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Accounting and Finance: An Introduction 9th edition

Accounting and Finance: An Introduction 9th edition

Eddie McLaney | Peter Atrill

(2018)

Additional Information

Book Details

Abstract

Accounting and Finance: An Introduction, now in its ninth 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.

 

New to this Edition

·    Latest revisions to the IASB’s Conceptual framework and to the UK Corporate Governance Code

·    Expanded coverage of relevant costs for decision making

·    More activities throughout the text to encourage student interaction and to develop critical thinking.

·    New real world examples to illustrate accounting concepts and techniques

·    Expanded coverage of finance for smaller businesses

  

 

Eddie McLaney was formerly Senior Lecturer in Accounting and Finance at Plymouth Universal Business School.

 

Peter Atrill is a freelance academic and author who has worked 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
Front Cover Front Cover
Half Title Page i
Title Page iii
Copyright Page iv
Brief Contents v
Contents vii
Preface xxii
How to use this book xxiv
Acknowledgements xxvi
Chapter 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 12
Management accounting and financial accounting 14
Scope of this book 16
The changing face of accounting 16
Why do I need to know anything about accounting and finance? 18
Accounting for business 19
What is the purpose of a business? 19
What kinds of business ownership exist? 20
Sole proprietorship 20
Partnership 21
Limited company 21
How are businesses organised? 23
How are businesses managed? 26
The quest for wealth creation 27
Meeting the needs of other stakeholders 28
Balancing risk and return 30
Reasons to be ethical 31
Not-for-profit organisations 32
Summary 34
Key terms 36
References 36
Further reading 36
Review questions 36
Part 1 Financial accounting 37
Chapter 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 48
The effect of trading transactions 51
Classifying assets 53
Current assets 54
Non-current assets 54
Classifying claims 56
Current liabilities 56
Non-current liabilities 56
Statement layouts 57
Capturing a moment in time 59
The role of accounting conventions 60
Business entity convention 60
Historic cost convention 60
Prudence convention 61
Going concern convention 62
Dual aspect convention 63
Money measurement 64
Goodwill and brands 64
Human resources 65
Monetary stability 66
Valuing assets 66
Non-current assets 67
Non-current assets with finite lives 67
Non-current assets with indefinite useful lives 68
Fair values 68
The impairment of non-current assets 70
Inventories 71
Meeting user needs 73
Self-assessment question 2.1 74
Summary 74
Key terms 76
Further reading 76
Review questions 77
Exercises 77
Chapter 3: Measuring and reporting financial performance 80
Introduction 80
Learning outcomes 80
The income statement 81
Different roles 82
Income statement layout 83
Gross profit 84
Operating profit 84
Profit for the period 84
Further issues 85
Cost of sales 85
Classifying expenses 86
Recognising revenue 88
Recognising expenses 90
When the expense for the period is more than the cash paid during the period 91
When the amount paid during the period is more than the full expense for the period 93
Profit, cash and accruals accounting 94
Depreciation 95
Calculating the depreciation expense 96
Depreciation method 97
Impairment and depreciation 103
Depreciation and asset replacement 103
Depreciation and judgement 104
Costing inventories 106
Inventories – some further issues 109
Trade receivables problems 111
Doubtful debts 112
Uses and usefulness of the income statement 115
Self-assessment question 3.1 115
Summary 116
Key terms 118
Further reading 118
Review questions 119
Exercises 119
Chapter 4: Accounting for limited companies (1) 123
Introduction 123
Learning outcomes 123
The main features of limited companies 124
Legal nature 124
Perpetual life 124
Limited liability 125
Legal safeguards 127
Public and private companies 127
Taxation 129
The role of the Stock Exchange 129
Managing a company 130
Financing limited companies 130
Equity (the owners’ claim) 130
The basic division 131
Share capital 132
Reserves 134
Bonus shares 136
Share capital jargon 138
Borrowings 138
Raising share capital 140
Withdrawing equity 140
The main financial statements 144
The income statement 145
The statement of financial position 146
Dividends 147
Accounting for groups of companies 148
Self-assessment question 4.1 152
Summary 153
Key terms 155
Further reading 155
Review questions 156
Exercises 156
Chapter 5: Accounting for limited companies (2) 161
