business accounting

844 Pages·2011·11.4 MB·English

0273693107_COVER(Wood2) 9/2/05 9:34 am Page 1
F R A N K W O O D ’ S
2
TENTH EDITION
Every year, thousands of students rely on
Frank Wood's best-selling books to help them
pass their accountancy exams.
business
b
TENTH EDITION
Business Accountingis the world’s best-selling textbook on bookkeeping and accounting. Now in its tenth
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edition, it has become the standard introductory text for accounting students and professionals alike.
s F accounting
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New to this edition: Features: i R
➤ Over 120 brand new review questions for exam ➤ Easy-to-follow explanations of contemporary O n
practice accounting practice O e A
➤ Two new chapters on Corporate Governance ➤ Clear and logical progression through topics
and Public Sector Accounting ➤ Activities designed to reinforce your D s N
➤ Coverage of International Accounting understanding of key concepts s
Standards 2005 ➤ Over 300 review questions, including past & K
➤ Additional worked examples for areas of Examination Board questions
difficulty such as ratio analysis ➤ Regularly updated Companion Website at S a
www.pearsoned.co.uk/woodincluding further
W
self-test questions and accounting standards A c
updates N c
O
FRANK WOOD &
G o
O
S u ALAN SANGSTER
The book is used on a wide variety of courses in accounting and business, both at secondary and tertiary
level and for those studying for professional qualifications. It builds on Business Accounting 1to cover T D
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advanced aspects of financial accounting. It also covers introductory aspects of management accounting E
suitable for use at all levels up to and including professional foundation level courses and first-year R t ’
degree courses. S
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n

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'A classic textbook that has set thousands of students on a straight path since it was first
2
published, Wood & Sangster's Business Accountingcan be recommended without reservation to all
accounting students.'
Dr George Iatridis, University of Athens, Greece and University of Manchester
An imprint of
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BA2_A01.qxd 10/3/05 1:42 pm Page i
FRANK WOOD’S
2
business accounting
Visit the Business Accounting, tenth editionCompanion Website
at www.pearsoned.co.uk/wood to find valuable student learning
material including:
l Learning objectives for each chapter
l Multiple choice questions to help test your learning
l Review questions and answers
l Links to relevant sites on the web
l Searchable online glossary
l Flashcards to test your knowledge of key terms and definitions
BA2_A01.qxd 10/3/05 1:42 pm Page ii
Frank Wood
1926–2000
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F R A N K W O O D ’ S
2
business
TENTH EDITION
accounting
FRANK WOOD
BSc (Econ), FCA
and
ALAN SANGSTER
BA, MSc, Cert TESOL, CA
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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 edition published in 1967
Second edition published under the
Longman imprint in 1972
Third edition published in 1979
Fourth edition published in 1984
Fifth edition published under the
Pitman Publishing imprint in 1989
Sixth edition published in 1993
Seventh edition published in 1996
Eighth edition published under the Financial Times
Pitman Publishing imprint in 1999
Ninth edition published in 2002
Tenth edition published in 2005
© Frank Wood 1967
© Longman Group UK Limited 1972, 1979, 1984, 1989, 1993
© Pearson Professional Limited 1996
© Financial Times Professional Limited 1999
© Pearson Education Limited 2002, 2005
The rights of Frank Wood and Alan Sangster 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 0 273 69310 7
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

Wood, Frank.
Frank Wood’s business accounting, 2 / Frank Wood and Alan Sangster.—10th ed.
p. cm.
Includes index.
ISBN 0-273-69310-7
1. Accounting. I. Title: Business accounting 2. II. Title: Business accounting two. III. Sangster, Alan.
IV. Title.
HF5635.W8633 2005
657—dc22
2004061993
10 9 8 7 6 5 4 3
08 07 06 05
Typeset in 9.5/11.5pt Sabon by 35.
Printed and bound in China.
