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Accounting An Introduction Fourth Edition Fourth Edition Accounting An Introduction Eddie McLaney Peter Atrill Fourth Edition Audience Features Suitable for all those studying an introductory course in accounting, who are seeking an understanding of basic principles and underlying concepts without detailed technical knowledge. ● ● Authors Eddie McLaney is Visiting Fellow in Accounting and Finance at the University of Plymouth. Peter Atrill is a freelance academic and author working with leading institutions in the UK, Europe and SE Asia. He was previously Head of Business and Management at the University of Plymouth Business School. ● ● ● Visit the companion website at www.pearsoned.co.uk/mclaney ● ● ● Progress checks: numerous activities and exercises enable you to constantly test your understanding and reinforce learning. Lively and relevant examples from the real world demonstrate the practical application and value of concepts and techniques learnt. Interactive ‘open learning’ style is ideal for self study. Decision making focus on the use of accounting information rather than its preparation is highly appropriate for tomorrow’s business managers. Fully incorporates International Financial Reporting Standards, which are crucial in the European and world business arena. Key terms, glossary and bulleted summaries are excellent revision aids. Clearer distinctions between process costing and job order costing. Eddie McLaney Peter Atrill 9780273711360_04_COVER.indd 1 Eddie McLaney Peter Atrill More extensive coverage of corporate governance and ethics issues. The text is supported by MyAccountingLab, a completely new type of educational resource. MyAccountingLab complements student learning by presenting the user with a study plan that adapts and customises to the student’s individual requirements as they progress through online tests. Students can also practice problems before taking tests, and because most of these are algorithmically driven, they can practice over and over again without repetition. Additionally, students have access to an eBook, animated guides to various key topics, and guided solutions, all of which are designed to help them overcome the most difficult concepts. Both students and lecturers have access to gradebooks that allow them to track progress, and lecturers will have the ability to create new tests and activities using the large number of problems available in the question database. an imprint of Accounting An Introduction Accounting: An Introduction 4th edition is renowned for its clear, accessible and uncluttered style. It provides a comprehensive introduction to the main principles of financial accounting, management accounting, and the core elements of financial management. With a clear and unequivocal focus on how accounting information can be used to improve the quality of decision making by managers, combined with a strong practical emphasis, this book provides the ideal grounding for a career in management. www.pearson-books.com 1/8/07 14:52:27 ACCA_A01.qxd 7/08/2007 11:14 Page i Accounting An Introduction Visit the Accounting: An Introduction, fourth edition Companion Website at www.pearsoned.co.uk/mclaney to find valuable student learning material including: ● ● ● ● ● Multiple choice questions to help test your learning Additional exercises and review questions Solutions to end of chapter review questions Links to relevant sites on the web An online glossary to explain key terms ACCA_A01.qxd 7/08/2007 11:14 Page ii We work with leading authors to develop the strongest educational materials in Accounting, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk ACCA_A01.qxd 7/08/2007 11:14 Page iii 4th edition Accounting An Introduction Eddie McLaney and Peter Atrill ACCA_A01.qxd 7/08/2007 11:14 Page iv Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 1999 by Prentice Hall Europe Second edition published 2002 Third edition published 2005 Fourth edition published 2008 © Prentice Hall Europe 1999 © Pearson Education Limited 2002, 2005, 2008 The rights of Eddie McLaney and Peter Atrill to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN 978-0-273-71136-0 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 9 8 7 6 5 4 3 2 1 11 10 09 08 07 Typeset in 9.5/12.5pt Stone Serif by 35 Printed and bound by Mateu Cromo Artes Graficas, Spain The publisher’s policy is to use paper manufactured from sustainable forests. ACCA_A01.qxd 7/08/2007 11:14 Page v Brief contents Preface • How to use this book • Guided tours • Acknowledgements 1 Introduction to accounting and finance Part 1 Financial accounting 2 3 4 5 6 7 Measuring and reporting financial position Measuring and reporting financial performance