Preface to the Fourth Edition xvii About the Author xxi Acknowledgements xxii PART I Context of Accounting 1 1 Introduction to Accounting 3 Accounting, accountability and the account 3 Introducing the functions of accounting 5 A short history of accounting 6 The role of financial accounting 7 The role of management accounting 8 Recent developments in accounting 10 The relationship between financial accounting and management accounting 12 A critical perspective 13 Conclusion 15 References 15 Questions 16 2 Accounting and its Relationship to Shareholder Value and Corporate Governance 17 Capital and product markets 17 Shareholder value-based management 18 Shareholder value, strategy and accounting 21 Company regulation and corporate governance 23 The regulation of companies 23 Corporate governance 23 Principles of corporate governance 24 Responsibility of directors 24 Audit 25 Audit committees 25 Stock Exchange Listing Rules 26 Risk management, internal control and accounting 26 A critical perspective 27 Conclusion 28 References 28 Websites 28 Questions 29 3 Recording Financial Transactions and the Principles of Accounting 30 Business events, transactions and the accounting system 30 The double entry: recording transactions 31 Extracting financial information from the accounting system 35 Basic principles of accounting 37 Accounting entity 37 Accounting period 37 Matching principle 38 Monetary measurement 38 Historic cost 38 Going concern 39 Conservatism 39 Consistency 39 Cost terms and concepts: the limitations of financial accounting 39 Conclusion 41 References 41 Questions 42 4 Management Control, Accounting and its Rational-Economic Assumptions 44 Management control systems 44 Planning and control in organizations 47 Non-financial performance measurement 51 A theoretical framework for accounting 55 Conclusion 56 References 56 Websites 58 5 Interpretive and Critical Perspectives on Accounting and Decision Making 59 Research and theory in management control and accounting 60 Alternative paradigms 62 The interpretive paradigm and the social construction perspective 65 Culture, control and accounting 67 The radical paradigm and critical accounting 68 Power and accounting 70 Case study 5.1: easyJet 71 Ethics and accounting 74 Case study 5.2: Enron 76 Case study 5.3: WorldCom 77 Conclusion 77 References 78 PART II The Use of Financial Statements for Decision Making 81 6 Constructing Financial Statements: IFRS and the Framework of Accounting 83 International Financial Reporting Standards (IFRS) 84 Framework for the Preparation and Presentation of Financial Statements 85 Objectives of financial statements 86 Qualitative characteristics of financial statements 86 Elements of financial statements 87 Concepts of capital maintenance 88 True and fair view 88 Reporting profitability: the Statement of Comprehensive Income 89 Reporting financial position: the Statement of Financial Position 92 Accruals accounting 94 Depreciation 95 Specific IFRS accounting treatments 97 Accounting for sales taxes 98 Accounting for goodwill and impairment testing 98 Accounting for research and development expenditure 99 Accounting for leases 99 Reporting cash flow: the Statement of Cash Flows 100 Differences between the financial statements 102 Illustration 102 A theoretical perspective on financial statements 103 Agency theory 104 A critical perspective on financial statements and accounting standards 105 Conclusion 105 Reference 106 Websites 106 Appendix: IFRS as at 1 January 2011 106 Questions 107 7 Interpreting Financial Statements 111 Annual Reports 111 The context of financial statements 113 Ratio analysis 113 Profitability 115 Return on (shareholders') investment (ROI) 115 Return on capital employed (ROCE) 115 Operating margin (or operating profit/sales) 116 Gross margin (or gross profit/sales) 116 Overheads/sales 116 Sales growth 116 Liquidity 117 Working capital 117 Acid test (or quick ratio) 117 Gearing 117 Gearing ratio 117 Interest cover 117 Activ