Introduction 161
Learning outcomes 161
The framework of annual financial reports 162
The directors’ duty to account 163
The need for accounting rules 163
Sources of accounting rules 166
The growing authority of the IASB 166
Adopting IFRSs 167
Presenting the financial statements 169
Fair representation 169
Statement of financial position 170
Statement of comprehensive income 171
Statement of changes in equity 173
Statement of cash flows 174
Notes 175
General points 175
The need for a conceptual framework 175
The IASB framework 176
The auditors’ role 178
Segmental financial reports 178
Segmental reporting rules 179
Segmental disclosure 180
Segmental reporting problems 181
Corporate governance 183
Strengthening the framework of rules 184
The UK Corporate Governance Code 184
Management commentary 186
Directors’ report 187
Strategic report 188
Creative accounting 190
Creative accounting methods 190
Checking for creative accounting 196
Creative accounting and economic growth 197
Self-assessment question 5.1 197
Summary 198
Key terms 200
References 200
Further reading 200
Review questions 201
Exercises 201
Chapter 6: Measuring and reporting cash flows 203
Introduction 203
Learning outcomes 203
The statement of cash flows 204
Why is cash so important? 205
The main features of the statement of cash flows 206
A definition of cash and cash equivalents 207
The relationship between the main financial statements 208
The layout of the statement of cash flows 209
Cash flows from operating activities 209
Cash flows from investing activities 210
Cash flows from financing activities 210
Net increase or decrease in cash and cash equivalents 211
The normal direction of cash flows 211
Preparing the statement of cash flows 213
Deducing net cash flows from operating activities 213
Deducing the other areas of the statement of cash flows 218
Reconciliation of liabilities from financing activities 221
What does the statement of cash flows tell us? 222
Problems with IAS 7 225
Self-assessment question 6.1 225
Summary 227
Key terms 228
Reference 228
Further reading 228
Review questions 229
Exercises 229
Chapter 7: Analysing and interpreting financial statements 236
Introduction 236
Learning outcomes 236
Financial ratios 237
Financial ratio classifications 238
The need for comparison 239
Past periods 239
Similar businesses 240
Planned performance 240
Calculating the ratios 240
A brief overview 243
Profitability 244
Return on ordinary shareholders’ funds 244
Return on capital employed 245
Operating profit margin 247
Gross profit margin 248
Efficiency 250
Average inventories turnover period 250
Average settlement period for trade receivables 251
Average settlement period for trade payables 252
Sales revenue to capital employed 254
Sales revenue per employee 254
Relationship between profitability and efficiency 256
Liquidity 257
Current ratio 258
Acid test ratio 258
Cash generated from operations to maturing obligations ratio 259
Financial gearing 260
Gearing ratio 263
Interest cover ratio 264
Investment ratios 265
Dividend payout ratio 265
Dividend yield ratio 266
Earnings per share 266
Cash generated from operations per share 269
Price/earnings ratio 269
Financial ratios and the problem of overtrading 273
Trend analysis 275
Using ratios to predict financial failure 276
Using single ratios 276
Using combinations of ratios 278
Z-score models 279
Limitations of ratio analysis 281
Quality of financial statements 281
Inflation 282
The restricted view given by ratios 282
The basis for comparison 283
Statement of financial position ratios 283
Self-assessment question 7.1 284
Summary 285
Key terms 286
References 287
Further reading 287
Review questions 288
Exercises 288
Part 2 Management accounting 295
Chapter 8: Making management decisions 297
Introduction 297
Learning outcomes 297
Cost–benefit analysis 298
What is meant by ‘cost’? 299
Relevant costs: opportunity and outlay costs 300
Irrelevant costs: sunk costs and committed costs 303
Sunk cost fallacy 304
Determining the relevant cost of labour and materials 305
Labour 305
Materials 308
Non-measurable costs and benefits 311
Risk 312
Sensitivity analysis 313
Self-assessment question 8.1 316
Summary 317
Key terms 318
Further reading 318
Review questions 318
Exercises 319
Chapter 9: Cost–volume–profit analysis 324
Introduction 324
Learning outcomes 324
Cost behaviour 325
Fixed cost 325
Variable cost 327
Semi-fixed (semi-variable) cost 328
Analysing semi-fixed (semi-variable) costs 329
Finding the break-even point 330
Contribution 336
Contribution margin ratio 336
Margin of safety 337
Achieving a target profit 339
