Table Of Content

t h i r d e d i t i o n W a l t e r a e r t s P e t e r W a l t o n Global Financial Accounting and Reporting: Principles and Analysis Australia  Brazil  Japan  Korea  Mexico  Singapore  Spain  United Kingdom  United States 62869_02_fm_pi_xvi.indd 1 15/12/12 7:41 AM Global Financial Accounting and Reporting: © 2013 Cengage Learning EMEA Principles and Analysis 3rd Edition ALL RIGHTS RESERVED. No part of this work covered by the copyright Walter Aerts and Peter Walton herein may be reproduced, transmitted, stored or used in any form or by Publishing Director: Linden Harris any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, Publisher: Andrew Ashwin information networks, or information storage and retrieval systems, except Commissioning Editor: Annabel Ainscow as permitted under Section 107 or 108 of the 1976 United States Copyright Editorial Assistant: Lauren Darby Act, or applicable copyright law of another jurisdiction, without the prior written permission of the publisher. Project Editor: Alison Cooke Production Controller: Eyvett Davis While the publisher has taken all reasonable care in the preparation of this book, the publisher makes no representation, express or implied, with Marketing Manager: Anne Renton regard to the accuracy of the information contained in this book and cannot Typesetter: S4Carlisle Publishing Services accept any legal responsibility or liability for any errors or omissions from Cover design: Adam Renvoize the book or the consequences thereof. Products and services that are referred to in this book may be either trademarks and/or registered trademarks of their respective owners. The publishers and author/s make no claim to these trademarks. The publisher does not endorse, and accepts no responsibility or liability for, incorrect or defamatory content contained in hyperlinked material. For product information and technology assistance, contact [email protected]. For permission to use material from this text or product, and for permission queries, email [email protected].. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: 978-1-4080-6286-9 Cengage Learning EMEA Cheriton House, North Way, Andover, Hampshire, SP10 5BE, United Kingdom Cengage Learning products are represented in Canada by Nelson Education Ltd. For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com Printed in China by RR Donnelley 1 2 3 4 5 6 7 8 9 10 – 15 14 13 62869_02_fm_pi_xvi.indd 2 15/12/12 7:41 AM Chapter 2 Accounting And AccountAnts iii b r i e f c o n t e n t s Preface X Acknowledgements XI Structure of the book XII Walk-through tour XIV Part 1 The accounting and business environment 1 1 Financial reporting and regulation 2 2 Accounting and accountants 29 Part 2 Basic financial statements 57 3 Measurement concepts and the balance sheet equation 58 4 Accruals accounting 98 5 Non-current assets and depreciation 131 6 Refining the accounting system 165 7 Preparing financial statements 197 Part 3 An introduction to financial statement analysis 215 8 A framework for interpretation 216 9 Financial statement analysis I 231 10 Statement of cash flows 261 Part 4 The financial statements of multinational companies 291 11 The annual report 292 12 Consolidated financial statements 306 13 Operating segments and foreign operations 344 14 Issues in financial reporting by multinationals 379 15 International taxation 412 16 Auditing and corporate governance 429 Part 5 Advanced financial statement analysis 449 17 Financial statement analysis II 450 18 IFRS and the future 484 Further reading 492 Glossary 495 Index 504 iii 62869_02_fm_pi_xvi.indd 3 15/12/12 7:41 AM c o n t e n t s Preface X Acknowledgements XI Structure of the book XII Walk-through tour XIV Part 1 The accounting and business environment 1 1 Financial reporting and regulation 2 Introduction 2 Using this book 3 Annual financial statements 4 Uses of financial statements 6 Accounting choices 10 Qualitative characteristics 12 Accounting regulation 14 International Financial Reporting Standards 20 Summary 28 Discussion questions 28 2 Accounting and accountants 29 Introduction 29 Accounting function 30 Accounting database 34 Recording transactions 34 Organization of data within the general ledger 36 Control and audit 38 The accounting profession 52 Summary 55 Discussion questions 55 Part 2 Basic financial statements 57 3 Measurement concepts and the balance sheet equation 58 Introduction 59 The balance sheet does not purport to show what the company is worth 60 iV 62869_02_fm_pi_xvi.indd 4 15/12/12 7:41 AM contents V Company characteristics affecting financial reporting behaviour 60 Content of financial statements 64 The basics of accounting measurement 70 Generally accepted accounting principles 71 Conventional measurement bases 76 Accounting for transactions 80 The IASB definition and recognition criteria for elements of the statement of financial position and the statement of profit or loss 89 Summary 94 Discussion Questions 94 Assignments 94 4 Accruals accounting 98 Introduction 99 Accruals basis of accounting 99 Credit transactions 101 Recognition of revenue 105 Period costs 108 Inventories and profit measurement 109 Inventory accounting techniques 115 Net realizable value 117 Accruals and the working