EPC/03
Also available:
Frank Wood’s Business Accounting Vol 1 –0273 681494
Book-keeping & Accounts – 0273 685481
Frank Wood’s A-level Accounting – 0273 685325
BA2_A01.qxd 10/3/05 1:42 pm Page v
Contents
Notes for teachers and lecturers xii
Notes for students xiv
part 1 Special accounts
1 Accounting for branches 3
2 Hire purchase accounts 29
part 2 Companies
3 Limited companies: general background 49
4 The issue of shares and debentures 55
5 Companies purchasing and redeeming their own shares and debentures 70
6 Limited companies taking over other businesses 94
7 Taxation in company financial statements 113
8 Provisions, reserves and liabilities 130
9 The increase and reduction of the share capital of limited companies 136
10 Accounting standards and related documents 148
11 The financial statements of limited companies: profit and loss
accounts, related statements and notes 183
12 The financial statements of limited companies: balance sheets 205
13 Published financial statements of limited companies:
accompanying notes 218
14 Cash flow statements 240
15 Contract accounts 264
part 3 Groups

16 Group financial statements: an introduction 277
17 Consolidation of balance sheets: basic mechanics (I) 284
18 Consolidation of balance sheets: basic mechanics (II) 307
19 Intercompany dealings: indebtedness and unrealised profit in stocks 317
20 Consolidated financial statements: acquisition of shares in
subsidiaries at different dates 330
21 Intra-group dividends 333
22 Consolidated balance sheets: sundry matters 347
23 Consolidation of the financial statements of a vertical group of
companies 356
24 Consolidated profit and loss accounts 369
25 Consolidated financial statements: acquisitions and mergers 378
26 Standards covering subsidiary and associated undertakings and
joint ventures 386
v
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Contents
part 4 Financial analysis
27 Accounting ratios 401
28 Interpretation of financial statements 422
part 5 Issues in financial reporting
29 Accounting theory 447
30 Current cost accounting 466
31 Social accounting 482
32 Corporate governance 491
33 Public sector accounting 496
34 Accounting for management control 505
part 6 Costing
35 Elements of costing 517
36 Absorption and marginal costing 531
37 Job, batch and process costing 555
part 7 Budgets
38 Budgeting and budgetary control 573
39 Cash budgets 582
40 Co-ordination of budgets 594
part 8 Standard costing and variance analysis
41 Standard costing 615
42 Materials and labour variances 620
43 Overhead and sales variances 638
part 9 Planning, control and decision making
44 Break-even analysis 657

45 Interest, annuities and leasing 674
46 Capital expenditure appraisal 689
47 The balanced scorecard 707
part 10 The emerging business environment of accounting
48 The supply chain and enterprise resource planning systems 717
49 E-commerce and accounting 724
Appendices
1 Interest tables 731
2 Answers to review questions 735
3 Glossary 804
Index 808
vi
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Supporting resources
Visit www.pearsoned.co.uk/woodto find valuable online resources
Companion Website for students
l Learning objectives for each chapter
l Multiple choice questions to help test your learning
l Review questions and answers
l Links to relevant sites on the web
l Searchable online glossary
l Flashcards to test your knowledge of key terms and definitions
FFoorr iinnssttrruuccttoorrss
l Complete, downloadable Solutions Manual
l PowerPoint slides that can be downloaded and used as OHTs
AAllssoo:: The Companion Website provides the following features:
l Search tool to help locate specific items of content
l E-mail results and profile tools to send results of quizzes to instructors
l Online help and support to assist with website usage and troubleshooting

For more information please contact your local Pearson Education sales
representative or visit www.pearsoned.co.uk/wood
BA2_A01.qxd 10/3/05 1:42 pm Page viii
Guided tour of the book
Part opening
part chapter
5 4
The issue of shares and debentures
ISSUES IN FINANCIAL
REPORTING
Learning objectives
After you have studied this chapter, you should be able to: Learning objectives
lexplain the terminology relating to the issue of shares and debentures
ldescribe the steps in the process of issuing of shares and debentures outline what you will
lrecord the accounting entries relating to the issue of shares and debentures
lmake the necessary entries in the ledger accounts when shares are forfeited need to have
Introduction learned by the end
In this chapter, you’ll learn about the alternatives available to companies when they
wish to issue shares and of the various entries to be made in the ledger accounts. of the chapter.
