Financial Accounting

Michael Jones is Professor of Financial Reporting and Director of the Financial Reporting and Business Communication Unit at the University of Bristol. He is also author of Accounting 3rd Edition, Creative Accounting, Fraud and International Accounting Scandals and Management Accounting, all published by John Wiley and Sons Ltd.

• About the Author xiii About the Book xvAcknowledgements xxi1 INTRODUCTION TO ACCOUNTING 1Introduction 2Nature of Accounting 2Importance of Accounting 4Financial Accounting and Management Accounting 5Users of Accounts 6Accounting Context 8Types of Accountancy 12Types of Accountant 15Limitations of Accounting 18Conclusion 18Discussion Questions 20SECTION A: FINANCIAL ACCOUNTING: THE TECHNIQUES 212 THE ACCOUNTING BACKGROUND 23Introduction 24Financial Accounting 24Language of Accounting 26Student Example 34Why Is Financial Accounting Important? 38Accounting Principles 38Accounting Conventions 39Conclusion 41Discussion Questions 42Numerical Questions 43Appendix 2.1: Illustration of a Consolidated Income Statementfor Marks & Spencer plc 2010 44 Appendix 2.2: Illustration of a Consolidated Statement of FinancialPosition for Marks and Spencer plc 2010 46Appendix 2.3: Illustration of a Consolidated Statement of Cash Flows for Marks and Spencer plc 2010 48Appendix 2.4: Illustration of a Consolidated Income Statement for Volkswagen 2009 50Appendix 2.5: Illustration of a Consolidated Balance Sheet (Statement of Financial Position) for Volkswagen 2009 51Appendix 2.6: Illustration of a Consolidated Cash FlowStatement (Statement of Cash Flows) for Volkswagen 2009 533 RECORDING: DOUBLE-ENTRY BOOKKEEPING 55Introduction 56The Accounting Equation 57Worked Example 62Day Books and Ledgers 74Computers 78Conclusion 79Discussion Questions 79Numerical Questions 80Appendix 3.1: Complete Worked Example for Gavin Stevens 864 MAIN FINANCIAL STATEMENTS: THE INCOME STATEMENT (PROFIT AND LOSS ACCOUNT) 89Introduction 90Context 90Definitions 92Layout 93Main Components 94Profit 103Listed Companies 106Capital and Revenue Expenditure 106Limitations 107Interpretation 107Conclusion 107Discussion Questions 108Numerical Questions 1085 MAIN FINANCIAL STATEMENTS: THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 110Introduction 111Context 112Definitions 113Layout 114Main Components 116Limitations 129Interpretation 131Listed Companies 131Conclusion 132Discussion Questions 132Numerical Questions 133Appendix 5.1: Horizontal Format of Statement of Financial Position 1346 PREPARING THE FINANCIAL STATEMENTS 135Introduction 136Main Financial Statements 136Trial Balance to the Income Statement (Profi t and Loss Account) and the Statement of Financial Position (Balance Sheet) 138Adjustments to Trial Balance 142Comprehensive Example 154Conclusion 158Discussion Questions 158Numerical Questions 1597 PARTNERSHIPS AND LIMITED COMPANIES 172Introduction 173Context 174Partnerships 175Limited Companies 181Distinctive Accounting Features of Limited Companies 185Accounting Treatment For Limited Companies 194Limited Company Example: Stevens, Turner Ltd 196Limited Companies: Published Accounts 201Conclusion 206Discussion Questions 207Numerical Questions 208Appendix 7.1: Example of an Income Statement (Profit and Loss Account) using UK GAAP (Manchester United Ltd) 218Appendix 7.2: Example of a Statement of Financial Position (Balance Sheet) using UK GAAP (Manchester United Ltd) 2198 MAIN FINANCIAL STATEMENT: THE STATEMENT OF CASH FLOWS 221Introduction 222Importance of Cash 223Context 225Cash and the Bank Account 225Relationship between Cash and Profit 229Preparation of Statement of Cash Flows 231Bank Reconciliation Statements 245Conclusion 246Discussion Questions 247Numerical Questions 248Appendix 8.1: Main Headings for the Cash Flow Statement (Statement of Cash Flows) for Sole Traders, Partnerships and some Non-Listed Companies under UK GAAP 255Appendix 8.2: Preparation of a Sole Trader’s Cash Flow Statement Using the Direct Method Using UK Format 256Appendix 8.3: Preparation of the Cash Flow Statement of Any Company Ltd using the Indirect Method Using UK GAAP 257Appendix 8.4: Example of Statement of Cash Flows (Cash Flow Statement) Using UK GAAP (Manchester United Ltd) 2609 INTERPRETATION OF ACCOUNTS 262Introduction 263Context 263Overview 264Importance of Ratios 266Closer Look at Main Ratios 267Worked Example 279Report Format 287Holistic View of Ratios 289Performance Indicators 290Limitations 291Conclusion 292Discussion Questions 293Numerical Questions 294Appendix 9.1: John Brown Plc 303Appendix 9.2: The Cash Flow Ratio using UK GAAP 305SECTION B: FINANCIAL ACCOUNTING: THE CONTEXT 30710 REGULATORY AND CONCEPTUAL FRAMEWORKS 309Introduction 310Traditional Corporate Model: Directors, Auditors and Shareholders 311Regulatory Framework 316Regulatory Framework in the UK 318Corporate Governance 323Conceptual Framework 328Conclusion 335Selected Reading 336Discussion Questions 33711 MEASUREMENT SYSTEMS 338Introduction 339Overview 339Measurement Systems 342Deficiencies of Historical Cost Accounting 344Illustrative Example of Different Measurement Systems 344Real Life 347Conclusion 348Selected Reading 348Discussion Questions 34912 THE ANNUAL REPORT 350Introduction 351Definition 351Context 352Multiple Roles 353Main Contents of the Annual Report 358Presentation 375Group Accounts 377Impression Management 381Conclusion 384Selected Reading 385Discussion Questions 38613 CREATIVE ACCOUNTING 387Introduction 388Definition 390Managerial Motivation 392Methods of Creative Accounting 394Example 401Real Life 401Case Studies 404Creative Presentation 408Controlling Creative Accounting 410Conclusion 410Selected Reading 411Discussion Questions 412Numerical Questions 41314 INTERNATIONAL ACCOUNTING 414Introduction 415Context 415Divergent Forces 417Classification 423Country Snapshots 423Convergent Forces 430Conclusion 437Selected Reading 437Discussion Questions 438Appendix 14.1: List of International Standards 439Glossary of Key Accounting Terms 441Appendix: Answers 465Index 511