Fifth Edition

FINANCIAL ANDMANAGEMENT ACCOUNTINGAn Introduction

Pauline WeetmanProfessor of AccountingUniversity of Edinburgh

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Contents

Preface to the fifth editionGuided tour of the bookPublisher's acknowledgements

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Part 1 A conceptual framework: setting the scene

Chapter 1 Who needs accounting? 4Real World Case 4Learning outcomes 5

1.1 Introduction 61.2 The development of a conceptual framework 71.3 Framework for the preparation and presentation of financial

statements 81.4 Types of business entity 91.5 Users and their information needs 121.6 General purpose or specific purpose financial statements? 171.7 Stewards and agents 171.8 Who needs financial statements? 18

1.9 Summary 19

Further reading 20

Questions 20A Test your understanding 20B Application 21C Problem solving and evaluation 21Activities for study groups 22Notes and references 22

Supplement: introduction to the terminology of business transactions 24Test your understanding 25

Chapter 2 A systematic approach to financial reporting:the accounting equation 26Real World Case 26Learning outcomes 27

2.1 Introduction 282.2 The accounting equation 28

Contents

2.3 Defining assets2.4 Examples of assets2.5 Recognition of assets2.6 Defining liabilities2.7 Examples of liabilities2.8 Recognition of liabilities2.9 Defining the ownership interest2.10 Recognition2.11 Changes in the ownership interest2.12 Assurance for users of financial statements2.13 Summary

Further reading

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Notes and references

Supplement: debit and credit bookkeepingTest your understanding

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Chapter 3 Financial statements from the accounting equationReal World CaseLearning outcomes

3.1 Introduction3.2 Who is in charge of the accounting system?3.3 The accounting period3.4 The statement of financial position (balance sheet)3.5 The income statement (profit and loss account)3.6 The statement of cash flows3.7 Usefulness of financial statements3.8 Summary

QuestionsA Test your understandingB ApplicationActivities for study groups

Supplement: using the accounting equation to analysetransactionsTest your understanding

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Chapter 4 Ensuring the quality of financial statementsReal World CaseLearning outcomes

4.1 Introduction4.2 Qualitative characteristics of financial statements4.3 Measurement in financial statements4.4 Views on prudence

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4.5 Regulation of financial reporting4.6 Reviewing published financial statements4.7 Summary

Further reading

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Notes and references

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Chapter 5 Accounting information for service businessesReal World CaseLearning outcomes

5.1 Introduction5.2 Analysing transactions using the accounting equation5.3 Illustration of accounting for a service business5.4 A process for summarising the transactions: a spreadsheet5.5 Financial statements as a means of communication5.6 Summary

QuestionsA Test your understandingB Application

Supplement: recording transactions in ledger accounts -a service businessTest your understanding

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Chapter 6 Accounting information for trading businessesReal World CaseLearning outcomes

6.1 Introduction6.2 Goods purchased for resale6.3 Manufacturing goods for resale6.4 Illustration of accounting for a trading business6.5 A process for summarising the transactions: a spreadsheet6.6 Financial statements of M. Carter, wholesaler6.7 Summary

QuestionsA Test your understandingB Application

Supplement: recording transactions in ledger accounts:a trading businessTest your understanding

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Contents

Part 3 Recognition in financial statements

Chapter 7 Published financial statements 160Real World Case 160Learning outcomes 162

7.1 Introduction 1637.2 International influences 1637.3 Accounting framework 1657.4 Statement of financial position (balance sheet) 1697.5 Income statement (profit and loss account) 1737.6 Statement of cash flows 1767.7 Group structure of companies 1797.8 Group financial statements 1817.9 Small and medium-sized entities (SMEs) 1857.10 Beyond the annual report 1877.11 Summary 190

Further reading 191Useful websites . 191

Questions 191A Test your understanding 191B Application ' 192C Problem solving and evaluation 193Activities for study groups 193

Notes and references 193

Supplement 7.1: information to be presented on the face of thebalance sheet, as required by IAS 1 195

Supplement 7.2: balance sheet format 1, as prescribed by theCompanies Act 2006 196

Supplement 7.3: information to be presented on the face of theIncome Statement as required by IAS 1 198

Supplement 7.4: UK Companies Act profit and loss account format 1 -list of contents 199

