Accounting and Finance for Business

518 Pages·2013·32.026 MB·English

by  Mr Geoff Black, Mahmoud Al-Kilani

Accounting And
FinAnce For Business
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Accounting And FinAnce
For Business
geoff Black and Mahmoud Al-Kilani
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PEARSON EDUCATION LIMITED
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First published 2013 (print and electronic)
© Pearson Education Limited 2013 (print and electronic)
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ISBN: 978-0-273-77394-8 (print)
978-0-273-78934-5 (eTxt)
978-0-273-77396-2 (eBk)
British Library Cataloguing-in-Publication Data
A catalogue record for the print edition is available from the British Library
Library of Congress Cataloging-in-Publication Data
Black, Geoff.
Accounting and finance for business / Geoff Black and Mahmoud Al-kilani.
pages cm
Includes bibliographical references and index.
ISBN 978-0-273-77394-8 (pbk.)
1. Accounting. 2. Managerial accounting. 3. Business enterprises – Finance. I. Al-kilani,
Mahmoud. II. Title.
HF5635.B66167 2013
657–dc23 2013008126
10 9 8 7 6 5 4 3 2 1
17 16 15 14 13
Print edition typeset in Minion Pro 10.5/13
Print edition printed and bound by Rotolito, Lombarda, Italy
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
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Brief contents
Preface xi
Guided tour xii
Acknowledgements xiv
1 The background to accounting 1
2 Processing financial data 22
3 Adjusting and summarising data 51
4 The income statement and statement of financial position 74
5 Further aspects of assets and liabilities 104
6 Limited liability companies and other types of
business organisation 137
7 Cash flow statements 179
8 Analysing company reports 197
9 Management accounting 244
10 Absorption costing and marginal costing 256
11 Standard costing 285
12 Break-even and cost–volume–profit analysis 303
13 Business planning 321
14 Investment appraisal 339
15 Decision-making 366
16 Contemporary issues in finance 388
17 Environmental accounting 406
Appendix 1: Answers to self-check questions 423
Appendix 2: Answers to self-study questions 424
Appendix 3: Answers to case study questions 459
Appendix 4: Answers to revision sections 483
Index 497
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contents
Preface xi
Guided tour xii
Acknowledgements xiv
1 the background to accounting 1 2.7 Summary 43
2.8 Chapter glossary 44
1.1 Introduction 2
1.2 What is accounting? 2 3 Adjusting and summarising
1.3 Who uses accounting? 3 data 51
1.4 Financial accounting and management
3.1 Introduction 52
accounting 4
3.2 Financial periods 52
1.5 Accounting assumptions and characteristics 5
3.3 Accounting adjustments 53
1.5.1 Underlying Assumption 1:
3.3.1 Inventory adjustments 53
The accrual basis 5
3.3.2 Accruals 54
1.5.2 Underlying Assumption 2:
3.3.3 Prepayments 55
Going concern 6
3.3.4 Depreciation 57
1.5.3 Fundamental QC 1: Relevance 7
3.4 Basics of the financial summaries 63
1.5.4 Fundamental QC 2:
3.4.1 The income statement 63
Faithful representation 8
3.4.2 The statement of financial position 64
1.5.5 Enhancing QC 1: Comparability 8
3.5 Summary 66
1.5.6 Enhancing QC 2: Verifiability 8
3.6 Chapter glossary 66
1.5.7 Enhancing QC 3: Timeliness 9
4 the income statement and
1.5.8 Enhancing QC 4: Understandability 9
1.6 Assets, liabilities and equity 9 statement of financial position 74
1.6.1 Assets 9 4.1 Introduction 75
1.6.2 Liabilities 10 4.2 The income statement 75
1.6.3 Equity 11 4.2.1 Format of the income statement 76
