209
The normal direction of cash flows 209
Preparing the statement of cash flows 211
Deducing net cash flows from operating activities 211
Deducing the other areas of the statement of cash flows 216
Reconciliation of liabilities from financing activities 219
What does the statement of cash flows tell us? 219
Problems with IAS 7 222
Self-assessment question 6.1 222
Summary 224
Key terms 225
Reference 225
Further reading 225
Review questions 226
Exercises 226
7 Analysing and interpreting financial statements 233
Introduction 233
Learning outcomes 233
Financial ratios 234
Financial ratio classifications 234
The need for comparison 236
Past periods 236
Similar businesses 237
Planned performance 237
Calculating the ratios 237
A brief overview 240
Profitability 241
Return on ordinary shareholders' funds (ROSF) 241
Return on capital employed (ROCE) 242
Operating profit margin 244
Gross profit margin 245
Efficiency 247
Average inventories turnover period 247
Average settlement period for trade receivables 248
Average settlement period for trade payables 249
Sales revenue to capital employed ratio 251
Sales revenue per employee 251
Relationship between profitability and efficiency 253
Liquidity 254
Current ratio 255
Acid test ratio 255
Cash generated from operations to maturing obligations ratio 256
Financial gearing 257
Gearing ratio 260
Interest cover ratio 261
Investment ratios 262
Dividend payout ratio 262
Dividend yield ratio 263
Earnings per share 264
Cash generated from operations per share 266
Price/earnings (P/E) ratio 266
Financial ratios and the problem of overtrading 270
Trend analysis 272
Using ratios to predict financial failure 272
Using single ratios 273
Using combinations of ratios 274
Z-score models 276
Limitations of ratio analysis 278
Quality of financial statements 278
Inflation 279
The restricted view given by ratios 279
The basis for comparison 280
Statement of financial position ratios 280
Self-assessment question 7.1 281
Summary 282
Key terms 283
References 284
Further reading 284
Review questions 285
Exercises 285
Part 2 Management accounting 293
8 Making management decisions 295
Introduction 295
Learning outcomes 295
Cost-benefit analysis 296
What is meant by 'cost'? 297
Relevant costs: opportunity and outlay costs 299
Sunk costs and committed costs 304
Non-measurable costs and benefits 306
Risk 307
Sensitivity analysis 308
Self-assessment question 8.1 311
Summary 312
Key terms 313
Further reading 313
Review questions 314
Exercises 314
9 Cost-volume-profit analysis 319
Introduction 319
Learning outcomes 319
Cost behaviour 320
Fixed cost 320
Variable cost 322
Semi-fixed (semi-variable) cost 323
Analysing semi-fixed (semi-variable) costs 324
Finding the break-even point 325
Contribution 332
Contribution margin ratio 332
Margin of safety 333
Achieving a target profit 335
Operating gearing 336
Operating gearing and its effect on profit 337
Profit-volume charts 338
The economist's view of the break-even chart 339
Failing to break even 341
Weaknesses of break-even analysis 341
Using contribution to make decisions: marginal analysis 344
Pricing/assessing opportunities to enter contracts 345
The most efficient use of scarce resources 347
Make-or-buy decisions 349
Closing or continuation decisions 351
Self-assessment question 9.1 353
Summary 354
Key terms 355
Further reading 355
Review questions 356
Exercises 356
10 Full costing 361
Introduction 361
Learning outcomes 361
What is full costing? 362
Why do managers want to know the full cost? 362
Single-product businesses 364
Multi-product businesses 365
Direct and indirect cost 366
Job costing 367
Full (absorption) costing and the behaviour of cost 368
The problem of indirect cost 370
Overheads as service renderers 370
Job costing: a worked example 370
Selecting a basis for charging overheads 374
Segmenting the overheads 377
Dealing with overheads on a cost centre basis 377
Batch costing 387
Non-manufacturing overheads 388
Full (absorption) costing and estimation errors 389
Using full (absorption) cost information 391
Full cost (cost-plus) pricing 393
Price makers and price takers 393
Use of cost-plus information by price takers 394
Criticisms of full (absorption) costing 396
Full (absorption) costing versus variable costing 396
Which method is better? 398
Self-assessment question 10.1 400
Summary 401
Key terms 402
Reference 403
Further reading 403
Review questions 404
Exercises 404
11 Costing and performance evaluation in a competitive environment 408
Introduction 408
Learning outcomes 408
Cost determination in the changed business environment 409
Costing and pricing: the traditional way 409
Costing and pricing: the new environment 410
Cost management systems 410
The problem of overheads 411
Taking a closer look 411
Activity-based costing 412
Attributing overheads 413
Benefits of ABC 414
ABC versus the traditional approach 414
ABC and service industries 414
Criticisms of ABC 419
Other costing approaches in the modern environment 421
Total life-cycle costing 421
Total quality management 424
Costing quality procedures 426
Target costing 427
Kaizen costing 428
Value chain analysis 429
Benchmarking 431
Non-financial measures of performance 433
The balanced scorecard 434
Scorecard problems 440
Measuring shareholder value 440
The quest for shareholder value 441
How can shareholder value be created? 441
The need for new measures 442
Economic value added (EVA®) 443
Self-assessment question 11.1 448
Summary 450
Key terms 451
Reference 451
Further reading 451
Review questions 452
Exercises 452
12 Budgeting 457
Introduction 457
Learning outcomes 457
How budgets link with strategic plans and objectives 458
Time horizon of plans and budgets 460
How budgets help managers 461
Budgets and forecasts 463
Limiting factors 464
Periodic and continual budgets 464