capital cycle 118 Summary 120 Discussion Questions 120 Appendices 120 Assignments 126 5 Non-current assets and depreciation 131 Introduction 132 General valuation principles of non-current assets 133 Expensing non-current assets 136 Accounting for depreciation 144 Specific valuation principles by type of non-current assets 149 Intangible assets 149 Tangible assets 155 Investments 159 Summary 160 Discussion Questions 161 Assignments 161 6 Refining the accounting system 165 Introduction 166 Accruals and deferrals of expenses and revenues 166 Provisions 172 Asset impairment 178 Bad debts and doubtful debts 185 Hidden reserves 187 62869_02_fm_pi_xvi.indd 5 15/12/12 7:41 AM Vi contents Summary 192 Discussion Questions 192 Assignments 193 7 Preparing financial statements 197 Constructing financial statements 197 Accounting adjustments 205 Uses of financial statements 208 Summary 209 Assignments 209 Part 3 An introduction to financial statement analysis 215 8 A framework for interpretation 216 Introduction 217 Financial structure 218 Sources of finance 220 Dividend policy 223 Working capital management 224 Performance measurement 228 Summary 229 Discussion Questions 230 9 Financial statement analysis I 231 Introduction 231 The purpose of analysis 232 Traditional analysis 234 Tools of analysis 236 Management performance ratios 241 Financial strength ratios 247 Analyzing financial statements 250 Summary 254 Assignments 255 10 Statement of cash flows 261 Introduction 262 Usefulness of cash flow information 262 Cash flow cycles 263 Format and structure of the statement of cash flows 264 Cash flows from investing and financing activities 266 Cash flows from operating activities 270 Direct method for reporting operating cash flows 274 Constructing a statement of cash flows 1 277 Disposal of long-term assets 279 62869_02_fm_pi_xvi.indd 6 15/12/12 7:41 AM contents Vii Constructing a statement of cash flows 2 281 Interpretation 284 Presentational differences 286 Summary 287 Discussion Questions 287 Assignments 287 Part 4 The financial statements of multinational companies 291 11 The annual report 292 Introduction 292 The corporate report 294 Publicity document 297 Statement of comprehensive income 298 Analyzing the annual report 304 Summary 305 Discussion Questions 305 12 Consolidated financial statements 306 Introduction 307 Rationale for consolidated financial statements 311 Control as the basis for consolidation 313 Consolidation basics 314 Acquisition method 316 Goodwill and its subsequent measurement 321 Non-controlling interest 324 Consolidated statement of profit or loss 325 Associates and joint arrangements 329 Disclosure requirements 335 Summary 336 Discussion Questions 337 Assignments 337 13 Operating segments and foreign operations 344 Introduction 345 Stock exchange requirements 345 Segment reporting 346 Foreign currency transactions and foreign operations 356 Primary translation – translating foreign currency transactions in the functional currency 359 Secondary translation – translating foreign currency financial statements in a group’s presentation currency 362 62869_02_fm_pi_xvi.indd 7 15/12/12 7:41 AM Viii contents Alternative accounting methods for secondary translation 364 Functional currency and type of foreign operation 370 Hedging a net investment in a foreign operation 373 Summary 374 Discussion Questions 375 Assignments 375 14 Issues in financial reporting by multinationals 379 Introduction 380 Values in accounting 380 Measurement attributes 383 The IASB’s mixed-attribute model 388 Financial instruments 389 Investment property and agriculture 392 Pension obligations 395 Provisions 399 Post reporting period events 401 Discontinued operations 403 Environmental disclosures 404 Intellectual capital 408 Summary 409 Discussion Questions 409 Assignments 410 15 International taxation 412 Introduction 413 Corporate income tax and dividends 414 Deferred taxation 416 International taxation 424 Transfer pricing 425 Tax havens 427 Summary 427 Discussion Questions 428 16 Auditing and corporate governance 429 Corporate governance 430 Statutory audit 437 Issues in international audit 438 Auditor independence 439 Internal control and risk management 441 Audit committee 445 Summary 447 Discussion questions 447 62869_02_fm_pi_xvi.indd 8 15/12/12 7:41 AM contents iX Part 5 Advanced financial statement analysis 449 17 Financial statement analysis II 450 Introduction 450 Investor relations 451 Income smoothing 452 Why earnings fluctuate 453 Professional analysts 457 Quality of earnings 460 Analytical techniques 463 Strategic ratio analysis 466 Shareholder value 473 Summary 475 Assignments 476 18 IFRS and the future 484 Introduction 484 Strategic evolution 485 The IASB’s first decade 487 The 2007 financial crisis 489 The next five years 490 Summary 491 Further reading 492 Glossary 495 Index 504 62869_02_fm_pi_xvi.indd 9 15/12/12 7:41 AM

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"Global Financial Accounting and Reporting 3e" provides a complete companion to financial accounting that takes management students with no previous knowledge of accounting from the mechanics of how financial records are structured through to being able to understand and analyze published consolidat