Index

Aberdeen Asset Management, 414

abridged company accounts, 87, 171, 188

absolute size, 276

absorption costing, 433, 435, 455

total, 433, 435, 449, 452, 453, 457, 458

ACCA see Association of Chartered Certified Accountants

acceptance of IAS standards, 419

accountability, 313, 315, 337–8

accountancy, types of, 12–17

auditing, 12–13

bookkeeping, 14–15

financial accounting, 15

financial management, 15

insolvency, 15

management accounting, 15

fraud detection, 15

management consultancy, 17

taxation, 16–17

accountant, types of, 17–19

professionally qualified accountants, 17–19

second-tier bodies, 19

accounting, background to, 24–55

accounting principles, 40–41

language of accounting, 28–36

importance of financial accounting, 40

student example, 36–9

financial accounting, 26–8

accounting business, nature of, 10–12

accounting concepts, 41–3

accruals (matching concept), 43

consistency, 43

going concern, 42

prudence, 43

accounting context, 8–12

history, 9

international accounting, 9–10

organisations, 10–12

technology, 10

accounting equation, 59–64, 129, 134

balancing off, 67–74

and financial statements, 129

initial recording using double-entry bookkeeping, 65–7

trial balance, 73–6

Accounting Council, 305

accounting for growth, 385

accounting health check, 385

accounting, introduction to, 1–22

accounting context, 8–12

financial accounting and financial management, 5–6

importance of accounting, 4

limitations of accounting, 20

nature of accounting, 2–3

types of accountancy, 12–17

types of accountant, 17–19

users of accounts, 6–8

accounting, language of, 28–36

assets, 30

statement of financial position (balance sheet), 32–3

state of cash flows, 34–6

equity (capital), 31

expenses, 29–30

income, 28

income statement, 31–2

liabilities, 30

accounting, limitations of, 20

accounting, nature of, 2–3

accounting policies, 350–1

accounting principles, 40–1

concepts, 41

conventions, 41–3

accounting profession, 405

accounting questions, 3

accounting rate of return, 590–1

accounting scandals, 100, 372, 373, 374, 413

see also creative accounting; Enron; WorldCom

accounting standards, 303–5, 415

Accounting Council, 305

Accounting Standards Board, 305, 312, 313, 316

Financial Reporting Council, 304–305

Financial Reporting Review Panel, 306–9

introduction of, 303

Urgent Issues Task Force, 305

Accounting Standards Board, 305, 311, 316

Statement of Principles, 313

Accounting Standards Steering Committee, 302

accounting terms, 32

accounting treatment for limited companies, 181–2

accruals (matching concept), 43, 98, 117, 135

and prepayments, 136

accumulated depreciation, 113

acid test ratio, 258

acquisitions, 576

activities, identification of, 458, 459

activity-based costing, 432, 433, 452, 458–61

activity-cost driver rates, calculation of, 459

adjustments to trial balance, 134–42

accruals, 135

bad and doubtful debts, 136–42

depreciation, 136

inventories (stock), 134–5

prepayments, 136

administrative expenses, 450

after-sales service, 562, 570

after-tax profits, 255

AGM (annual general meeting), 300

AICPA see American Institute of Certified Public Accountants

allocation of indirect costs, 454

American Accounting Association, 3

American Institute of Certified Public Accountants, 326, 412, 413

amortisation, 382

Andersen, Arthur, 390

Anglo-Saxon view of accounting, 409

annual financial accounts, 28

annual general meeting, 300

annual report, 188, 334–70

audited statements, 344–52

conflicting objectives of, 342

context, 336–7

definition, 336

group accounts, 361–4

impression management, 365–8

main contents, 342–59

multiple roles, 337–42

non-audited sections, 351–9

presentation, 359–61

annual report, roles, 337–42

conflicting objectives, 342

decision making, 340–1

public relations, 341

stewardship and accountability, 337–9

AOL, 58

Apple Computers, 571

appropriate overhead allocation, 459

appropriation account, 162–4

Arbuthnot Banking Group, 620, 621