You’ll learn about how to record the issue of shares at a price greater than their
nominal value and how to record the issue of shares to existing shareholders,
rather than to non-shareholders wishing to purchase them. You will also learn
about the difference in accounting entries made when debentures (a form of loan
capital) rather than shares, are issued.
Introduction
This part looks at the theories upon which accounting practice is 4.1 The issue of shares
based, considers issues affecting accounting and financial
rceopnoterxtitn ogf atnhde erenvviierwonsm theen tp ilna cweh oifc ha cbcuosuinnteisnsg einnftoitrimesa otipoenr iant eth.e TcihenWe tc htooesn te onshfs uaisrrseeu st ihnaegr e cs ohissastur oeesfd c,d aotnhin ebyge s mvoea irysy rbheeil gaphtia.v yAealsby laien ,r seeisigtunhlitefi,r c t(haane) t n icmuommmbepedarir aoetfde l sytho ao trnhe esa piaspmsluioceuadnt imtosnu r,se toc ber iev( bseu)d f.bfiy-
instalments. Issues of shares may take place on the following terms connected with the price of
the shares:
2390 ACcucroreunntt icnogs tth aecocroyunting 446467 1S£h1a eraecsh i.ssued at par. This would mean that a share of £1 nominal value would be issued for
31 Social accounting 482 2Shares issued at a premium. In this case a share of £1 nominal value would be issued for more
32 Corporate governance 491 than £1 each, say for £3 each.
3334 PAcucboliucn steincgto fro ra cmcaonuangtienmgent control 540956 Nm19oi8gt0eh.:t Ahta voen be eteimn eis,s suheadr efos rc £o3u leda cbhe. iHssouweedv aetr , at hdisis wcoausn et.x pTrheusss,l ys hfoarrebsid edaecnh ino ft h£e5 Cnoommpinaanli evsa Alucet
Ac4ti.v1ity Wyohuy t hdion kyo cuo mthpinakn iceosm avpoaindi ebse minagy i nw itshhi st op oisssituieo ns?hares at a discount and how do
55
A wide range of exhibitsoffer clear examples
of accounting practice and methodology.
Chapter 36lAbsorption and marginal costing Chapter 8lProvisions, reserves and liabilities
36.12 Using marginal costs smhoovuelmd eevnetsr; more eitt cao suitluda btieo an gwehneerrea li tr ewseoruvled a scucfofeurn ltotshsa bt eccoauulsde boef ufosreedi gfonr c aunrrye pnucyrp eoxsceh. ange rate
Let’s test what you’re just learnt in another example. A company produces five products and has See Section 8.3 for a further look at general reserves.
the following cost and sales data. It can sell exactly 100 of each product it manufactures. Total
fixed costs are £4,800, apportioned: A £5 (100), B £7 (100), C £11 (100), D £15 (100), E £10 Such transfers are an indication to the shareholders that it would be unwise at the time of the
(100), i.e. £4,800 total. Exhibit 36.9 presents this in a table. transfer to pay out all the available profits as dividends. The resources represented by this part of
the profits should be retained, at least for the time being. Revenue reserves can be called upon in
Exhibit 36.9 future years to help swell the profits shown in the profit and loss appropriation account as being
available for dividend purposes. This is effected quite simply by debiting the particular reserve
Violet Ltd Products account and crediting the profit and loss appropriation account.
