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					                                      Accounting
                                   Theory and Practice

                                           Contents

Preface to the eighth edition                               xxi
Acknowledgements                                            xxv


Part 1 ACCOUNTING I THEORY: AN OVERVIEW                       1
Introduction to Part 1                                        3

1 Accountability and accounting                               5
   Setting the scene                                          5
   Learning objectives                                        5
   Responsibility and accountability                          5
   Accountability and the social conscience                   6
   Accountability, truth and transparency                     7
   Accountability, trust and care                             7
   Accountability and responsibility: the duty of care        7
   Truth and fairness                                         8
   Summary                                                    8
   Self-assessment questions                                  9
   References                                                 9

2 The scope of business accounting                           10
   Setting the scene                                         10
   Learning objectives                                       10
   The definition of accounting                              10
   The emerging role of accounting                           12
   Accounting in a changing environment                      13
   Summary                                                   15
   Self-assessment questions                                 16
   References                                                16

3 Accounting as an information system                        17
   Setting the scene                                         17
   Learning objectives                                       17
   The output of an information system                       18
   Accounting information and the allocation of resources    21
   Behavioural aspects of decision making                    22
   Summary                                                   22
   Self-assessment questions                                        23
   Reference                                                        23

4 The universality of business accounting method                    24
   Setting the scene                                                24
   Learning objectives                                              24
   The transaction principle and double-entry bookkeeping           25
   The doctrinal purity of double-entry bookkeeping                 26
   Universal double-entry bookkeeping                               27
   The integration of financial and cost management                 28
   Social aspects of double-entry bookkeeping                       29
   Summary                                                          29
   Self-assessment questions                                        30
   References                                                       30

5 International rules for business accounting                       31
   Setting the scene                                                31
   Learning objectives                                              31
   The context of business accounting                               32
   The development of international rules for business accounting   33
   Concepts that determine the nature of business accounting        35
   The emergence of the global market economy                       35
   Summary                                                          36
   Self-assessment questions                                        36

6 The scope and role of accounting theory                           37
   Setting the scene                                                37
   Learning objectives                                              37
   The definition of good theory                                    38
   Theory construction                                              39
   Theory construction in accounting                                40
   Different approaches to accounting theory construction           41
   The ethics of accounting standards                               44
   Summary                                                          46
   Self-assessment questions                                        46
   References                                                       46


Part 2 ACCOUNTING INFORMATION                                       49
Introduction to Part 2                                              51

Section la Financial accounting                                     55

7 Financial accounting statements                                   56
   Setting the scene                                                56
   Learning objectives                                              56
   The income statement                                             57
   The balance sheet                                                58
   The accrual basis of accounting                                         61
   The statement of cash flows                                             61
   Summary                                                                 64
   Self-assessment questions                                               64
   Reference                                                               64

8 Financial accounting concepts                                            65
   Setting the scene                                                       65
   Learning objectives                                                     65
   The nature of financial accounting concepts                             66
   Financial accounting concepts                                           66
   Summary                                                                 78
   Self-assessment question                                                79
   Problems                                                                79
   References                                                              80

9 Financial accounting standards                                           81
   Setting the scene                                                       81
   Learning objectives                                                     81
   The importance of comparability                                         82
   Reasons for concern about standards                                     83
   The Accounting Standards Board (ASB) and the International Accounting
    Standards Board (IASB)                                                 84
   Accounting concepts, accounting methods and policy                      84
   Company legislation and International Accounting Standards              87
   Summary                                                                 88
   Self-assessment questions                                               88
   References                                                              88

10 The generation of financial accounting data                             89
   Setting the scene                                                       89
   Learning objectives                                                     89
   An outline of the information generation process                        90
   Source documents                                                        90
   The entry of basic data in the source books                             93
   The ledger                                                              96
   Computerized accounting systems                                         96
   Summary                                                                 98
   Self-assessment question                                                99
   Problems                                                                99
   Reference                                                               100

11 Data processing and double-entry bookkeeping                            101
   Setting the scene                                                       101
   Learning objectives                                                     101
   The accounting equation                                                 101
   Transactions and the accounting equation                                102
   Simplifying the recording of transactions                               104
  The nature of double-entry bookkeeping                      105
  Double-entry bookkeeping as a 'closed' system               110
  Accounts as descriptions of transactions                    112
  The mathematical implications of double-entry bookkeeping   113
  The trial balance                                           114
  Summary                                                     119
  Problems                                                    120
  Reference                                                   124

