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Find more at http://www.downloadslide.com Fifth Edition Accounting An Introduction Eddie McLaney Peter Atrill Find more at http://www.downloadslide.com Fifth Edition Accounting An Introduction Eddie McLaney and Peter Atrill Find more at http://www.downloadslide.com 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 Fifth edition published 2010 © Prentice Hall Europe 1999 © Pearson Education Limited 2002, 2005, 2008, 2010 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. ISBN: 978-0-273-73320-1 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data McLaney, E. J. Accounting : an introduction / Eddie McLaney and Peter Atrill. — 5th ed. p. cm. Includes bibliographical references and index. ISBN 978-0-273-73320-1 (pbk.) 1. Accounting. I. Atrill, Peter. II. Title. HF5635.M48833 2010 657—dc22 2009053919 10 9 8 7 6 5 4 3 2 14 13 12 11 10 Typeset in 9.5/12.5pt Stone Serif by 35 Printed and bound by Rotolito Lombarda, Italy Find more at http://www.downloadslide.com 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 xix 1 35 37 76 121 165 200 230 Part 2 Management accounting 289 8 9 10 11 12 13 291 Relevant costs for decision making Cost—volume—profit analysis Full costing Costing and performance evaluation in a competitive environment Budgeting Accounting for control 309 348 393 439 482 Part 3 Financial management 523 14 Making capital investment decisions 15 Financing a business 16 Managing working capital 525 Part 4 Supplementary information 685 Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F 687 Index Recording financial transactions Glossary of key terms Solutions to self-assessment questions Solutions to review questions Solutions to selected exercises Present value table 587 637 706 723 739 753 816 818 Find more at http://www.downloadslide.com Find more at http://www.downloadslide.com Detailed contents Preface How to use this book Guided tour of the book Guided tour of 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 xix xx xxii xxiv xxvi 1 1 1 2 3 5 5 6 7 8 9 11 13 15 15 16 17 18 18 19 19 20 21 22 24 25 27 29 30 32 32 32 33 Find more at http://www.downloadslide.com vi CONTENTS Part 1 Financial accounting 2 Measuring and reporting financial position 37 Introduction Learning outcomes 37 37 Making financial decisions The major financial statements – an overview The statement of financial position Assets Claims 38 38 43 43 45 The effect of trading transactions Classifying assets Current assets Non-current assets 49 51 51 52 Classifying claims Current liabilities Non-current liabilities Statement layouts Capturing a moment in time The role of accounting conventions Business entity convention Historic cost convention Prudence convention Going concern convention Dual aspect convention 54 54 54 55 57 58 58 58 59 60 60 Money measurement Goodwill and brands Human resources Monetary stability 61 62 63 64 Valuing assets Tangible non-current assets (property, plant and equipment) Intangible non-current assets The impairment of non-current assets Inventories 64 65 67 67 68 Meeting user needs 69 Summary Key terms Further reading Review questions Exercises 70 72 72 73 73 3 Measuring and reporting financial performance 76 Introduction Learning outcomes 76 76 What does it mean? The income statement 77 77 Find more at http://www.downloadslide.com CONTENTS Different roles Income statement layout Gross profit Operating profit Profit for the year Further issues Cost of sales Classifying expenses The accounting period 79 80 80 81 81 81 81 83 84 Recognising revenue Long-term contracts Services 84 86 87 Recognising expenses When the expense for the period is more than the cash paid during the period When the amount paid during the period is more than the full expense for the period Profit, cash and accruals accounting 88 Depreciation Tangible non-current assets (property, plant and equipment) Depreciating intangible assets Depreciation and asset replacement Depreciation and judgement 93 93 99 100 101 Costing inventories First in, first out (FIFO) Last in, first out (LIFO) Weighted average cost (AVCO) Inventories – some further issues 103 103 104 104 106 Trade receivables problems Uses and usefulness of the income statement 107 112 Summary Key terms Further reading Review questions Exercises 113 115 115 116 116 4 Accounting for limited companies (1) 89 91 92 121 Introduction Learning outcomes 121 121 Why limited companies? The main features of limited companies Legal nature Perpetual life Limited liability Legal safeguards Public and private companies Taxation 122 122 122 123 124 125 125 128 vii Find more at http://www.downloadslide.com viii CONTENTS Transferring share ownership: the role of the Stock Exchange 128 Managing a company Strengthening the framework of rules The Combined Code 129 130 130 Financing limited companies The owners’ claim The basic division Share capital Reserves Bonus shares Share capital jargon 135 135 135 136 138 140 142 Raising share capital Borrowings Withdrawing equity The main financial statements The income statement The statement of financial position 142 143 145 148 150 150 Dividends Accounting for groups of companies 151 152 Summary Key terms Reference Further reading Review questions Exercises 156 158 158 158 159 159 5 Accounting for limited companies (2) 165 Introduction Learning outcomes 165 165 The directors’ duty to account The need for accounting rules Sources of accounting rules Presenting the financial statements Statement of financial position Statement of comprehensive income Statement of changes in equity Statement of cash flows Notes General points 166 167 167 170 171 171 174 175 175 175 The framework of principles The IASB framework 176 176 The auditors’ role Directors’ report Segmental financial reports Segmental reporting rules Segmental disclosure Segmental reporting issues 177 178 179 179 180 181 Find more at http://www.downloadslide.com CONTENTS Business review The reporting framework The quality of business reviews Summary financial statements Creative accounting Creative accounting methods Checking for creative accounting Creative accounting and economic growth Summary Key terms Reference Further reading Review questions Exercises 183 183 187 188 188 189 193 194 194 196 196 196 197 197 6 Measuring and reporting cash flows 200 Introduction Learning outcomes The statement of cash flows Why is cash so important? The main features of the statement of cash flows A definition of cash and cash equivalents The relationship between the main financial statements The form of the statement of cash flows The normal direction of cash flows Preparing the statement of cash flows Deducing net cash flows from operating activities Deducing the other areas of the statement of cash flows What does the statement of cash flows tell us? Problems with IAS 7 Summary Key terms Reference Further reading Review questions Exercises 7 Analysing and interpreting financial statements Introduction Learning outcomes Financial ratios Financial ratio classifications The need for comparison Past periods Similar businesses Planned performance Calculating the ratios A brief overview 200 200 201 202 203 203 204 204 207 209 209 212 216 217 220 221 221 221 222 222 230 230 230 231 232 232 233 233 233 234 236 ix