CoDsti rpeectr luanbiot:ur and materials A£8 B£9 1C£6 D2£ 5 1E£1 Ac8ti.v1ity Wevheyry dthoi nyogu in t hthinek p srpoefictia al nredv leonssu ea crceosuenrvte (sw ahriec hu sise,d i,t srealtfh, ear r tehvaenn usiem rpelsye rlevaev)?ing
Variable manufacturing costs 7 8 10 13 14
MFixaerdg icnoaslt csost 155 177 2161 3185 2150 8.3 General reserve
Full cost 20 24 37 53 35
Selling price per unit 30 21 31 80 20 A general reserve is one that can be used for any purpose. For example, it may be needed because
ovof ltuhme ee fofef cttr aodf ei nrfleamtiaoinns: athsseu smame ae fcoorm tphae nnye xnte etdhsr e£e4 y,0ea0r0s wbuotr kthinagt dcaupriintagl tihna 2t 0tXim3e ,a nthde tgheant etrhael Activitiesoccur
bmtlehevae Oedr rlgisensi scn outoafhl nltae tc loiflon ufps ulttrleh. o cdeIdo? nufs uYtcE ltbolxs au chcso iokibssnnti,t toco i3nawn6lulc y.teu1h dAl0aa a,t t a siypo nborndoeu. fd DoYcura ocaentu.p i opsceneaea n sri h fat oolfsuo oblldl eos ecwpeer iaownsfigeht ataohtbn ilwsley .ob wSurihlhndoeg unhsl adtmvh peoe rrhsoeea dlppluirpncoegtfini opte ndrti h coiafef n piB srf, oo lCedlsl uosa cwntthdiioan Enng lacaheamlevlln epotnlh u oooenvt ft e pspprr crooooiffiscm setpissebr oialtnyhrfice itrfis sed npatiaorssoten rsabci blebgeu ymett nhe2.eed5r , as ptla hemrree escce eovrnmvote:lp utiahmnnesey twe oawodfir lktlo rifsan tdgpil ealc yahaipnasi vgtie att lho dreniemdlqy u ioni£ru 4e2tm, 00ae0Xsn0 3dt wi.wv Toiidlrrlek anninndosgswf ei crsba repoi nin£tgea5 l,aw 0wn0anh0yui. c taIohfl ftrherqouuegnhtoluy t the
Exhibit 36.10 Ac8ti.v2ity Itnh itse armnds loefa tvhineg a tmhoe uanmt oouf nwt otrrkainnsgfe crarepdit ainl, pwrhoafitt ias nthde l odsisf?ference between doing book to test your
(1) (2) (3)
cfueallFs-ceoo lplsotrw opdirnuicgcini ngg, Ucspoirnsotgidn mugc,a icnreggai nEsea l aIgltpnorogoredetu hccoeesr t aailnnl gd sopOhny othf e‘i to’sth beert thearn tdo, biet msaafey tjhuasnt bsoe rtrhye’, cino nthseisr vcaatsiesm to c roenstvreicntt idoinv iadsesnedrtsi nbge ciatsueslef ,t hwei tfhu nad ps hthileoy- understanding of
Sales:EBCDA 111110000000000 ×××××£££££2238301100 B, C83,,a00n00£d00 E 8323o,,,,n0011l0000£y0000 i28323te,,,,,00011m00000£s00000 wdunitshseo oeeasnTyuds ec, hl a,drwt ierhs wwehd et iei hrittsnteh ehhbv,n a daeti rhfrnlle eaaeuthanwh eovrce eelreyfdsser, u eoswiterlshmtsre ei vr ctt tee hqoha sauupe utre la ebdsniavtdu t piei soblunoi nunstuu u seetotisc h nftsrh eoe et m sh stftsiueeahm rn hyevbed aeabs ss?alhe a ts aYeon ntrx ceehebceseheee. dy oostIet slnfaeddi v rrp et eeihrurn osecsa ,afie o mpw tntmrshovho aoeueofimrrmn teta tes aesrnden nelo o,tvdi tnfea o ltsdflofo.it iqsecs sstrru hr iaisaiadbiplsr lup.e,f tur Ttecohndahpedp i rbssioi tyaiwabs tlw ein soiooaennrmryg sta eoricoatnfcif nemo dtfsuihfifevensecir t idoeeb.e dnvuInf etst dlriioy-t-, new concepts.