Operating gearing and its effect on profit 340
Profit–volume charts 342
The economist’s view of the break-even chart 343
The problem of breaking even 345
Weaknesses of break-even analysis 346
Using contribution to make decisions: marginal analysis 349
Pricing/assessing opportunities to enter contracts 350
The most efficient use of scarce resources 352
Make-or-buy decisions 354
Closing or continuation decisions 357
Self-assessment question 9.1 359
Summary 359
Key terms 361
Further reading 361
Review questions 362
Exercises 362
Chapter 10: Full costing 367
Introduction 367
Learning outcomes 367
What is full costing? 368
Why do managers want to know the full cost? 368
Single-product businesses 370
Process-costing problems 371
Multi-product businesses 371
Direct and indirect cost 372
Job costing 373
Full costing and cost behaviour 374
The problem of indirect cost 376
Overheads as service renderers 376
Job costing: a worked example 376
Selecting a basis for charging overheads 381
Segmenting the overheads 384
Dealing with overheads on a cost centre basis 385
Batch costing 396
Non-manufacturing overheads 397
Full (absorption) costing and estimation errors 399
Full cost (cost-plus) pricing 400
Price makers and price takers 401
Use of cost-plus information by price takers 402
Full (absorption) costing and relevant costs 403
Full (absorption) costing versus variable costing 404
Which method is better? 407
Self-assessment question 10.1 408
Summary 409
Key terms 411
Reference 411
Further reading 411
Review questions 412
Exercises 412
Chapter 11: Costing and performance evaluation in a competitive environment 416
Introduction 416
Learning outcomes 417
Cost determination in the changed business environment 417
Costing and pricing: the traditional way 417
Costing and pricing: the new environment 418
Cost management systems 419
The problem of overheads 419
Taking a closer look 420
Activity-based costing 420
Assigning overheads 421
Benefits of ABC 422
ABC and the traditional approach compared 422
ABC and service industries 424
Benefits and costs of ABC 428
ABC in practice 428
Managing costs over the product life cycle 430
Total life-cycle costing 430
Target costing 433
Kaizen costing 435
Other approaches to managing costs in a modern environment 437
Value chain analysis 437
Benchmarking 438
Total quality management 440
Managing quality costs 442
An alternative view 444
Non-financial measures of performance 445
The balanced scorecard 446
Scorecard problems 452
Measuring shareholder value 453
The quest for shareholder value 453
How can shareholder value be created? 454
The need for new measures 455
Economic value added (EVA®) 456
Self-assessment question 11.1 462
Summary 463
Key terms 465
References 465
Further reading 465
Review questions 466
Exercises 466
Chapter 12: Budgeting 471
Introduction 471
Learning outcomes 471
How budgets link with strategic plans and objectives 472
Time horizon of plans and budgets 474
Budgets and forecasts 475
Periodic and continual budgets 475
Limiting factors 477
How budgets link to one another 477
How budgets help managers 480
The budget-setting process 482
Using budgets in practice 486
Incremental and zero-base budgeting 487
Preparing budgets 490
The cash budget 490
Preparing other budgets 494
Activity-based budgeting 497
Non-financial measures in budgeting 499
Budgets and management behaviour 500
Who needs budgets? 500
Beyond conventional budgeting 502
Long live budgets! 504
Self-assessment question 12.1 507
Summary 508
Key terms 510
References 510
Further reading 510
Review questions 511
Exercises 511
Chapter 13: Accounting for control 517
Introduction 517
Learning outcomes 517
Budgeting for control 518
Types of control 519
Variances from budget 521
Flexing the budget 522
Sales volume variance 523
Sales price variance 526
Materials variances 527
Labour variances 528
Fixed overhead variance 529
Reasons for adverse variances 535
Variance analysis in service industries 536
Non-operating profit variances 536
Investigating variances 537
Variance analysis in practice 539
Compensating variances 540
Standard quantities and costs 541
Setting standards 542
Who sets the standards? 542
How is information gathered? 542
What kind of standards should be used? 543
The learning-curve effect 543
Other uses for standard costing 545
Some problems . . . 545
The new business environment 547
Making budgetary control effective 549
Behavioural issues 550
The impact of management style 551
Failing to meet the budget 552
Budgets and innovation 553
Self-assessment question 13.1 554
Summary 555
Key terms 556
Reference 556
Further reading 557
Review questions 557
