CONTENTS Preface How to use this book Acknowledgements 1 Introduction to accounting Introduction Learning outcomes What is accounting? Who are the users of accounting information? The conflicting interests of users How useful is accounting information? Providing a service Weighing up the costs and benefits Accounting as an information system Management accounting and financial accounting Scope of this book The changing face of accounting Accounting for business What is the purpose of a business? What kinds of business ownership exist? How are businesses organised? The quest for wealth creation Meeting the needs of other stakeholders Balancing risk and return Reasons to be ethical Not-for-profit organisations Summary Key terms References Further reading Review questions 2 Measuring and reporting financial position Introduction Learning outcomes The major financial statements - an overview The statement of financial position The effect of trading transactions Classifying assets Classifying claims Statement layouts Capturing a moment in time The role of accounting conventions Money measurement Valuing assets Meeting user needs Self-assessment question Summary Key terms Review questions Exercises 3 Measuring and reporting financial performance Introduction Learning outcomes The income statement Different roles Income statement layout Further issues Recognising revenue Recognising expenses Profit, cash and accruals accounting Depreciation Costing inventories Trade receivables problems Uses and usefulness of the income statement Self-assessment question Summary Key terms Further reading Review questions Exercises 4 Accounting for limited companies (1) Introduction Learning outcomes The main features of limited companies Legal safeguards Public and private companies Taxation The role of the Stock Exchange Capital market efficiency Managing a company Financing limited companies Share capital Reserves Bonus shares Share capital jargon Borrowings Raising share capital Withdrawing equity The main financial statements Dividends Self-assessment question Summary Key terms References Further reading Review questions Exercises 5 Accounting for limited companies (2) Introduction Learning outcomes The directors' duty to account The need for accounting rules Sources of accounting rules Problems with standards Accounting rules or accounting choice? The need for a conceptual framework The IASB framework The auditors' role The framework of annual financial reports Presenting the financial statements Management commentary Directors' report Strategic report Accounting standards and accounting policies Creative accounting Self-assessment question Summary Key terms References Further reading Review questions Exercises 6 Measuring and reporting cash flows 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 layout of the statement of cash flows The normal direction of cash flows Preparing the statement of cash flows Reconciliation of liabilities from financing activities What does the statement of cash flows tell us? Problems with IAS 7 Self-assessment question Summary Key terms Reference Further reading Review questions Exercises 7 Recognising and reporting assets and liabilities Introduction Learning outcomes Provisions, contingent liabilities and contingent assets Provisions Contingent liabilities Contingent assets Internally-generated intangible assets Leases Borrowing costs Self-assessment question Summary Key terms Further reading Review questions Exercises Appendix: Time value of money 8 Analysing and interpreting financial statements (1) Introduction Learning outcomes Financial ratios Financial ratio classifications The need for comparison Calculating the ratios A brief overview Profitability Efficiency Relationship between profitability and efficiency Liquidity Operating cash cycle Financial gearing Self-assessment question Summary Key terms Further reading Review questions Exercises 9 Analysing and interpreting financial statements (2) Introduction Learning outcomes Investment ratios Financial ratios and the problem of overtrading Key performance indicators Common-size financial statements Trend analysis Using ratios to predict financial failure Limitations of ratio analysis Self-assessment question Summary Key terms References Further reading Review questions Exercises 10 Reporting the financial results of groups of companies Introduction Learning outcomes What is a group of companies? How do groups arise? Types of group relationship Preparing a group statement of financial position Goodwill arising on consolidation and asset carrying amounts Inter-company assets and claims Preparing a group income statement The statement of comprehensive income Inter-company trading Group statement of cash flows Accounting for less than a controlling interest - associate companies The argument against consolidation Self-assessment question Summary Key terms Further reading Review questions Exercises 11 Increasing the scope of financial reporting Introduction Learning outcomes The development of financial reporting From stewardship to decision making Segmental financial reports Summary financial statements Interim financial statements The value added statement Inflation accounting and reporting Self-assessment question Summary Key terms References Further reading Review questions Exercises 12 Governing a company Introduction Learning outcomes Corporate governance The board of directors The UK Corporate Governance Code Tasks of the board Chairing the board The role of non-executive directors The audit process Remunerating directors Performance measures Assessing board performance The rise of shareholder activism Self-assessment question Summary Key terms References Further reading Review questions Exercises Appendix A Recording financial transactions Introduction Learning outcomes The basics of double-entry bookkeeping Recording trading transactions Balancing accounts and the trial balance Preparing the financial statements (final accounts) The ledger and its division Summary Key terms Further reading Exercises Appendix B Glossary of key terms Appendix C Solutions to self-assessment questions Appendix D Solutions to review questions Appendix E Solutions to selected exercises Index