arms race, 394

ASB see Accounting Standards Board

Asda, 448, 548

assessment of current business position, 558, 559–67

external environment, 560–1

internal environment, 561–7

asset-rich companies, 327

asset turnover ratio, 257

assets, 30

wearing out, 98–100

associated companies, 361–3

Association of Accounting Technicians, 17

Association of Chartered Certified Accountants, 17–19

assumptions see accounting concepts

AstraZeneca, 188–91, 227–8

Audit and Assurance Council, 305

audited statements of annual report, 344–52

explanatory material, 350–2

main statements, 344–5

subsidiary statements, 348–50

auditing, 12–14

accounting narratives, 354

Auditing Practices Board, 297, 304

auditors, 296–9, 387

auditors’ report, 355, 356–7

AVCO, 464–5

average cost (AVCO), 464–5

BA (British Airways), 538

BAA (British Airport Authority), 381

bad debts, 116, 139–141

balance sheet see statement of financial position

balanced scorecard, 438, 570–1

balancing off, 67–73

bank account, 69

bank loan, 615

Bank of America, 375

Bank of Crete, 390

Bank of England, 338

bank overdraft, 608, 615

bankruptcy, 162, 169, 367, 385

banks, creative accounting in, 391–2

Barbie dolls, 574

Barclays Bank, 4

batch costing, 446, 466

BBC (British Broadcasting Corporation), 335

BCG (Boston Consulting Group), 566, 567

Bear Stearns, 392

beer brewing, 469

before-tax profits, 255

being seen, 622

benchmarking, 438, 572–3

bending regulations, 375

benefits in kind, 296

Benson, Henry, 415

BMW, 414

Body Shop, 561

bonuses, 296, 355, 376

Boo.com, 209

bookkeeping, 14–15

Boston Consulting Group, 566, 567

bottlenecks, 540, 561

brands, 382

break-even analysis, 436, 437, 542–6

assumptions, 542–3

graphical break-even point, 543–5

margin of safety, 543

other uses of, 543–6

what-if analysis, 543

British Airport Authority, 381

British Airways, 538

British Broadcasting Corporation, 335

British Gas, 331

British Petroleum, 170

British Telecom, 620

Brook Brothers, 90

BT (British Telecom), 620

‘budget is God’, 478

budget targets, meeting, 496

budgeting, 433, 478–507

behavioural aspects, 496–9

creative budgeting, 499

example, 491–5

padding the budget, 498

spending to budget, 497–8

budgeting, nature of, 480–4

control, 482

coordinating, 482

motivation, 482

planning, 482

Bulmer Holdings, H.P., 440

business, language of, 2

Byers, Stephen, 338

Cadbury Committee, 307

Cadburys, 382

called-up capital, 193

capital accounts, 164

capital and revenue expenditure, 100

capital employed, 119–20

see also equity

capital expenditure, 583

capital investment appraisal, 439, 581–605

accounting rate of return, 590–1

assumptions, 585

inflation, 600

internal rate of return, 595–9

nature of, 582–5

net present value, 592–5

other factors, 600

payback period, 588–9

sensitivity analysis, 600

taxation, 600

techniques, 586–9

capital investment, nature of, 582–5

initial investment, 584

net cash flows, 585

other flows, 585

capital maintenance, 324–5

capital reserves, 179

capitalisation of costs, 383

capitalisation of interest, 385, 386

capitalism, 340

Cardiff Millennium Stadium, 452

Carnegie, Andrew, 445

cash, 608, 615

bank account and, 212–16

bank and, 117

definition, 212

importance of, 210–11

cash book, 212

cash budget, 484–5

cash cows, 566

cash flow, 209, 210, 218

vs. profit, 218

cash flow ratios, 259, 270

cash flow statement see statement of cash flows

cash inflow and outflow of cash, 213

cash loss vs. stated loss, 217

Certified Public Accountant, 405

chairman's statement, 353

Channel Tunnel, 584

charitable gifts, 353

chartered accountants, 17–18

Chartered Institute of Management Accountants, 19, 27

Chartered Institute of Public Finance and Accountancy, 19

checks and balances, 300

China, 410–11

choice, 437

Churchill, Winston S., 301

CIMA (Chartered Institute of Management Accountants), 19, 27

CIPFA (Chartered Institute of Public Finance and Accountancy), 19

City, the, 303, 470