Exercises 557
Part 3 Financial management 561
Chapter 14: Making capital investment decisions 563
Introduction 563
Learning outcomes 563
The nature of investment decisions 564
Investment appraisal methods 565
Accounting rate of return (ARR) 567
ARR and ROCE 568
Problems with ARR 569
Payback period (PP) 571
Problems with PP 573
Net present value (NPV) 575
Why does time matter? 576
Interest lost 576
Risk 577
Inflation 577
What should managers do? 578
Dealing with the time value of money 578
Calculating the net present value 580
Using present value tables 581
The discount rate and the cost of capital 583
Why NPV is better 584
NPV’s wider application 584
Internal rate of return (IRR) 585
Problems with IRR 589
Some practical points 590
Investment appraisal in practice 594
Investment appraisal and strategic planning 596
Risk and investment 597
Managing investment projects 599
Stage 1: Determine investment funds available 599
Stage 2: Identify profitable project opportunities 600
Stage 3: Evaluate the proposed project 600
Stage 4: Approve the project 601
Stage 5: Monitor and control the project 601
Self-assessment question 14.1 604
Summary 605
Key terms 607
Reference 607
Further reading 607
Review questions 607
Exercises 608
Chapter 15: Financing a business 614
Introduction 614
Learning outcomes 614
The main objective of financing policy 615
Sources of finance 615
Internal sources of finance 615
Internal sources of long-term finance 616
Retained earnings 616
Dividend policy 617
Internal sources of short-term finance 618
Tighter credit control 618
Reducing inventories levels 618
Delaying payment to trade payables 618
Some further points 620
External sources of finance 620
External sources of long-term finance 620
Ordinary shares 621
Preference shares 621
Borrowing 622
Finance leases 630
Sale-and-leaseback arrangements 632
Hire purchase 633
Securitisation 635
External sources of short-term finance 636
Bank overdrafts 637
Debt factoring 637
Invoice discounting 639
Long-term versus short-term borrowing 641
Gearing and the financing decision 642
Financial gearing: the traditional approach 644
A challenge to the traditional approach 645
Financial gearing: the evidence 647
Raising long-term finance 647
Share issues 647
Rights issues 647
Offers for sale and public issues 650
Setting a share price 651
Private placings 651
Bonus issues 652
The role of the Stock Exchange 652
Advantages of a listing 652
Disadvantages of a listing 654
Going private 656
The Alternative Investment Market 656
Providing long-term finance for the small business 657
Is finance a particular problem for small businesses? 658
Equity finance 658
Venture capital 659
Business angels 659
Crowdfunding 659
Non-equity finance 661
Evidence on small business financing 662
Islamic finance 663
Self-assessment question 15.1 663
Summary 665
Key terms 667
References 668
Further reading 668
Review questions 669
Exercises 669
Chapter 16: Managing working capital 674
Introduction 674
Learning outcomes 674
What is working capital? 675
Managing working capital 676
The scale of working capital 676
Managing inventories 679
Budgeting future demand 682
Financial ratios 682
Recording and reordering systems 682
Levels of control 684
Inventories management models 685
Managing trade receivables 691
Which customers should receive credit and how much should they be offered? 691
Length of credit period 693
Cash discounts 696
Debt factoring and invoice discounting 698
Credit insurance 698
Collection policies 698
Managing cash 703
Why hold cash? 703
How much cash should be held? 704
Controlling the cash balance 705
Cash budgets and managing cash 706
Operating cash cycle 706
Cash transmission 711
Bank overdrafts 711
Managing trade payables 712
Taking advantage of cash discounts 713
Controlling trade payables 713
Managing working capital 714
Self-assessment question 16.1 717
Summary 718
Key terms 720
Further reading 720
Review questions 721
Exercises 721
Part 4 Supplementary information 727
Appendix A: Recording financial transactions 729
Introduction 729
Learning outcomes 729
The basics of double-entry bookkeeping 730
Recording trading transactions 732
Balancing accounts and the trial balance 735
Preparing the financial statements (final accounts) 739
The ledger and its division 742
Summary 743
Key terms 744
Further reading 744
Exercises 745
Appendix B: Glossary of key terms 748
Appendix C: Solutions to self-assessment questions 765
Appendix D: Solutions to review questions 786
Appendix E: Solutions to selected exercises 801
Appendix F: Present value table 851
Index 853
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