1.7 The accounting equation 11 4.2.2 Manufacturing businesses 78
1.7.1 H ow does the value of equity 4.2.3 Trading businesses 80
change? 13 4.2.4 Service businesses 82
1.8 Alternative terminology 15 4.3 Income statements of partnerships
1.9 Summary 15 and limited companies 83
1.10 Chapter glossary 16 4.4 The statement of financial position 85
4.5 Published income statements
2 Processing financial data 22
and statements of financial position 88
2.1 Introduction 23 4.6 Preparing the summaries
2.2 The dual aspect of transactions 23 from accounting data 88
2.3 How the system works 26 4.7 Summary 93
2.4 Checking the maths 32 4.8 Chapter glossary 94
2.5 Optimising the system 34
5 Further aspects of assets
2.5.1 The cash book 35
and liabilities 104
2.5.2 The petty cash book 35
2.5.3 Analysed cash books and petty cash 5.1 Introduction 105
books 37 5.2 Sales of non-current assets 105
2.5.4 Day books 38 5.3 Inventory valuation 108
2.5.5 The journal 42 5.3.1 The importance of the valuation 108
2.6 Computerised accounting systems 43 5.3.2 FIFO and AVCO 110
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viii contents
5.4 Bad and doubtful debts 114 8.4 The second stage: horizontal and vertical
5.4.1 Bad debts 114 analysis 203
5.4.2 Doubtful debts 115 8.4.1 Interpreting the analysis 206
5.5 Current and non-current liabilities 119 8.5 The third stage: ratio analysis 207
5.6 Summary 119 8.5.1 Profitability ratios 208
5.7 Chapter glossary 120 8.5.2 Efficiency ratios 210
Revision of Chapters 1–5 127 8.5.3 Short-term solvency and liquidity
ratios 212
6 Limited liability companies
8.5.4 Long-term solvency and liquidity
and other types of business
ratios 215
organisation 137
8.5.5 Investment ratios 219
6.1 Introduction 138 8.6 The validity of the financial statements 220
6.2 Sole proprietorships 138 8.7 Summary 221
6.3 Partnerships 139 8.8 Chapter glossary 222
6.3.1 Accounting requirements of Revision of Chapters 6–8 235
partnerships 140
6.3.2 Partnership accounts 141 9 Management accounting 244
6.3.3 Partnership income statements 141
9.1 Introduction 245
6.3.4 Partnership statement of financial
9.2 Defining management accounting 245
position 142
9.3 The classification of costs 247
6.3.5 Limited liability partnerships 143
9.3.1 Analysis by function 247
6.4 Limited liability companies 143
9.3.2 Analysis by type 247
6.4.1 Accounting specifically for limited
9.3.3 Analysis by behaviour 249
companies 145
9.3.4 Analysis by time 250
6.4.2 Share capital and reserves 145
9.4 Summary 251
6.4.3 Changes to share capital 150
9.5 Chapter glossary 251
6.5 Sources of finance 153
6.5.1 Long-term sources of finance: share
10 Absorption costing
sales 154
and marginal costing 256
6.5.2 Long-term sources of finance: loans 156
6.5.3 Long-term sources of finance: 10.1 Introduction 257
finance leases 158 10.2 Absorption costing 257
6.5.4 Short-term sources of finance: 10.2.1 Stage 1: Allocation of costs to cost
bank overdrafts 158 centres 257
6.5.5 Short-term sources of finance: debt 10.2.2 Stage 2: Apportionment of overheads 258
factoring and invoice discounting 160 10.2.3 Stage 3: Reapportionment
6.5.6 Internal sources of finance 161 of overheads 259
6.6 Published financial summaries 162 10.2.4 Stage 4: Absorption of production
6.7 Groups of companies 169 centre costs into products 260
6.8 Summary 170 10.3 Advantages and disadvantages
6.9 Chapter glossary 170 of absorption costing 262
10.4 Activity-based costing (ABC) 264
7 cash flow statements 179
10.5 Absorption costing and activity-based
7.1 Introduction 180 costing compared 265
7.2 Cash flows and working capital 181 10.6 Marginal costing 266