TLeostsalC roesvtse:nue 11,000 16,200 18,200 other reserves.
DVair11re00iac00tb ××llaeccb mooossautt nrpp uaeefnrra dppc trrmuoorddaitnuuegccrtt icaolss:ts: ((££3230)) 32,,300000 ((££5388)) 53,,880000 ((££6592)) 65,,920000 8.4 Capital reserves
Fixed costs (do not change) 4,800 4,800 4,800 A capital reserveis a reserve which is notavailable for transfer to the profit and loss appropri-
Total costs (10,100) (14,400) (16,900) ation account to swell the profits shown as available for cash dividend purposes. Most capital
Net profit 900 1,800 1,300 rweislel rbvee ss eceann lnateevre rth baet ubtoilnisuesd s hfoarr ecsa msha dyi bvied iesnsude pdu arsp oa s‘enso –n -ncoatsihc’e dtihvei duesned o.f the word ‘cash’, as it
Let us look at the ways in which capital reserves are created.
543 131
viii
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A number of worked examplesare provided Learning outcomesrevisit and reinforce
to guide you through more difficult concepts. the major topics covered in the chapter.
Chapter 23lConsolidation of the financial statements of a vertical group of companies Part 3lGroups
Profit and Loss 16.9 Teaching method
£000 £000
MMiinnoorriittyy iinntteerreesstt SS12 143 PS1 6105 This topic can be taught and learnt using either of two methods. One is to focus on the journal
Cost of control S1: pre-acquisition 4 S2 35 entries required; this is quite abstract and, many feel, more difficult to understand than the other
Cost of control S2: pre-acquisition 9 method. Accordingly, the method used in this book for teaching consolidated financial state-
Cost of control: goodwill written off 20 ments is that of showing the adjustments needed on the face of the consolidated balance sheet,
Balance to consolidated balance sheet 11600 110 tboegceatuhseer: with any workings required to explain the amounts included. This approach is adopted
isll CMoisnto orift yc oinntterorel s8t0 2%0%×× 1×010 G£e0n010e082ral ResSe1r vbealance b/d £0110000 1Wphawdeaherjpuaf pbots eterimnsmli iehen vnatgehpt, se po t oeuhnnnree i cnjtnohegesbe,sc rafieasars tcystheao e cr oraty rflt ychat uhactleocna o bthhuiaoaenllvnaptiisnn n.yc ggoeW tuesoe hn t leotabre beitue longisre idivvaoeeerurs esst talhmay an‘ ubttdr,ci a rhtgdch ie’vees ye a-senosuyi uebearr j v ewctciloetaew, ay uar ’tn nhseddorxe o pntruhslogatatahnt jn auiadtts ic.ito s oSnt meoh a oopbsfwile ee wrxian hbtsgolea e ttts hoteioeesf
double-entry adjustments made in ledger accounts.
Now, let’s look at the same example but, this time, with the addition of proposed dividends. 2This would be a much lengthier and more costly book if all of the double entry accounts were
shown. It is better for a first look at consolidated financial statements to be an introduction to
23.6 A worked example with proposed dividends tIfh ey osuu bcjaenct u onndleyr,s rtaanthde rth teh acno nbsootlhid aante din fitrnoadnucciatilo snt aatnemd ean vtse rsyh odwetna iilned t hains abloysoiks ,o yfo tuh ew siullb hjeacvte.
a firm foundation which will enable you, in your future studies, to tackle the more difficult
Taking the same companies as in Example 1 but in this case the companies have proposed divi- and complicated aspects of the subject.
dends at 31 December 20X5 of P Ltd £16,000; S1 Ltd £5,000; S2 Ltd £20,000. The balance sheets
would have appeared:
Balance Sheets as at 31 December 20X5 Learning outcomes
Fixed assets P Ltd£00400 S1 Ltd£0004 S2 Lt£d00207 Y1ouO rsdhionualrdy nshoawr ehhaoveld leerasr gnet:nerally have voting rights, a right in the net assets of
Investments the company, and a right to an interest in profits earned.
