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 |