How budgets link to one another 465
The budget-setting process 468
Using budgets in practice 471
Incremental and zero-base budgeting 473
Preparing budgets 476
The cash budget 476
Preparing other budgets 480
Activity-based budgeting 483
Non-financial measures in budgeting 485
Budgets and management behaviour 485
Who needs budgets? 485
Beyond conventional budgeting 487
Long live budgets! 489
Self-assessment question 12.1 492
Summary 493
Key terms 494
References 494
Further reading 494
Review questions 495
Exercises 495
13 Accounting for control 501
Introduction 501
Learning outcomes 501
Budgeting for control 502
Types of control 503
Variances from budget 505
Flexing the budget 506
Sales volume variance 507
Sales price variance 509
Materials variances 511
Labour variances 512
Fixed overhead variance 513
Reasons for adverse variances 518
Variance analysis in service industries 520
Non-operating profit variances 520
Investigating variances 520
Variance analysis in practice 523
Compensating variances 523
Standard quantities and costs 524
Setting standards 525
What kind of standards should be used? 525
Who sets the standards? 525
How is information gathered? 525
The learning-curve effect 526
Keeping standards relevant 527
Other uses for standard costing 528
Making budgetary control effective 528
Some problems . . . 529
The new business environment 530
Behavioural issues 532
The impact of management style 533
Failing to meet the budget 535
Budgets and innovation 536
Self-assessment question 13.1 537
Summary 537
Key terms 539
Reference 539
Further reading 539
Review questions 540
Exercises 540
Part 3 Financial management 545
14 Making capital investment decisions 547
Introduction 547
Learning outcomes 547
The nature of investment decisions 548
Investment appraisal methods 549
Accounting rate of return (ARR) 551
ARR and ROCE 552
Problems with ARR 553
Payback period (PP) 555
Problems with PP 557
Net present value (NPV) 559
Interest lost 560
Risk 560
Inflation 561
What will logical investors do? 562
Using present value tables 565
The discount rate and the cost of capital 566
Why NPV is better 567
NPV's wider application 568
Internal rate of return (IRR) 568
Problems with IRR 572
Some practical points 573
Investment appraisal in practice 577
Investment appraisal and strategic planning 580
Risk and investment 580
Managing investment projects 581
Stage 1: Determine investment funds available 582
Stage 2: Identify profitable project opportunities 583
Stage 3: Evaluate the proposed project 583
Stage 4: Approve the project 584
Stage 5: Monitor and control the project 584
Self-assessment question 14.1 586
Summary 587
Key terms 589
Reference 589
Further reading 589
Review questions 590
Exercises 590
15 Financing a business 596
Introduction 596
Learning outcomes 596
The main objective of financing policy 597
Sources of finance 597
Internal sources of finance 597
Internal sources of long-term finance 598
Retained earnings 598
Dividend policy 599
Internal sources of short-term finance 600
Tighter credit control 600
Reducing inventories levels 600
Delaying payment to trade payables 600
Some further points 601
External sources of finance 602
External sources of long-term finance 602
Ordinary shares 603
Preference shares 603
Borrowing 604
Forms of borrowing 608
Finance leases 612
Sale-and-leaseback arrangements 615
Hire purchase 616
Securitisation 617
External sources of short-term finance 619
Bank overdrafts 619
Debt factoring 619
Invoice discounting 621
Long-term versus short-term borrowing 623
Gearing and the financing decision 624
Raising long-term finance 628
Share issues 628
Rights issues 629
Offers for sale and public issues 632
Setting a share price 632
Private placings 633
Bonus issues 633
The role of the Stock Exchange 634
Advantages of a listing 634
Disadvantages of a listing 636
Going private 638
The Alternative Investment Market 638
Providing long-term finance for the small business 639
Venture capital 639
Business angels 641
Government assistance 641
Islamic finance 642
Self-assessment question 15.1 642
Summary 644
Key terms 646
References 646
Further reading 647
Review questions 648
Exercises 648
16 Managing working capital 653
Introduction 653
Learning outcomes 653
What is working capital? 654
Managing working capital 655
The scale of working capital 655
Managing inventories 658
Budgeting future demand 661
Financial ratios 661
Recording and reordering systems 661
Levels of control 663
Inventories management models 665
Managing trade receivables 669
Which customers should receive credit and how much should they be offered? 670
Length of credit period 672
Cash discounts 675
Debt factoring and invoice discounting 676
Credit insurance 676
Collection policies 676
Managing cash 680
Why hold cash? 680
How much cash should be held? 681
Controlling the cash balance 682
Cash budgets and managing cash 683
The operating cash cycle 683
Cash transmission 688
Bank overdrafts 689
Managing trade payables 690
Taking advantage of cash discounts 692
Controlling trade payables 693
Self-assessment question 16.1 695
Summary 696
Key terms 698
Further reading 699
Review questions 700
Exercises 700
Part 4 Supplementary information 707
Appendix A Recording financial transactions 709
Introduction 709
Learning outcomes 709
The basics of double-entry bookkeeping 710
Recording trading transactions 712
Balancing accounts and the trial balance 715
Preparing the financial statements (final accounts) 719
The ledger and its division 722
Summary 723
Key terms 724
Further reading 724
Exercises 725
Appendix B Glossary of key terms 728
Appendix C Solutions to self-assessment questions 745
Appendix D Solutions to review questions 766
Appendix E Solutions to selected exercises 781
Appendix F Present value table 830
Index 833