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ACCOUNTING AND FINANCE FOR NON-SPECIALISTS F01 Accounting and Finance for Non 34691.indd 1 12/08/2021 07:11 At Pearson, we have a simple mission: to help people make more of their lives through learning. We combine innovative learning technology with trusted content and educational expertise to provide engaging and effective learning experiences that serve people wherever and whenever they are learning. From classroom to boardroom, our curriculum materials, digital learning tools and testing programmes help to educate millions of people worldwide – more than any other private enterprise. Every day our work helps learning flourish, and wherever learning flourishes, so do people. To learn more, please visit us at www.pearson.com/uk F01 Accounting and Finance for Non 34691.indd 2 12/08/2021 07:11 A C C O U N T I N G AND FINANCE FOR NON-SPECIALISTS TWELFTH EDITION Peter Atrill Eddie McLaney Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan F01 Accounting and Finance for Non 34691.indd 3 12/08/2021 07:11 Pearson Education Limited KAO Two KAO Park Harlow CM17 9NA United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First published 1995 by Prentice Hall Europe (print) Second edition published 1997 (print) Third edition published 2001 by Pearson Education Ltd (print) Fourth to Tenth editions (2004, 2006, 2008, 2011, 2013, 2015, 2017) (Print and electronic) Eleventh edition published 2019 (print and electronic) Twelfth edition published 2022 (print and electronic) © Prentice Hall Europe 1995, 1997 (print) © Pearson Education Limited 2001, 2004, 2006, 2008, 2011 (print) © Pearson Education Limited 2013, 2015, 2017, 2019, 2022 (print and electronic) The rights of Peter Atrill and Edward McLaney to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Barnard’s Inn, 86 Fetter Lane, London EC4A 1EN. The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the authors’ and the publisher’s rights and those responsible may be liable in law accordingly. 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. Contains public sector information licensed under the Open Government Licence (OGL) v3.0. http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3/. The screenshots in this book are reprinted by permission of Microsoft Corporation. Pearson Education is not responsible for the content of third-party internet sites. The Financial Times. With a worldwide network of highly respected journalists, The Financial Times provides global business news, insightful opinion and expert analysis of business, finance and politics. With over 500 journalists reporting from 50 countries worldwide, our in-depth coverage of international news is objectively reported and analysed from an independent, global perspective. To find out more, visit www.ft.com/pearsonoffer. ISBN: 978-1-292-33469-1 (print) 978-1-292-33473-8 (PDF) 978-1-292-33472-1 (ePub) 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 Names: Atrill, Peter, author. | McLaney, E. J., author. Title: Accounting and finance for non-specialists / Peter Atrill, Edward McLaney. Description: Twelfth edition. | Hoboken, NJ : Pearson, 2022. | Revised edition of the authors’ Accounting and finance for non-specialists, [2019] | Includes bibliographical references and index. | Summary: “This book provides an introduction to accounting and finance. It is aimed at Students who are not majoring in accounting or finance but who are, nevertheless, studying introductory level accounting and finance as part of their course. The course may be in business, economics, hospitality management, tourism, engineering or some other area. For these students, the book provides an overview of the role and usefulness of accounting and finance within a business or some other organisation. Students, who are majoring in either accounting or finance. These students should find the book a helpful introduction to the main principles, which can serve as a foundation for further study”-- Provided by publisher. Identifiers: LCCN 2021027514 (print) | LCCN 2021027515 (ebook) | ISBN 9781292334691 | ISBN 9781292334738 | ISBN 9781292334721 | ISBN 9781292334721 (epub) Subjects: LCSH: Accounting. | Financial statements. Classification: LCC HF5636 .A87 2022 (print) | LCC HF5636 (ebook) | DDC 657—dc23 LC record available at https://lccn.loc.gov/2021027514 LC ebook record available at https://lccn.loc.gov/2021027515 10 9 8 7 6 5 4 3 2 1 26 25 24 23 22 Front cover image: Optimarc/Shutterstock Cover design by Kelly Miller Print edition typeset in 9/12.5 Helvetica Neue LT W1G by Straive Printed and bound in Slovakia by Neografia NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION F01 Accounting and Finance for Non 34691.indd 4 12/08/2021 07:11 Brief contents Preface xiii 1 Introduction to accounting and finance 1 Part One FINANCIAL ACCOUNTING 23 2 Measuring and reporting financial position 24 3 Measuring and reporting financial performance 61 4 Accounting for limited companies 97 5 Measuring and reporting cash flows 138 6 Analysing and interpreting financial statements 165 Part Two MANAGEMENT ACCOUNTING 209 7 The relevance and behaviour of costs 211 8 Full costing 245 9 Budgeting 281 Part Three FINANCE 313 10 Making capital investment decisions 314 11 Financing a business 351 12 Managing working capital 393 Appendix A: Glossary of key terms 435 Appendix B: Solutions to self-assessment questions 445 Appendix C: Solutions to critical review questions 458 Appendix D: Solutions to selected exercises 467 Appendix E: Present value table 492 Index 494 Acknowledgments 508 BRIEF CONTENTS v F01 Accounting and Finance for Non 34691.indd 5 12/08/2021 07:11 F01 Accounting and Finance for Non 34691.indd 6 12/08/2021 07:11 Contents Preface xiii 1 Introduction to accounting and finance 1 Introduction 1 What are accounting and finance? 2 Who are the users of accounting information? 2 Providing a service 4 Weighing up the costs and benefits 6 Accounting as an information system 8 Management accounting and financial accounting 9 Scope of this book 12 The changing face of accounting 12 Accounting for ethics 13 Why do I need to know anything about accounting and finance? 15 The quest for wealth creation 15 Meeting the needs of other stakeholders 16 Wealth creation over the long term 17 Balancing risk and return 18 Summary 20 Key terms 21 References 21 Further reading 21 Critical review questions 22 Part One FINANCIAL ACCOUNTING 23 2 Measuring and reporting financial position 24 Introduction 24 The major financial statements – an overview 25 The statement of financial position 29 The effect of trading transactions 36 Classifying assets 37 Classifying claims 39 Statement layouts 40 Capturing a moment in time 42 The role of accounting conventions 43 Money measurement 46 CONTENTS vii F01 Accounting and Finance for Non 34691.indd 7 12/08/2021 07:11 Valuing assets 49 Meeting user needs 54 Summary 56 Key terms 57 Reference 58 Further reading 58 Critical review questions 58 Exercises 59 3 Measuring and reporting financial performance 61 Introduction 61 The income statement 62 Different roles 63 Income statement layout 64 Further issues 65 Recognising revenue 68 Recognising expenses 71 Depreciation 75 Costing inventories 83 Trade receivables problems 88 Uses and usefulness of the income statement 90 Summary 91 Key terms 92 Further reading 93 Critical review questions 93 Exercises 93 4 Accounting for limited companies 97 Introduction 97 The main features of limited companies 98 The role of the Stock Exchange 103 Managing a company 103 The UK Corporate Governance Code 105 Financing limited companies 107 Borrowings 114 Withdrawing equity 114 The main financial statements 118 Dividends 120 Additional financial statements 121 The directors’ duty to account 124 The need for accounting rules 124 Sources of accounting rules 125 The auditors’ role 126 Management commentary 127 Creative accounting 129 viii CONTENTS F01 Accounting and Finance for Non 34691.indd 8 12/08/2021 07:11 Summary 132 Key terms 133 Further reading 134 Critical review questions 134 Exercises 134 5 Measuring and reporting cash flows 138 Introduction 138 Why is cash so important? 139 The statement of cash flows and its relation to the other financial statements 140 The relationship between the financial statements 141 The main features of the statement of cash flows 142 A definition of cash and cash equivalents 142 The layout of the statement of cash flows 144 The normal direction of cash flows 146 Preparing the statement of cash flows 148 What does the statement of cash flows tell us? 156 Summary 159 Key terms 159 Further reading 160 Critical review questions 160 Exercises 160 6 Analysing and interpreting financial statements 165 Introduction 165 Financial ratios 166 Financial ratio classifications 166 The need for comparison 167 Calculating the ratios 169 A brief overview 170 Profitability 171 Efficiency 177 Relationship between profitability and efficiency 182 Liquidity 184 Financial gearing 186 Investment ratios 190 Trend analysis 198 Using ratios to predict financial failure 199 Limitations of ratio analysis 199 Summary 202 Key terms 204 Further reading 204 Critical review questions 204 Exercises 205 CONTENTS ix F01 Accounting and Finance for Non 34691.indd 9 12/08/2021 07:11