Chapter 8 Non-current (fixed) assetsReal World CaseLearning outcomes

8.1 Introduction8.2 Definitions8.3 Recognition8.4 Users' needs for information8.5 Information provided in the financial statements8.6 Usefulness of published information8.7 Depreciation: an explanation of its nature8.8 Reporting non-current (fixed) assets and depreciation in

financial statements8.9 Summary

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Further reading 224

Questions 224A Test your understanding 225B Application 225C Problem solving and evaluation 226Activities for study groups 227

Notes and references 227

Supplement: recording non-current (fixed) assets and depreciation 228Test your understanding 237

Chapter 9 Current assetsReal World CaseLearning outcomes

9.1 Introduction9.2 Definitions9.3 The working capital cycle9.4 Recognition9.5 Users' needs for information9.6 Information provided in the financial statements9.7 Measurement and recording9.8 Inventories (stocks) of raw materials and finished goods9.9 Receivables (debtors)9.10 Prepayments9.11 Revenue recognition9.12 Summary

QuestionsA Test'your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Notes and references

Supplement: bookkeeping entries for (a) bad and doubtful debts;and (b) prepaymentsTest your understanding

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Chapter 10 Current liabilitiesReal World CaseLearning outcomes

10.1 Introduction10.2 Definitions10.3 Recognition10.4 Users' needs for information10.5 Information provided in the financial statements10.6 Measurement and recording10.7 Accruals and the matching concept10.8 Liabilities for taxation10.9 Summary

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QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Notes and references

Supplement: bookkeeping entries for accrualsTest your understanding

Chapter 11 Provisions and non-current (long-term) liabilitiesReal World CaseLearning outcomes

11.1 Introduction11.2 Users' needs for information11.3 Information provided in the financial statements11.4 Provisions11.5 Deferred income11.6 Non-current (long-term) liabilities11.7 Summary

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Notes and references

Supplement: bookkeeping entries for provisions and deferred incomeTest your understanding

Chapter 12 Ownership interestReal World CaseLearning outcomes

12.1 Introduction12.212.312.412.512.612.712.812.9

Definition and recognitionPresentation of ownership interestStatement of changes in equityUsers' needs for informationInformation provided in the financial statementsDividendsIssue of further shares on the Stock ExchangeSummary

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Notes and references

Supplement: a spreadsheet for adjustment to a trial balanceat the end of the accounting periodTest your understanding

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Part 4 Analysis amid issues no reporting

Chapter 13 Ratio analysis 340Real World Case 340Learning outcomes 341

13.1 Introduction 341

13.2 A note on terminology 34213.3 Systematic approach to ratio analysis 34213.4 Investors'views on risk and return 35013.5 Pyramid of ratios 35213.6 Use and limitations of ratio analysis 35313.7 Worked example of ratio analysis 35413.8 Linking ratios to the statement of cash flows 36013.9 Summary 363Questions 363A Test your understanding 364B Application 364C Problem solving and evaluation 366

Chapter 14 Reporting corporate performance 367Real World Case 367Learning outcomes 369

14.1 Introduction 36914.2 Operating and financial review (OFR) and business review 36914.3 Other guidance in analysis 37314.4 . Segmental information 37714.5 Off-balance-sheet finance 38114.6' Corporate social responsibility 38314.7 Corporate governance • 385

14.8 Developing issues: 'present fairly' and 'true and fair view' 38714.9 Measurement of value 38914.10 Developing issues: how valid is the stakeholder model? 39214.11 Summary 393Further reading 394Questions 395A Test your understanding 395B Application 396C Problem solving and evaluation 396Activities for study groups 396Notes and references 397

Chapter 15 Reporting cash flows 399Real World Case 399Learning outcomes 400

15.1 Introduction 40115.2 Cash and cash equivalents 40115.3 The direct method and the indirect method 401

15.4 Preparing a statement of cash flows: the indirect method 405

15.5 Preparing a statement of cash flows: the direct method 413

Contents

15.6 Interpretation of cash flow information15.7 Illustration15.8 SummaryFurther reading

QuestionsA Test your understandingB ApplicationC Problem solving and evaluation

Notes and references

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Part 5 Setting the scene and defining the basic tools of jmanagement accounting l

Chapter 16 Functions of management account ing 428Real World Case 428Learning outcomes '' 429

16.1 Introduction 43016.2 Meeting the needs of internal users 43216.3 Management functions 43316.4 Role of management accounting 43816.5 Judgements and decisions: case study illustrations 44116.6 The language of management accounting 44616.7 Summary 447Further reading 447Questions • 447A Test your understanding 447B Application 448C Problem solving and evaluation 449Activities for study groups / 452Notes and references 452