Section 1b Periodic measurement                               125

12 Double-entry bookkeeping and periodic measurement          126
  Setting the scene                                           126
  Learning objectives                                         126
  Problems in periodic measurement                            127
  Identifying the revenues and expenses of the period         127
  The meaning of revenue and expense                          128
  Periodic measurement and the accruals concept               129
  The accrual of income                                       129
  The accrual of expenses                                     130
  The results of the accrual adjustments                      134
  The matching of revenues and expenses                       135
  Inventory adjustments                                       136
  Summary                                                     138
  Self-assessment question                                    139
  Problems                                                    139

13 Losses in asset values and periodic measurement            142
  Setting the scene                                           142
  Learning objectives                                         142
  The treatment of losses in asset values                     143
  Losses in the value of non-current assets                   143
  The nature of depreciation                                  143
  The accounting concept of depreciation                      145
  Accounting for depreciation                                 151
  Accounting for the disposal of assets                       153
  Narrowing accounting differences: the role of standards     154
  Losses arising from the default of debtors                  156
  Summary                                                     161
  Self-assessment questions                                   161
  Problems                                                    161
  References                                                  164

14 Preparing an income statement and a balance sheet          165
  Setting the scene                                           165
  Learning objectives                                         165
  Preparing an income statement                               166
  Adjusting for accruals                                      167
   Adjusting for inventory                                    167
   Adjusting for loss in asset values                         168
   Calculating the periodic income                            169
   The formal presentation of the income statement            172
   Preparing a balance sheet                                  172
   The formal presentation of the balance sheet               175
   Summary                                                    178
   Problems                                                   179
   Reference                                                  186

15 Reporting recorded assets and liabilities                  187
   Setting the scene                                          187
   Learning objectives                                        187
   The valuation of assets                                    188
   The valuation of non-current assets                        188
   The revaluation of non-current assets                      189
   The valuation of current assets                            190
   The valuation of other assets                              194
   Provisions, contingent liabilities and contingent assets   201
   Summary                                                    202
   Self-assessment question                                   202
   Problems                                                   202
   Reference                                                  206

Section 2 Cost accounting                                     207
Introduction to Section 2                                     208

16 The processes of management                                212
   Setting the scene                                          213
   Learning objectives                                        213
   Planning                                                   214
   Organizing                                                 215
   Control                                                    216
   Communication                                              217
   Motivation                                                 218
   Information and decision making                            219
   Summary                                                    221
   Self-assessment questions                                  221
   Problem                                                    222
   References                                                 222

17 Traditional cost accounting                                223
   Setting the scene                                          223
   Learning objectives                                        223
   Objectives of cost analysis                                225
   The elements of cost                                       225
   The problem of overhead costs                              227
   Costing systems                                            237
   Summary                                                 239
   Self-assessment questions                               239
   Problems                                                240
   Reference                                               242

18 ABC and JIT                                             243
   Setting the scene                                       243
   Learning objectives                                     243
   Developing an ABC system                                244
   ABC and service organizations                           248
   Time-driven activity-based costing                      250
   Evaluation of ABC                                       250
   Just-in-time production systems                         251
   Summary                                                 253
   Self-assessment questions                               253
   Problem                                                 254
   References                                              254

19 Cost–volume–income analysis                             255
   Setting the scene                                       255
   Learning objectives                                     255
   Cost analysis and changes in output                     256
   Break-even analysis                                     257
   Calculating the break-even point                        258
   The profit–volume chart                                 262
   Changes in the factors                                  263
   The sales mix                                           268
   Cost–volume–profit analysis: some limitations           269
   Long-term variable costs                                270
   Summary                                                 271
   Self-assessment questions                               271
   Problems                                                272
   Reference                                               274

20 Marginal costing                                        275
   Setting the scene                                       275
   Learning objectives                                     275
   The case for marginal costing for inventory valuation   276
   Absorption and marginal costing compared                278
   The marginal costing controversy                        283
   Marginal costing and ABC                                283
   Summary                                                 283
   Self-assessment questions                               284
   Problems                                                284
   References                                              285

21 Costs for pricing                                       286
   Setting the scene                                       286
   Learning objectives                                      286
   The nature of the pricing problem                        287
   Pricing theory in accounting and economics               287
   Cost-based pricing theories                              289
   Target pricing and target costs                          296
   Return-on-investment pricing                             296
   Cost for export pricing                                  297
   Retrograde pricing                                       298
   Summary                                                  299
   Self-assessment questions                                299
   Problems                                                 300
   References                                               301

22 Costs for short-run tactical decisions                   302
   Setting the scene                                        302
   Learning objectives                                      302
   The nature of relevant costs                             303
   The importance of the contribution margin                304
   Opportunity costs                                        306
   Dropping a product line                                  307
   Selling or further processing                            308
   Operate or lease                                         309
   Make or buy                                              309
   Decision making in the face of limiting factors          310
   Linear programming and decision making                   312
   Summary                                                  316
   Self-assessment questions                                316
   Problems                                                 317
   Reference                                                321