classification

of costs, 454, 471

of international accounting, 407

clerical costs, 613

Coca-Cola, 170, 382, 575

Codes and Standards Committee, 304–5

collateralised debt obligations (CDOs), 391

collateralised mortgage obligations (CMOs), 391

collective mobility, 430

Companies Acts, 10, 302, 303, 319

1981 303

1985 84, 88, 105

2006 170, 302, 303

company, 169

comparability, 316–7

compensating variances, 521

competitive advantage, costing as, 448

competitors, 561

complex convertible securities, 394

compliance, 372, 373

compound growth, 587

computers, 10, 67, 76, 441

helpline, 450

use of bookkeeping packages, 14–15, 599

conceptual framework, 311–19

content of, 316

criticisms of, 319

measurement model, 318

objectives, 312–14

qualitative information characteristics, 316–18

user needs, 315

users, 314–15

conflict of interest, 497

consistency, 43

contract costing, 466–8

contracting out, 538, 616

contribution, 437, 531–2

to revenue, 545–6

contribution analysis, 436, 437, 530–3

contribution, 531–2

fixed costs, 531

variable costs, 531

contribution graph, 546–7

control, 482

controllable costs, 433, 500

conventions, 40–1

entity, 41

historical cost, 40, 41

monetary measurement, 41

periodicity, 41

convergence, 398–423

convergent forces, 414–20

European Union, 414–15

International Accounting Standards Board, 415–20

US standards, 419–20

cookie jar accounting, 373

coordination, 482

corporate governance, 307–11

corporation tax, 171, 193

cost accounting, 432, 433–5

costing, 433

importance of, 447–8

and management accounting, 438

planning, control and performance, 434–5

cost behaviour, 437–8

cost control, 449

cost-cutting, 470–1

cost drivers, identification of, 459

cost minimisation and revenue maximisation, 439–40

cost of capital, 623–6

behavioural implications of, 593

cost of sales, 92–4, 465

cost-plus pricing, 448

cost recording, 453–4, 471

cost, types of, 448–51

cost-volume-profit analysis, 437

costing, 432, 433, 445–77

activity-based costing, 458–61

as competitive advantage, 448

cost-cutting, 470–1

definition, 435

different methods for different industries, 466–70

importance of, 447–8

for stock valuation, 462–5

target costing, 470

traditional costing, 452–8

types of cost, 448–51

costing methods, 466–70

batch costing, 466

contract costing, 466–8

process costing, 469

service costing, 469–70

costs, classification of, 454, 471

County NatWest Woodmac, 386

creative accounting, 365–6, 371–97

case studies, 387–92

controlling, 394

creative presentation, 392–3

definitions, 374–6

depreciation, 366

inventory, 365–6

managerial motivation, 376–8

methods, 378–84

real life, 385–7

creative accounting, methods, 378–84

brands, 382

capitalisation of costs, 383

depreciation, 381

inflating income, 379

inventories, 379

creative budgeting, 499

creative presentation, 392–3

credit default swaps (CDOs), 391

credit sales, 619

creditors’ collection period, 255–6

creditors see trade payables

credits, 64

crisps, 257

Cuba, 375

culture, 406

current accounts, 165

debit balances on, 165

current assets, 114–17

cash and bank, 117

inventories (stocks), 114–16

prepayments, 116

trade receivables (debtors), 116

current business position, appraisal, 568–73

assessment, 559–67

balanced scorecard, 570–1

benchmarking, 572–3

SWOT analysis, 568–9

current liabilities, 117–19

accruals, 117

loans, 117–19

trade payables (creditors), 117

current products, 561

current ratio, 257

current value systems, 325

customer profiles, 562

customer profitability analysis, 438

Customer Strategies Worldwide, 448

customers, 562

cynicism, 322, 419

Daimler Benz, 410

dairy industry, 573

data mining, 438

database mining, 575

debentures, 177–8

see also loan capital

debit balances on current accounts, 165

debits, 64

debt factoring, 616–17

debt finance, 403

debtors see trade receivables

debtors’ collection model, 608

debtors collection period, 255, 256

model, 608

deceased companies, 386