Accounting for limited companies (1) Accounting for limited companies (2) Measuring and reporting cash flows Analysing and interpreting financial statements xxi–xxviii 1 35 37 71 115 159 192 221 Part 2 Management accounting 277 8 9 10 11 12 13 279 Relevant costs for decision making Cost–volume–profit analysis Full costing Costing and pricing in a competitive environment Budgeting Accounting for control 297 332 372 430 470 Part 3 Financial management 507 14 Making capital investment decisions 15 Financing the business 16 Managing working capital 509 Part 4 Supplementary information 657 Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F 659 Index Recording financial transactions Glossary of key terms Solutions to self-assessment questions Solutions to review questions Solutions to selected exercises Present value table 566 614 677 693 709 723 787 789 ACCA_A01.qxd 7/08/2007 11:14 Page vi ACCA_A01.qxd 7/08/2007 11:14 Page vii Detailed contents Preface How to use this book Guided tour of the book Guided tour MyAccountingLab Acknowledgements 1 Introduction to accounting and finance Introduction Learning outcomes What are accounting and finance? Who are the users of accounting information? The conflicting interests of users How useful is accounting information? Evidence on the usefulness of accounting Providing a service But . . . is it material? Weighing up the costs and benefits Accounting as an information system Management and financial accounting Scope of this book Has accounting become too interesting? The changing face of accounting Why do I need to know anything about accounting and finance? Accounting for business What is the purpose of a business? What kinds of business ownership exist? Sole proprietorship Partnership Limited company How are businesses organised? How are businesses managed? What is the financial objective of a business? Balancing risk and return Not-for-profit organisations Summary Key terms References Further reading Review questions xxi xxii xxiv xxvi xxviii 1 1 1 2 3 5 5 6 7 8 9 11 13 15 15 16 17 18 18 19 19 20 20 22 24 25 28 28 30 32 32 32 33 ACCA_A01.qxd viii 7/08/2007 11:14 Page viii CONTENTS Part 1 Financial accounting 2 Measuring and reporting financial position 37 Introduction Learning outcomes 37 37 The major financial statements – an overview The balance sheet Assets Claims 38 42 42 44 The effect of trading operations on the balance sheet The classification of assets Current assets Non-current assets 47 49 50 50 The classification of claims Balance sheet layouts The balance sheet and time Accounting conventions and the balance sheet Business entity convention Historic cost convention Prudence convention Going concern convention Dual aspect convention 52 52 55 55 55 56 56 57 57 Money measurement Goodwill and brands Human resources Monetary stability 58 59 60 60 Valuing assets on the balance sheet Tangible non-current assets (property, plant and equipment) Intangible non-current assets The impairment of non-current assets Inventories (stock) 61 61 63 63 64 Interpreting the balance sheet 65 Summary Key terms Further reading Review questions Exercises 66 67 67 68 68 3 Measuring and reporting financial performance 71 Introduction Learning outcomes 71 71 The income statement The income statement and the balance sheet Income statement layout Some further issues Cost of sales 72 73 74 75 76 ACCA_A01.qxd 7/08/2007 11:14 Page ix CONTENTS Classification of expenses The accounting period 77 78 Recognising revenue Long-term contracts Services 79 80 81 Recognising expenses When the expense for the period is more than the cash paid during the period When the amount paid during the year is more than the full expense for the period Profit, cash and accruals accounting 82 Depreciation Tangible non-current assets (property, plant and equipment) Depreciating intangible assets Depreciation and the replacement of non-current assets Depreciation and judgement 87 87 93 94 95 83 85 86 Costing inventories First in, first out (FIFO) Last in, first out (LIFO) Weighted average cost (AVCO) Inventories – some further issues 97 97 98 98 100 Dealing with trade receivables’ problems Interpreting the income statement 101 107 Summary Key terms Further reading Review questions Exercises 107 109 109 110 110 4 Accounting for limited companies (1) 115 Introduction Learning outcomes 115 115 The main features of limited companies Legal nature Perpetual life Limited liability Legal safeguards Public and private companies Taxation Transferring share ownership: the role of the Stock Exchange 116 116 116 117 119 119 121 122 Managing a company Strengthening the framework of rules The Combined Code 123 124 124 Financing limited companies The owners’ claim The basic division 128 128 129 ix