Part 3 ACCOUNTING INFORMATION FOR DECISION MAKING           323
Introduction to Part 3                                      325

Section 1 a Financial reporting                             327

23 Companies: their nature and regulation                   328
   Setting the scene                                        328
   Learning objectives                                      328
   The nature of companies                                  329
   Financial accounting implications of corporate status    330
   The capital structure                                    331
   Leverage and the capital structure                       332
   Accounting procedures applied to the capital structure   334
   The regulation of financial reporting                    338
   The development of a conceptual framework                341
   Regulation by the Stock Exchange                         345
   Corporate governance                                     345
   Summary                                                                          345
   Self-assessment questions                                                        346
   Reference                                                                        346

24 Published financial statements                                                   347
   Setting the scene                                                                347
   Learning objectives                                                              347
   The recent developments of accounting and financial reporting legislation        348
   The current legislative framework for financial reporting                        350
   The income statement                                                             350
   The statement of total recognized gains and losses                               356
   The balance sheet                                                                357
   Other disclosure requirements                                                    363
   Additional disclosures                                                           372
   Small and medium-sized companies                                                 374
   Taxation in company accounts                                                     375
   Summary                                                                          377
   Problems                                                                         378
   Reference                                                                        382

25 Statements of cash flows                                                         383
   Setting the scene                                                                383
   Learning objectives                                                              383
   Advantages of the statement of cash flow                                         384
   Understanding changes in cash                                                    384
   Reporting cash flows                                                             385
   Reporting on operating activities                                                386
   Reconciliation of net debt                                                       390
   Exceptional and extraordinary items                                              391
   Converting from FRS 1 Statement of cash flows to IAS 7 Statement of cash flows   391
   Summary                                                                          395
   Problems                                                                         396
   References                                                                       401

26 Interpreting and comparing financial reports                                     402
   Setting the scene                                                                402
   Learning objectives                                                              402
   The nature of ratio analysis                                                     403
   The analysis of solvency                                                         405
   The analysis of financial performance                                            410
   The analysis of investment decisions                                             412
   Cash flow ratios                                                                 414
   Ratios as predictors of business failure: empirical studies                      415
   Summary                                                                          417
   Problems                                                                         417
   References                                                                       423
Section 1b Financial reporting: alternative approaches                425

Introduction to Section lb                                            426

27 Capital, value and income                                          428
   Setting the scene                                                  428
   Learning objectives                                                428
   Capital                                                            429
   Capital maintenance                                                430
   Income                                                             431
   The objectives of income measurement                               432
   Summary                                                            434
   Self-assessment questions                                          435
   References                                                         435

28 Accounting and economic concepts of income and value               436
   Setting the scene                                                  436
   Learning objectives                                                436
   Accounting concepts                                                436
   Economic concepts                                                  438
   Summary                                                            442
   Self-assessment questions                                          443
   References                                                         443

29 Accounting under monetary instability and market volatility        444
   Setting the scene                                                  444
   Learning objectives                                                445
   Accounting under monetary instability                              447
   Accounting for market volatility                                   465
   Summary                                                            469
   Self-assessment questions                                          470
   Problems                                                           470
   References                                                         473

Section 1c Extending the boundaries of corporate accountability       475

Introduction to Section lc                                            476

30 Reporting to investors                                             477
   Setting the scene                                                  477
   Learning objectives                                                477
   What investors want to know and the role of the IASB and the ASB   478
   The case for a decision usefulness approach                        480
   Possible solutions                                                 480
   The efficient market hypothesis                                    486
   The costs of increasing disclosure                                 488
   Summary                                                            488
   Self-assessment questions                                          489
   References                                                         489
31 Social accounting and the caring society                             490
   Setting the scene                                                    490
   Learning objectives                                                  490
   Business accounting and social accounting                            491
   Social responsibility and accountability                             492
   The nature of corporate social responsibility                        494
   Social accounting and employee reporting                             496
   Partnerships for the common good                                     498
   Corporate social objectives                                          499
   Corporate social reporting in the UK                                 500
   The greening of accounting                                           501
   Environmental legislation                                            502
   Challenges facing accountants                                        502
   Adapting management accounting                                       504
   Summary                                                              504
   Self-assessment questions                                            505
   References                                                           505

Section 2 Management control                                            507
Introduction to Section 2                                               508