7.3 The cash flow statement 184 10.7 Using the contribution for ‘what-if’
7.4 Summary 189 calculations 269
7.5 Chapter glossary 190 10.8 Product costing 270
10.9 Specific order costing 271
8 Analysing company reports 197
10.9.1 Job costing 271
8.1 Introduction 198 10.9.2 Quotations and job cost sheets 271
8.2 Data for analysis 198 10.9.3 Batch costing 272
8.3 The first stage: preliminary research 200 10.9.4 Contract costing 273
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contents ix
10.10 Operation costing 274 14.3.4 Using spreadsheets to calculate
10.10.1 Process costing 274 NPV and IRR 347
10.10.2 Service costing 275 14.4 Investment appraisal using non-
10.11 Summary 276 discounting techniques 351
10.12 Chapter glossary 276 14.4.1 Payback period 351
14.4.2 Accounting rate of return (ARR) 352
11 standard costing 285
14.5 Summary 353
11.1 Introduction 286 14.6 Chapter glossary 354
11.2 Variances 286 Revision of Chapters 9–14 362
11.2.1 Setting standards 286
15 decision-making 366
11.3 Direct material variances 287
11.4 Direct labour variances 289 15.1 Introduction 367
11.5 Overhead variances 291 15.2 The background to decision-making 367
11.5.1 Variable overhead variances 291 15.2.1 One-off decisions 368
11.5.2 Fixed overhead variances 294 15.2.2 Forward-looking information 368
11.6 Summary 296 15.2.3 Probability testing 368
11.7 Chapter glossary 297 15.2.4 Opportunity costs 368
15.2.5 Relevant costs 369
12 Break-even and cost–volume–
15.2.6 Net cash flow 369
profit analysis 303
15.2.7 Data availability 369
12.1 Introduction 304 15.3 Cost classification 369
12.2 Break-even charts 304 15.3.1 Fixed and variable costs 369
12.2.1 A combination of graphs 305 15.3.2 Relevant and non-relevant costs 370
12.2.2 Interpreting the chart 306 15.3.3 Avoidable and non-avoidable costs 370
12.2.3 Changes in costs and revenue 310 15.3.4 Sunk costs 370
12.2.4 Limitations of break-even charts 311 15.3.5 Committed costs 370
12.3 Profit/volume charts 312 15.3.6 Opportunity costs 371
12.4 Summary 315 15.4 Types of decision 372
12.5 Chapter glossary 315 15.4.1 Closure or shut-down decision 372
15.4.2 Make or buy decision 372
13 Business planning 321
15.5 Pricing decisions 375
13.1 Introduction 322 15.5.1 External pricing 375
13.2 Long- and short-term planning 322 15.5.2 Internal pricing 377
13.3 Limiting factors 323 15.5.3 Other internal pricing strategies 379
13.4 To budget or not to budget? 323 15.6 Special orders 379
13.5 Preparing a budget 325 15.7 The Balanced Scorecard 380
13.6 The cash budget 328 15.7.1 The learning and growth perspective 380
13.7 Master budgets 331 15.7.2 The business process perspective 381
13.8 Flexible budgeting 331 15.7.3 The customer perspective 381
13.9 Zero-based budgeting 332 15.7.4 The financial perspective 381
13.10 Summary 332 15.8 Summary 382
13.11 Chapter glossary 333 15.9 Chapter glossary 382
14 investment appraisal 339 16 contemporary issues
in finance 388
14.1 Introduction 340
14.2 Present values and future values 340 16.1 Introduction 389
14.2.1 From present values to future values 340 16.2 What is integrated reporting? 389
14.2.2 From future values to present values 341 16.3 The International Integrated Reporting
14.3 Investment appraisal using discounting Framework 390
techniques 342 16.3.1 Key principles 390
14.3.1 Discounted cash flow (DCF) 342 16.4 Socially responsible investing 391
14.3.2 Net present value (NPV) 344 16.5 Executive pay, remuneration policy
14.3.3 Internal rate of return (IRR) 346 and shareholder ‘democracy’ 392
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