Seventh Edition ACCOUNTING AND FINANCE for Non-Specialists ...

Seventh Edition

ACCOUNTING AND FINANCE for Non-Specialists Peter Atrill and Eddie McLaney

Financial Times Prentice Hall is an imprint of

Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • Madrid • Mexico City • Amsterdam • Munich • Paris • Milan

Contents Preface (-Tow to use this book Integrated assessment material End-qf-chapter assessment material Guided tour of the book Guided tour of MyAccountingLab Acknowledgerffents

I Introduction to accounting and finance Introduction Learning outcomes What are accounting and finance? ,j Who are the users of accounting information? Providing a service But... is it material? Weighing up the costs and benefits Accounting as an information system Management accounting and financial accounting Scope of this book Has accounting become too interesting? The changing face of accounting How are businesses managed? What is the financial objective of a business? Balancing risk and return Not-for-profit organisations Why do I need to know anything about accounting and finance? Summary Key terms Further reading Review questions

xv xvi xvi xvi xviii xxi xxiii 1 1 1 2 3 5 7 7 9 10 12 12 14 15 15 19 20 21 22 24 24 25

VII

Contents

P a r t i FINANCIAL ACCOUNTING 2

•.

3

VIII

Measuring and reporting financial position

29

Introduction Learning outcomes Making financial decisions The major financial statements - an overview The statement of financial position The effect of trading transactions Classifying assets Classifying claims Statement layouts Self-assessment question 2.1 Capturing a moment in time The role of accounting conventions Money measurement Valuing assets Meeting user needs Summary '" Key terms Further reading Review questions • Exercises

29 29 30 30 35 42 44 47 48 50 50 51 55 58 63 64 66 66 67 67

Measuring and reporting financial performance

70

Introduction /' D Learning outcomes What does it mean? The income statement Different roles Income statement layout Further issues Recognising revenue Recognising expenses Depreciation Costing inventories Trade receivables problems Self-assessment question 3.1 Uses and usefulness of the income statement Summary Key terms

70 70 71 71 73 74 75 .78 83 87 97 101 103 104 105 107

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•

Contents

^Further reading •Review questions 'Exercises

107 107 108

Accounting for limited companies

112

Introduction Learning outcomes ^The main features of limited companies Managing a company The UK Corporate Governance Code Financing limited companies Raising share capital Borrowings Withdrawing equity The main financial statements Dividends Additional financial statements The directors' duty to account The need for accounting rules Sources of accounting rules The auditors' role The directors' report Creative accounting Self-assessment question 4.1 Summary Key terms Reference ° Further reading Review questions Exercises

112 112 113 119 121 123 131 131 132 136 138 138 141 142 143 145 145 146 148 149 152 152 152 153 153

Measuring and reporting cash flows

158

Introduction Learning outcomes The statement of cash flows Why is cash so important? The main features of the statement of cash flows A definition of cash and cash equivalents The relationship between the main financial statements The form of the statement of cash flows The normal direction of cash flows / Preparing the statement of cash flows

158 158 159 160 161 161 163 163 166 167

IX

Contents

What does the statement of cash flows tell us? Self-assessment question 5.1 Summary Key terms Further reading Review questions Exercises

6 j Analysing and'interpreting financial statements Introduction Learning outcomes Financial ratios Financial ratio classifications Trie need for comparison Calculating the ratios A brief overview Profitability Efficiency Relationship between profitability and efficiency Liquidity Financial gearing Self-assessment question 6.1 Investment ratios Trend analysis Using ratios to predict future outcomes Limitations of ratio analysis Summary ' Key terms Further reading Review questions Exercises

175 177 178 179 180 180 180

186 186 186 187 188 189 190 192 193 200 205 207 209 215 217 224 226 226 228 230 230 230 231

Part 2 MANAGEMENT ACCOUNTING I 7 « Cost-volume-profit analysis Introduction Learning outcomes Cost behaviour Fixed cost Variable cost

239 239 239 240 240 242

Contents

Semi-fixed (semi-variable) cost Finding the break-even point Contribution Margin of safety Achieving a target profit Operating gearing Profit-volume charts Failing to break even Weaknesses of break-even-analysis Using contribution to make decisions: marginal analysis Self-assessment question 7.1 Summary Key terms Furthehceading Review questions Exercises

8 Full costing

243 245 250 251 254 255 257 257 258 261 269 270 271 271 272 272 276

Introduction Learning outcomes Why do managers want to know the full cost? What is full costing? Single-product businesses Multi-product businesses Direct and indirect cost Job costing Overheads as service Tenderers How job costing works Batch costing Full (absorption) cost as the break-even price Self-assessment question 8.1 Activity-based costing Using full (absorption) cost information Summary Key terms Further reading Review questions Exercises

276 276 277 278 279 280 280 282 285 286 296 297 297 298 306 306 308 308 309 309

Budgeting

312

Introduction Learnina outcomes

312 312

XI

Contents

I I

, . ..." '

Budgets and budgeting How budgets link with strategic plans and objectives Time horizon of plans and budgets Limiting factors Budgets and forecasts Periodic and continual budgets How budgets link to one another How budgets help managers Using budgets in practice v Incremental and zero-base budgeting Preparing the cash budget Preparing other budgets Non-financial measures in budgeting Self-assessment question 9.1 Budgeting for control Measuring variances from budget Making budgetary control effective Behavioural issues Summary Key terms " Reference Further reading Review questions Exercises

313 313 316 316 317 317 318 321 323 325 327 331 334 334 335 336 343 344 345 346 346 346 347 347

Part 3 FINANCIAL MANAGEMENT 10; Making capital investment decisions Introduction Learning outcomes The nature of investment decisions Investment appraisal methods Accounting rate of return (ARR) Payback period (PP) Net present value (NPV) Why NPV is better Internal rate of return (IRR) Some practical points Investment appraisal in practice Self-assessment question 10.1 Summary

XII

355 355 355 356 357 359 364 368 377 379 384 388 391 393

Contents

Key terms Further reading Review questions Exercises

395 395 396 396

11 i Financing a business „

402

Introduction Learning outcomes .Sources of finance • Sources of internal finance [long-term sources of internal finance Short-term sources of internal finance Sources of external finance Long-tefrn sources of external finance Gearing and long-term financing decisions Share issues The role of the Stock Exchange T-he Alternative Investment Market Short-term sources of external finance Long-term versus short-term borrowing Providing long-term finance for the small business Self-assessment question 11.1 Summary Key terms References Further reading Review questions ~ Exercises

402 402 403 403 403 405 407 408 423 426 431 435 436 440 441 444 446 447 448 448 448 448

12 Managing working capital

453

Introduction Learning outcomes , What is working capital? The scale of working capital Managing inventories Managing receivables Self-assessment question 12.1 Managing cash Managing trade payables Summary Key terms Further reading

453 453 454 456 458 470 475 479 487 490 492 493

I

XIII &

Contents

Review questions Exercises

493 494

Appendix A: Glossary of key terms

498

Appendix B: Solutions to self-assessment questions

XIV

511

Appendix C: Solutions to review questions

522

Appendix D: Solutions to selected exercises

535

Appendix E: Present value table

563

Index

565