NeSSthh caaurrreersse iinnnt SSa12ssets (as before) 1491 256 28 23POrredfineraerny cseh asrheahroelhdoelrdse rrse cdeoi vneo ct oupsiueasl olyf hthaev efi nanany cvioatli nsgta rtiegmhtesn.ts for the
Dividends to be received (80% of S1) 4 (75% of S2) 15 company whose shares they hold, but not for any company whose shares are
104 50 55 owned by the company they hold their shares in.
RSPhreoatafireitn caeandpd pi tlraoolsfis tass f aotr 3210.X152.20X4 £00204 40 £0005 10 £00105 20 4Cwthoietnh gs firoonliuadpna ct–ei adnl o fistnt jaautnsectm itahelen s tptsaa itrneecmnoter pncootsmr apptrianonvgyi dt’she e os wrheanlr eaevchaconoltdu denartssta di nfao tpraa a.rlel ncto umnpdaenriteask iinng s
(seebelow) 24 20 – 5The status of ‘subsidiary undertaking’ is dependent upon the existence of control
GPreonpeorsael dr edsievrivdeends 4186 12055 2105 6o‘Cvoenr ttrhoal’t iusn ddeetretramkiinnge db yb ya nwohtehtehre ern ‘tdiotym.inant influence’ can be exerted,
104 50 55 not simply by the level of investment in the company.
Note:
Retained profit P S1 S2
Net profits 20X5 36 10 20
LessProposed dividends (16) (5) (20) Answers to activities
PSA1 d8 d705%D%i vo iofd fSe 1Sn2 d× ×s5 r2e0ceivable 204 155 –– 16.1Pepxreecrhmfeairnte gtnhece efm os rht otah rinee hflgourleednaectrees r t hhraiesv kde et chfiaesriyo lnee xsmsp earrkisiieknn gic neo ,ft htthheeeir c oiornmdviepnsaatnrmyy e.snhta rtehhaonld oerrds igneatr yv oshtianrge hrioglhdtesr st.h aInt
24 20 –
361 282
Chapter 19lIntercompany dealings: indebtedness and unrealised profit in stocks
Review questions Each chapter ends with a selection of
Ncoomtep:r iUsensle osrsd ointahreyr wshisaer eisn doifc £a1te eda, cthh.e share capital of the companies in these review questions practice questionsto prepare you for
19.1Prepare a consolidated balance sheet from the following details as at 31 March 20X6. your examinations.
Parent Balance Sheet as at 31 March 20X6
£ £
Investment in subsidiary: 50,000 shares bought 31.3.20X5 105,000
Fixed assets 140,000
245,000
Stock 26,000
BDaenbktors 340,,000000
60,000
Less: Creditors (3,000)
57,000
302,000
Share capital 200,000
Profit and loss:
As at 31.3.20X5 45,000
Profit for 20X6 50,000
95,000
General reserve 7,000
302,000
Subsidiary Balance Sheet as at 31 March 20X6
£ £
Fixed assets 104,000
Stock 19,000
Debtors 14,000
Bank 6,000
143,000
Less: Creditors (7,000)
136,000
Share capital 50,000
Profit and loss:
As at 31.3.20X5 35,000
Profit for 20X6 51,000
86,000
136,000
During the year, Parent sold goods which had cost £1,100 to Subsidiary for £1,800. None of these
gooAdts t hhaed b baleaennc eso slhde beyt dthaete b Paalarenncet oshweeest Sduabtsei.diary £2,000. ‘
323
ix