Chapter 17 Classification of costs 453Real World Case 453Learning outcomes 454

17.1 Definition of a cost 45417.2 The need for cost classification 45517.3 The meaning of 'activity' and 'output' 45517.4 Variable costs and fixed costs 45617.5 Direct costs and indirect costs 46017.6 Product costs and period costs 46217.7 Cost classification for planning, decision making and control 46417.8 Cost coding 46717.9 Cost selection and reporting 46817.10 Summary 469

Further reading 470

Contents

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Chapter 18 Product costs: materials, labour and overheadsReal World CaseLearning outcomes

18.1 Introduction18.2 Accounting for materials costs18.3 Accounting for labour costs18.4 Production overheads: traditional approach18.5 Activity-based costing (ABC) for production overheads18.6 Comparing the traditional approach and ABC

18.7 Summary

Further reading

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groupsNotes and references

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Part 6 Job costs and stock valuation

Chapter 19 Job costingReal World CaseLearning outcomes

19.1 Introduction19.2 Job-cost records: an illustration19.3 Job costing: applying the accounting equation to transactions19.4 Absorption costing and marginal costing19.5 Moving forward19.6 Summary

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Part 7 Decision making

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Chapter 20 Break-even analysis and short-term decision makingReal World CaseLearning outcomes

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Contents

20.1 Introduction20.2 Cost behaviour: fixed and variable costs20.3 Break-even analysis20.4 Using break-even analysis20.5 Limitations of break-even analysis20.6 Applications of cost-volume-profit analysis20.7 Cases in short-term decision making20.8 Pricing decisions20.9 Summary

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

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Part 8 Planning and control

Chapter 21 Preparing a budgetReal World CaseLearning outcomes

21.1 Introduction21.2 Purpose and nature of a budget system21.3 Administration of the budgetary process21.4 The benefits of budgeting21.5 Behavioural aspects of budgeting21.6 Approaches to budgeting21.7 Practical example - development of a budget21.8 Shorter budget periods21.9 Summary

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Chapter 22 Standard costsReal World CaseLearning outcomes

22.1 Introduction22.222.322.422.522.622.722.822.9

Purpose of using standard costsThe level of output to be used in setting standardsThe control processDirect materials cost varianceDirect labour cost varianceVariable overhead cost varianceFixed overhead expenditure varianceCase study: Allerdale Ltd

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22.10 Investigating variances22.11 Flexible budgets and variance analysis22.12 Case study: Brackendale Ltd22.13 Is variance analysis, based on standard costs, a useful22.14 A broader view of applications of variance analysis22.15 Summary

QuestionsA Test your understandingB ApplicationC Problem solving and evaluationActivities for study groups

Notes and references

Performance evaluation and feedback reportingReal World CaseLearning outcomes

23.1 Introduction23.2 Preparing performance reports23.3 Performance evaluation23.4 Benchmarking23.5 Non-financial performance measures23.6 The Balanced Scorecard23.7 Management use of performance measurement23.8 Summary

Further reading

QuestionsA Testyour understandingB ApplicationC Problem solving and evaluationActivities for study groups

Contents

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Part 9 Capital investment appraisal and business strategy

Chapter 24 Capital investment appraisalReal World CaseLearning outcomes

24.1 Purpose of capital investment appraisal24.2 Payback method24.3 Accounting rate of return24.4 Net present value method24.5 Internal rate of return24.6 Mutually exclusive projects24.7 Which methods are used in practice?24.8 Control of investment projects: authorisation and review24.9 Advanced manufacturing technologies

24.10 Summary

Further reading

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Questions 680A Test your understanding 680B Application 681C Problem solving and evaluation 682Activities for study groups 685

Supplement: table of discount factors 686

Chapter 25 Business strategy and management account ing 688Real World Case 688Learning outcomes 689

25.1 Introduction 68925.2 Strategic management accounting 690

25.3 The just-in-time approach 69125.4 Value chain analysis 69225.5 Total quality management and cost of quality 69325.6 Business process re-engineering 69425.7 E-business and e-commerce 695

25.8 Summary 698

Further reading 698

Questions 699A Test your understanding 699B Application 699C Problem solving and evaluation 700Activities for study groups 700Note and reference 700

Financial accounting terms defined G1Management accounting terms defined G11

AppendicesI Information extracted from annual report of Safe and

Sure Group pic, used throughout Financial Accounting A1II Solutions to numerical and technical questions in

Financial Accounting A15III Solutions to numerical and technical questions in

Management Accounting A41

Index 11