32 Budgeting for planning and control                                   510
   Setting the scene                                                    510
   Learning objectives                                                  510
   Objectives of budgeting                                              510
   The need for flexibility                                             511
   The organization of budgeting                                        512
   Steps in budgeting                                                   512
   Forecasting sales                                                    514
   An illustration of the budgeting process                             514
   Evaluating the budget proposals                                      527
   Budgeting systems                                                    527
   Activity-based budgeting (ABB) and Activity-based management (ABM)   528
   Summary                                                              530
   Self-assessment questions                                            530
   Problems                                                             531
   References                                                           535

33 Organizing for control                                               536
   Setting the scene                                                    536
   Learning objectives                                                  536
   The integration of planning and control                              536
   Responsibility accounting                                            539
   Transfer pricing                                                     549
   Summary                                                              553
   Self-assessment questions                                            553
   Problems                                                             554
   Reference                                                            555
34 Standard costs and variance analysis                            556
    Setting the scene                                              556
    Learning objectives                                            556
    Standard costs and budgeted costs                              557
    Applications of standard costing                               557
    Setting cost standards                                         558
    Setting standard costs for direct material and direct labour   559
    Variance analysis for direct costs                             559
    Setting standards for overhead costs                           562
    Flexible budgeting                                             565
    Variance analysis for overhead costs                           567
    Sales variance analysis and the control of revenue             569
    Responsibility for variances                                   572
    The investigation of variances                                 573
    Limitations of standard costing                                574
    Summary                                                        575
    Self-assessment questions                                      575
    Problems                                                       576
    Reference                                                      578

35 The control of managed costs                                    579
    Setting the scene                                              579
    Learning objectives                                            579
    The nature of managed costs                                    580
    The control of managed costs                                   581
    Control of administrative costs                                583
    Control of research and development costs                      583
    Control of marketing costs                                     584
    Summary                                                        588
    Self-assessment questions                                      589
    References                                                     589

36 Capital investment decisions                                    590
    Setting the scene                                              590
    Learning objectives                                            590
    Types of capital investment decisions                          591
    The analysis of capital investment proposals                   591
    The relevant cash flows                                        592
    Methods of appraising capital investments                      592
    Investment appraisal and inflation                             604
    High-tech investments                                          606
    Summary                                                        607
    Self-assessment questions                                      608
    Problems                                                       608
    References                                                     611
37 Behavioural aspects of performance evaluation                   612
    Setting the scene                                              612
     Learning objectives                                                       612
     Managerial style and organization culture                                 613
     The objectives of performance evaluation                                  613
     Leadership styles and the problem of control                              614
     The effects of budgets on people                                          615
     Budget information and performance evaluation                             618
     The need for several measures of performance                              618
     The importance of participation                                           619
     Management by objectives                                                  619
     Organization theory                                                       621
     Approaches to organization theory                                         622
     Agency theory                                                             623
     Summary                                                                   624
     Self-assessment questions                                                 624
     Problem                                                                   625
     References                                                                626

 38 Managing profitability                                                     627
     Setting the scene                                                         627
     Learning objectives                                                       628
     Managing profitability through strategic management control               629
     Activity analysis                                                         631
     Customer profitability analysis                                           632
     Competitor analysis                                                       633
     Accounting for market-led design                                          634
     Non-financial measures of performance                                     635
     Managing profitability under growth, inflation, recession and deflation   637
     Summary                                                                   643
     Self-assessment questions                                                 643
     References                                                                643


Part 4 ACCOUNTING FOR MULTINATIONAL CORPORATIONS                               645
Introduction to Part 4                                                         647

 Section 1 Financial accounting for groups of companies                        649

39 Financial reporting for groups of companies                                 650
     Setting the scene                                                         650
     Learning objectives                                                       650
     The regulatory framework                                                  651
     Definition of a group                                                     652
     Preparation of consolidated accounts                                      653
     Summary                                                                   662
     Problems                                                                  663
40 Understanding consolidated financial statements                669
   Setting the scene                                              669
   Learning objectives                                            669
   Accounting for minority interests                              670
   Accounting for associated companies                            673
   Mergers and acquisitions                                       675
   Multinational groups                                           680
   The inflation problem                                          684
   Summary                                                        684
   Problems                                                       685

Section 2 Management control systems for multinational
corporations                                                      687

Introduction to Section 2                                         688

41 Management control systems design: a conceptual framework      690
   Setting the scene                                              690
   Learning objectives                                            690
   A conceptual framework                                         690
   Leadership and management                                      692
   Management control systems: a functional analysis              692
   Seven elements of strategic fit                                693
   The John Lewis Sharing model                                   696
   Corporate leadership through strategic planning and control    697
   Summary                                                        700
   Self-assessment questions                                      701
   References                                                     701

   Appendix Solutions to self-assessment questions and problems   705

   Index                                                          818

				
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