decision making, 340–1, 433, 436–7, 528–30

financial evaluation, 529

forward-looking decision making, 529

key terms, 436

relevant information, 529

short-term decisions, 436, 527–53

and stewardship, 314

decisions, range of, 533–40

determining most profitable products, 535

make or buy decision, 539

maximising a limited factor, 539–40

cessation of production, 535–7

definitions

accounting, 3

accounting rate of return, 590

accounting standards, 305

annual report, 336

assets, 108

audit, 296

balance sheet (statement of financial position), 107–8

balanced scorecard, 570

benchmarking, 572

Boston Consulting Group (Product Portfolio, Matrix), 567

budget, 482

capital and revenue expenditure, 100

conceptual framework, 311

costing, 435

creative accounting, 374–6

decision-making objective of annual report, 341

double-entry bookkeeping, 59

equity, 108

expenses, 87

financial accounting, 26

income, 87

income statement (profit and loss account), 86

internal rate of return, 596

liabilities, 108

life cycle costing, 564

management accounting, 429

national regulatory framework, 301

net present value, 593

ownership interest, 108

payback period, 588

standard cost, 510

strategic management accounting, 558

subsidiaries and associated companies, 363

trial balance, 73

true and fair view, 303

Del Monte, 388

Deloitte and Touche, 28, 416

demographic trends, 560

Department of Trade and Industry, 306

depreciation, 136, 366

changes in, 381

measurement of, 112–13

determining most profitable product, 535

dialectic of creativity, 394

Dior, Christian, 92, 93, 555

direct costs, 435, 448–51, 452, 453, 460

direct method of cash flow statement preparation, 218–20

directors, 296

‘fat-cat’, 339

pay, 338–9

remuneration report, 355

report, 353

self-interest, 40

view of fat-cat directors, 339

disclosure, 366

discounted cash flow, 436, 439

discounting, 587, 592–3, 594

divergent forces, 401–6

accounting profession, 405

culture, 406

objectives, 401–2

regulation, 403–4

sources of finance, 403

spheres of influence, 405

taxation, 404–5

users, 402–3

dividend cover, 260, 261, 263

dividend yield, 260

dividends, 173–5

divorce of ownership and control, 170

dogs, 567

dot.com businesses, 257

double-entry bookkeeping, 57–82

accounting equation, 59–64

basic rules, 62

computers, 76

initial recording using, 65–7

worked example, 64–76

double-entry checks, 68

doubtful debts, 116, 136–42

earnings per share, 261

economic environment, 560

economic order quantity (EOQ), 439, 612–13

economic reality, 302, 373, 378, 382, 402–3

efficiency ratios, 255–7, 268

asset turnover ratio, 257

creditors’ collection period, 255–6

debtors’ collection period, 255

inventory (stock) turnover ratio, 257

Emerging Issues Task Force, 413

Enron, 210, 306, 338, 372, 373, 377, 382, 387, 389–90, 394

debt, 377, 390

extract from notes to the accounts, 389

US accounting, 413

Enterprise Inns, 621, 622

entity (capital), 31

environmental accounting, 367

environmental issues, 561

EOQ (economic order quantity), 439, 612–13

EPS (earnings per share), 261

equity, 31

see also capital

equity employed, 119–20

error some place, 75

estimating, 98

European Union (EU), 414–15

Fourth Directive, 414–15

Seventh Directive, 414

expenditure deferral, 499

expenses, 29–30, 95–7

explanatory material, 350–2

accounting policies, 350–1

notes to the accounts, 351

principal subsidiaries, 351

exploitation of inherent strengths, 573–5

Extel, 252

external business environment, 560–1

competitors, 561

economic environment, 560

environmental issues, 561

interest and pressure groups, 561

legal environment, 561

political environment, 560

social environment, 560

technological change, 560

external diversification, 576

external financing, 615–17, 619–23

cash, 615

inventory, 617

leasing, 619–20

loan capital, 622–3

share capital, 620

trade receivables, 615–16

failed companies, 353

fair value, 325

faithful representation, 316

