Accounting and finance for non-specialists

559 Pages·2006·1.59 MB·English

by  Peter Atrill

0273702440_COVER.qxd 9/3/06 14:36 Page 1
fifth
edition
Now in its fifth edition, this successful text introduces the basic principles and underlying
concepts of accounting and finance. It adopts a practical, non-technical approach, making it the
ideal text for students from non-accounting disciplines.
fifth edition
A
The text is written from a ‘user’ perspective, demonstrating ways in which accounting C ACCOUNTING AND FINANCE
statements and financial information can be used to improve the quality of decision making. C
O
U
Non-Specialists
N for
T
The fifth edition has been fully updated and revised throughout and has the
I
following key features: N
• A lively presentational style with extracts from newspapers and company G
f
reports to provide a real-life context. or A
N
• Real World boxes demonstrate the practical application and value of N
concepts and techniques learnt. o
nD
• An ‘open-learning’approach with numerous activities, worked examples -
SF
and questions interspersed throughout the text to aid understanding
pI
makes the book ideal for self-study. eN
c
• The decision-making focus on the use of accounting information rather A
i
a
than the preparation is highly appropriate for tomorrow’s business N
l
managers. isC
t
• An extensive range of additional resources, including further exercises, sE
innovative case studies, and multiple-choice questions. Peter Atrill &
Eddie McLaney
A
The authors t
Accounting and Finance for r
Peter Atrillis a freelance academic and author i
Non-Specialists, fifth edition l
working with leading institutions in the UK, Europe l
is aimed primarily at students and SE Asia. He was previously Head of Business and &
who are not majoring in
Management at the University of Plymouth Business
accounting or finance but M
School.
who are studying introductory c
level accounting as part of Eddie McLaneyis Visiting Fellow in Accounting and L
their course. Finance at the University of Plymouth. a
n
e
y
ISBN 0-273-70244-0
Additional student supportat
www.pearsoned.co.uk/atrillmclaney
9 780273 702443
Cover image: Additional student supportat
www.pearson-books.com
An imprint of © Getty Images/PhotoAlto www.pearsoned.co.uk/atrillmclaney
AAF_A01.qxd 3/30/06 11:08 AM Page i
ACCOUNTING AND FINANCE
for Non-Specialists
Visit the Accounting and Finance for Non-Specialists, fifth edition
Companion Website at www.pearsoned.co.uk/atrillmclaney to find
valuable studentlearning material including:
n Multiple choice questions to test your learning
n Solutions to end of chapter review questions
n Revision questions to help you check your understanding
n Extensive links to valuable resources on the web
n An online glossary to explain key terms
AAF_A01.qxd 3/30/06 11:08 AM Page ii
We work with leading authors to develop the strongest
educational materials in business and finance, 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
AAF_A01.qxd 3/30/06 11:08 AM Page iii
Fifth Edition
ACCOUNTING AND FINANCE
for Non-Specialists
Peter Atrill and Eddie McLaney
AAF_A01.qxd 3/30/06 11:08 AM 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 in 1995 by Prentice Hall Europe
Second edition in 1997
Third edition published in 2001 by Pearson Education Limited
Fourth edition in 2004
Fifth edition in 2006
© Pearson Education Limited 2006
The rights of Peter Atrill and Eddie McLaney 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,
90 Tottenham Court Road, London W1T 4LP.
ISBN-13: 978-0-273-70244-3
ISBN-10: 0-273-70244-0
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
A catalogue record for this book is available from the Library of Congress

10 9 8 7 6 5 4 3 2 1
10 09 08 07 06
Typeset in 9/12.5pt Stone Serif by 35
Printed and bound in Great Britain by Ashford Colour Press, Hampshire
The publisher’s policy is to use paper manufactured from sustainable forests.
AAF_A01.qxd 3/30/06 11:08 AM Page v
Contents
Preface xiii
Guided tour of the book xvi
Acknowledgements xix
1 Introduction to accounting and finance 1
Introduction 1
Learning outcomes 1
What are accounting and finance? 2
Accounting and user needs 3
Not-for-profit organisations 5
Accounting as a service function 6
The threshold of materiality 8
Costs and benefits of accounting information 8
Accounting as an information system 9
Planning and control 11
Management and financial accounting 13
The scope of this book 15
Has accounting become too interesting? 15
Why do I need to know anything about accounting and finance? 17
Business objectives 18
Summary 20
Key terms 21