Fame, 252, 264, 266

FASB (Financial Accounting Standards Board), 412

fat-cat directors, 307, 339

critics’ view, 339

directors’ view, 339

Fiat, 414

FIFO, 75, 351, 464–5

finance, nature of source of, 607–8

finance, sources of, 607–9

financial accounting, 5–6, 15, 26–8

importance of, 40

vs management accounting, 430–2

financial accounting, context of

annual report, 334–70

creative accounting, 371–97

international accounting, 398–423

measurement systems, 322–33

regulatory and conceptual frameworks, 293–321

annual report, 336–7

international accounting, 399–400

management accounting, 429–30

Financial Accounting Standards Board, 412

financial accounting, techniques

accounting background, 25–56

balance sheet, 104–26

cash flow statement, 208–46

double-entry bookkeeping, 57–82

interpretation of accounts, 247–90

partnerships and limited companies, 159–207

preparing financial statements, 127–58

profit and loss account, 83–103

financial analysts, 7

financial evaluation, 529

financial management, 15

financial position, 121

financial ratios, 277

Financial Reporting Council, 304

Financial Reporting Review Panel, 304, 306–7

financial statements, main, 128–9

see also balance sheet; cash flow statement; profit and loss account

financial statements, preparation, 127–58

adjustments to trial balance, 136–42

main financial statements, 128–9

trial balance to profit and loss account and balance sheet, 130–4

finished goods budget, 489–91

finished goods stock, 115

first-in-first-out see FIFO

non-current assets, 112–14

fixed costs, 436, 437, 531, 547

flexibility, 372–5

flexing the budget, 513, 516–17

football clubs

greatest assets, 122

new stadium, 585

profits, 99

see also Manchester United

forecasting the future, 584

forward-looking decision making, 529

France, 407–8

fraud, 375

detection, 15

see also creative accounting

FRC (Financial Reporting Council), 304

Freeserve, 620

friction, 511

FRRP see Financial Reporting Review Panel

FTBO, 575

fuel blockade, 615

functional analysis, 470

GAAP see Generally Accepted Accounting Principles

garbage in, garbage out, 10, 427

gearing management, 376, 377–8

gearing ratios, 258–9, 269–70

General Electric Company, 4, 413

General Motors, 414

Generally Accepted Accounting Principles, 382, 401–2, 416–20

Germany, 408–10

GIGO, 10, 427

Ginger Productions, 58

Glaxo-Wellcome, 338, 414

globalisation, 400, 432

going concern, 41

goodwill, 63, 141, 181, 364, 576

see also bonuses; intangible assets

Grand Metropolitan, 382

graphic designers, 336

graphical break-even point, 544–5

graphs, 367–8

grasping reality, 382

Greenbury, Sir Richard, 338

Greenbury Committee, 307

gross domestic product, 400

gross margin, 95

gross profit ratio, 254

group accounts, 361–4

goodwill, 364

subsidiary and associated companies, 361–3

Gucci, 418

Guinness, 382

Hampel Committee, 307

harmonisation, 414

see also convergence

health check, 385

Heineken, 326–7

Higgs Report, 307

highlights, 359

hire purchase, 619

historical cost, 41, 324, 325

deficiencies of, 328, 329

historical cost convention, 41

historical summary, 359

history of accounting, 9

Hofstede, Geert, 406

holistic view of ratios, 274–5

pictics, 274–5

Z score model, 274

horizontal analysis, 267

horizontal format of balance sheet, 126

HSBC, 12, 31, 85, 342

IASB see International Accounting Standards Board

ICAEW see Institute of Chartered Accountants in England and Wales

ICAI see Institute of Chartered Accountants in Ireland

ICAS see Institute of Chartered Accountants of Scotland

IFRS see International Financial Reporting Standards

ignorance, 606

importance

of accounting, 4

of stock valuation, 115

impression management, 365–8

creative accounting, 365–6

narrative enhancement, 366–8

income, 28

income inflation, 379

income recognition, 379

income statement see profit and loss account

income statement and statement of comprehensive income see statement of comprehensive income (SOCI)

incremental cost, 531

indirect cost allocation, 454

indirect costs, 435, 447, 448–51, 454, 460–1

indirect method of cash flow statement preparation, 221–32

adjusting profit before taxation, 222

reconciliation of operating profit, 222–32

individual price and quantity variance, 518–19

individual variances, calculation of, 518–19

individual price and quantity variances, 518–19

sales quantity variance, 518

industry life cycle, 564, 566

inflation, 600

of income, 379

informal personal budget, 480

information characteristics of conceptual framework, 312, 313, 316–18

information gathering, 559

infrastructure investment, 607

innovative accounting see creative accounting

insolvency, 15

Institute of Chartered Accountants in England and Wales, 18, 21, 432

Institute of Chartered Accountants in Ireland, 18, 21

Institute of Chartered Accountants of Scotland, 18, 21

intangible assets, 63, 141, 180–1, 364

see also goodwill

interest cover, 263–4

interest groups, 561

interest payable, 383

internal business environment, 561–7

current products, 561

customers, 562

internal organisation, 562

operating systems, 561

resources, 561

sources of finance, 562–7

internal financing, 609–15, 618–19

cash, 609–10

inventory, 611–15

retained profits, 618–19

trade receivables, 610–11

internal organisation, 562

internal rate of return, 595–9

calculating, 596

international accounting, 9–10, 398–423

classification, 407

context, 399–400

convergent forces, 414–20

country snapshots, 407–13

divergent forces, 401–6

International Accounting Standards Board, 9, 42, 43, 160, 301, 304, 415–19

IAS 1, 345

IAS 7, 213, 215–16

international comparison, 277

International Financial Reporting Standards, 9, 10, 100, 160, 301, 415–19

International Organisation of Securities Commissions (IOSCO), 416

interpretation of accounts see ratio analysis

inventory (stock), 114–15, 134–5, 365–6, 379–81, 611–15, 617

and creative accounting, 366

economic order quantity, 613–14

just-in-time, 613–15

sale and buy-back, 617

valuation, 115, 432

inventory turnover ratio, 257

inventory valuation measures, 464–5

investment analysts, 5

investment ratios, 259–64, 271

dividend cover, 260

dividend yield, 260

earnings per share, 261, 262

interest cover, 263–4

price/earnings ratio, 261–3

invoice discounting, 616–17

IOSC (International Organisation of Securities Commissions), 416

IRR see internal rate of return

Japan, 277, 415, 470, 613, 615

just-in-time, 613, 615

see also target costing

Johnson, H.T., 431, 554

Jubilee Line extension, 584

just-in-time, 432, 439, 613

Kaplan, Robert S., 323, 431, 554, 557, 570, 571

Kit Kat, 382

knowledge-driven society, 561

labour costs, cutting, 470–1

Laing, John, 452, 462, 467

Lamprell, 620

last-in-first-out see LIFO

leaseback, 608, 620

leasing, 619–20

ledger accounts, 67, 76

legal environment, 561

Lego, 534, 535

Lehman Brothers, 392

less developed countries, 415

liabilities, 30

life expectation, 381

LIFO, 75, 405, 413, 464–5

like with like comparison, 276

limited companies and partnerships, 159–207

context, 161–2

example, 182–8

limited companies, 168–82

partnerships, 162–8

profit and loss account, 87

published accounts, 188–93

limited companies, distinctive accounting features of, 172–81

balance sheet, 172

dividends, 173–5

formats and terminology, 175–7

intangible assets, 180–1

long-term capital, 177–80

taxation, 173

limited liability, 169

limited liability partnership (LLP), 162

linearity, 542

liquidation see bankruptcy

liquidity ratios, 257–8, 269

current ratio, 257–8

quick ratio, 258

listed companies, 100, 123

LLP (limited liability partnership), 162

loan capital, 621–2

loans, 117–19, 615, 616

London Eye, 584

London Stock Exchange, 309

long-term capital, 177–80

long-term contracts

policy, 467

pricing, 452

long-term decision making see capital investment appraisal

long-term financing, 618–22

external sources, 619–22

internal sources, 618–19

lord of the manor, 337

loss-making products, 537

Lufthansa, 418

Madoff Securities International, 392

make or buy decision, 538–9