Further reading 22
Review questions 22
Part 1 FINANCIAL ACCOUNTING
2 Measuring and reporting financial position 25
Introduction 25
Learning outcomes 25
The major financial statements – an overview 26
The balance sheet 30
v
AAF_A01.qxd 3/30/06 11:08 AM Page vi
Contents
The effect of trading operations on the balance sheet 37
The classification of assets 39
The classification of claims 41
Balance sheet formats 42
The balance sheet as a position at a point in time 45
Accounting conventions and the balance sheet 46
Accounting for goodwill and product brands 51
The basis of valuation of assets on the balance sheet 52
Interpreting the balance sheet 56
Summary 56
Key terms 57
Further reading 58
Review questions 58
Exercises 59
3 Measuring and reporting financial performance 61
Introduction 61
Learning outcomes 61
The income statement (profit and loss account) 62
Relationship between the income statement and the balance sheet 64
The format of the income statement 64
The income statement – some further aspects 66
Profit measurement and the recognition of revenue 69
Profit measurement and the recognition of expenses 71
Profit measurement and the calculation of depreciation 76
Profit measurement and inventories (stock) costing methods 86
Profit measurement and the problem of bad and doubtful debts 89
Interpreting the income statement 93
Summary 93
Key terms 95

Further reading 95
Review questions 96
Exercises 96
4 Accounting for limited companies 100
Introduction 100
Learning outcomes 100
Generating wealth through limited companies 101
Managing a company – corporate governance and the role of directors 107
Financing limited companies 1 10
Raising share capital 1 17
Loans and other sources of finance 1 18
vi
AAF_A01.qxd 3/30/06 11:08 AM Page vii
Contents
Restriction on the right of shareholders to make drawings of their claim 1 19
Accounting for limited companies 122
The directors’ duty to account 126
The need for accounting rules 126
The main sources of accounting rules 126
Directors’ report 127
Auditors 128
Accounting rules and the quality of financial statements 129
Summary 132
Key terms 134
Further reading 134
Reference 135
Review questions 135
Exercises 135
5 Measuring and reporting cash flows 139
Introduction 139
Learning outcomes 139
The cash flow statement 140
The main features of the cash flow statement 142
Preparing the cash flow statement 149
What does the cash flow statement tell us? 156
Summary 159
Key terms 160
Further reading 160
Review questions 161
Exercises 161
6 Analysing and interpreting financial statements 167
Introduction 167

Learning outcomes 167
Financial ratios 168
Financial ratio classifications 169
The need for comparison 170
Calculating the ratios 171
A brief overview 173
Profitability 174
Efficiency 180
The relationship between profitability and efficiency 185
Liquidity 187
Financial gearing 189
Investment ratios 195
vii
AAF_A01.qxd 3/30/06 11:08 AM Page viii
Contents
Trend analysis 203
Ratios and prediction models 205
Limitations of ratio analysis 205
Summary 207
Key terms 208
Further reading 208
Review questions 209
Exercises 209
Part 2 MANAGEMENT ACCOUNTING
7 Cost–volume–profit analysis 217
Introduction 217
Learning outcomes 217
The behaviour of costs 218
Fixed costs 218
Variable costs 221
Semi-fixed (semi-variable) costs 222
Break-even analysis 223
Contribution 228
Margin of safety and operating gearing 228
Profit-volume charts 232
Failing to break even 233
Weaknesses of break-even analysis 233
The popularity of break-even analysis 234
Marginal analysis 235
Accepting/rejecting special contracts 237
The most efficient use of scarce resources 238

Make-or-buy decisions 240
Closing or continuation decisions 242
Summary 244
Key terms 245
Further reading 245
Review questions 245
Exercises 246
8 Full costing 249
Introduction 249
Learning outcomes 249
The nature of full costing 250
viii
AAF_A01.qxd 3/30/06 11:08 AM Page ix
Contents
Deriving full costs in a single-product operation 250
Deriving full costs in multi-product operations 251
Activity-based costing (ABC) 267
Uses of full-cost information 272
Criticisms of full costing 274
Summary 274
Key terms 276
Further reading 276
References 276
Review questions 277
Exercises 277
9 Budgeting 280
Introduction 280
Learning outcomes 280
Budgets, long-term plans and corporate objectives 281
Time horizon of plans and budgets 282
Budgets and forecasts 283
The interrelationship of various budgets 284
The uses of budgets 286
The extent to which budgets are prepared 288
Preparing the cash budget 289
Preparing other budgets 293
Using budgets for control 298
Comparing the actual performance with the budget 300
Standard quantities and costs 31 1
Reasons for adverse variances 312
Investigating variances 313
Compensating variances 315
Making budgetary control effective 316

Limitations of the traditional approach to control through
variances and standards 316
Behavioural aspects of budgetary control 317
Summary 319
Key terms 320
Further reading 320
References 321
Review questions 321
Exercises 321
ix