management accounting, 5–6, 15, 427–44

budgeting, 478–507

capital investment appraisal, 581–605

changing nature of, 442

context, 429–30

control systems, 479

and cost accounting, 438

cost minimisation and revenue maximisation, 439–40

costing, 445–77

criticisms of, 557

definitions, 429

key decision-making terms, 436–7

overview, 432–9

relationship with financial accounting, 430–2

short-term decision making, 527–53

standard costing, 508–26

strategic management accounting, 554–80

use of computers, 441

working capital and sources of finance, 606–29

management accounting, overview, 432–9

cost accounting, 432, 433–5

cost behaviour, 437–9

decision making, 433, 436–7

non-production, 462–3

production, 462

management consultancy, 16

management of accounts, 376

management of working capital, 606–29

cost of capital, 623–5

long-term financing, 618–22

nature of sources of finance, 607–8

short-term financing, 608–17

management vs financial accounting, 430–2

manager under pressure, 511

managerial motivation, 376–7

manage gearing, 377–8

profit smoothing, 377

shares and share options, 376–7

managers, interests of, 374, 376

Manchester United, 4, 114, 584

depreciation, 114

earnings per share, 261

investment ratios, 259, 260

merger with Manchester City, 17

sales revenue, 10

Mannesmann, 576

manufacturing budgets, 488–91

finished goods budget, 489–91

production cost budget, 489

raw materials budget, 489, 490

manufacturing industry, decline of, 446, 449

margin of safety, 543

marginal costing, 433, 435, 447, 449, 531

Maritime Industrial Services (MIS), 620, 620

market price, 170, 448

Marks & Spencer, 32–4, 620

mark-up, 95

Massachusetts Institute of Technology, 530

matching see accruals

materials requirement planning (MRP), 439, 483

maximisation of limited factors, 539–40

Maxwell Communications, 307, 338, 385

measurement model of conceptual framework, 318

measurement systems, 322–33

alternative, 324, 331

example, 330

historical cost, 326

overview, 323–5

real life, 331–2

replacement cost, 326–9

types, 326–9

Memorandum of Association, 179

mergers, 576

MG Rover, 306

Microsoft, 4, 373, 400, 413

Middle Ages, 337

Milken, Michael, 120

missing assets, 122

mistrust, 6

Mitsubishi, 400

Mitsui, 400

monetary capital maintenance, 324

monetary measurement, 41

money, 27, 117

Montreal Olympics, 584

Morgan, J.P., 622

Mostel, Zero, 375

motivation, 378, 482

managerial, 376–8

MRP see materials requirement planning

multinationals, 399–400, 403, 414, 420

Multiplex, 379

narrative enhancement, 366–7

narrative sections of annual report, 353–9

auditors’ report, 355–7

business reviews, 353

chairman's statement, 353

directors’ remuneration report, 355

directors’ report, 353

operating and financial review, 353

review of operations, 354

shareholder information, 359

social and environmental accounting statement, 354

statement of corporate governance, 354

statement of directors’ responsibilities for financial statements, 357–9

national boundaries, 400

National Health Service, 275

national regulatory framework, 300, 301

negative contribution, 536

negative disclosure, 367

Nestle, 418

net assets, 107

net present value, 592–5

calculation of, 594

net profit, 97

net profit margins, 263

net profit ratio, 254–5

Netherlands, 326, 331, 415

New York Stock Exchange, 416, 420

NHS (National Health Service), 275

Nokia, 351, 355, 356–7, 400, 418

ratios, 271, 272

stocks (inventories), 114, 115

nominal value, 170

non-audited sections of annual report, 351–9

narrative sections, 353–9

non-narrative sections, 359

non-cash flow items, 222–32

non-compliance, 375

non-current assets, 112–14

non-narrative sections of annual report, 359

highlights, 359

historical summary, 359

shareholder analysis, 359

non-production overheads, 462

non-trading gains and losses, 345

Norton, David P., 323, 570, 571

Note on Historical Cost Profits and Losses, 350

Note on Reconciliation of Net Cash Flow to Movement in Net Debt, 350

notes to the accounts, 351, 368

Novartis, 418

objective value, 328

objectives of accounting system, 401–2

Office for National Statistics, 92, 160

OFR (operating and financial review), 353

Olympic Airlines, 427

ONS see Office for National Statistics

operating and financial review, 353

operating expenditure, 583

operating profit by adjusting profit before taxation, calculation of, 221–2

operating systems, 561

opportunity costs, 529

organisations, 10–12

nature of the business, 10–12

structure, 10

outsourcing, 538

overdrafts, 608, 615, 616

overhead recovery rate, 454–5

overheads, 435, 446, 447, 448, 449, 489, 531

fixed, 509, 510, 516, 517

variable, 509, 510, 514, 517, 521, 540

overtrading, 218

P/E ratio see price/earnings ratio

padding the budget, 498

Parmalat, 306, 307, 338, 372, 375

partners, 162

profit sharing, 164

partnerships and limited companies see limited companies and partnerships

‘passing the buck’, 530

patents, 181

payback period, 588–9

payback, limitations of, 589

Pennon, 30

Penny Black, 179

performance evaluation, 430, 500

performance graph, 355

performance indicators, 275–6

period costs, 435

periodicity, 42

personal budgets, 480

personal finances, 43

PESTLE analysis, 559

PESTLEO analysis, 438, 559

Philips, 331

Phoenix Four, 306

physical capital maintenance, 324

pictics, 274–5

placing, 620, 621

Plan Comptable Générale, Le, 407–8

planning, 482

planning for the future see budgeting

planning, control and performance, 433

see also budgeting; standard costing

political environment, 560

political gifts, 353

Polly Peck, 307, 338, 387–9

creative accounting, 367, 368

Porter, Michael, 562–4

positive cash flow, 220

positive disclosure, 367

prepayments, 116, 136

and accruals, 136

present value, 325

pressure groups, 561

pressures for convergence, 399, 400, 414

price changes, 98

price/earnings ratio, 261–3

PriceWaterhouseCoopers, 14, 297, 355

prime cost, 449

principal subsidiaries, 351

principal–agent relationship, 295

privatised utilities, 561

probability ratios, 253–5, 267–8

gross profit ratio, 254

net profit ratio, 254–5

return on capital employed, 253

problem solving, 430

process costing, 469

product life cycle analysis, 563–6

product portfolio matrix, 566–7

production cost budget, 489

products making negative contribution, 536

professional accountancy bodies, 18

profit, 97–100

accruals or matching concept, 98

changing prices, 98

estimating, 98

wearing out of assets, 98–9

Profit and Loss Account see statement of comprehensive income (SOCI)

profit performance, 85

profit sharing, 164

profit sharing ratio, 164

profit smoothing, 376, 377

profit/volume chart, 546

Promar International, 573

property, plant and equipment, 112, 138–9, 327

prudence, 42, 43, 318

PSR (profit sharing ratio), 162

public issues, 620

public relations, 341

published accounts of limited companies, 188–93

Puma, 418

punctuality, 275

question marks, 567

quick ratio, 258

quipus, 9

rail companies, performance indicators, 275, 276

Railtrack, 625

rates of return, 591

ratio analysis, 247–90

context, 248

holistic view of ratios, 274–5

limitations, 276–7

main ratios, 252–9

overview, 249–51

performance indicators, 275–6

ratios and size, 252

report format, 272–4

ratio analysis, limitations of, 276–7

absolute size, 276

context, 276

data validity, 277

international comparison, 277

like with like, 276

ratios, 252–63

cash flow ratios, 259

company specific, 271–2

efficiency ratios, 255–8

gearing ratios, 258–9

holistic view of, 274–5

importance of, 251–2

investment ratios, 259–63

liquidity ratios, 257–8

main, 252–9

probability ratios, 253–5

size and, 252

raw materials

budget, 489, 490

stock, 115

real life, 331–2, 385–7

realisable value, 325

reallocation of service support costs, 454

receivables, provision for impairment of, 140–2

reconciliation of movements in shareholders’ funds, 368

reconciliation of operating profit to operating cash flow, 222–32

non-cash flow items, 222–32

working capital adjustments, 222

recording see double-entry bookkeeping

reducing balance method of measuring depreciation, 112, 113

Registrar of Companies, 171

regulated industries, 377

regulation, 301, 403–4

regulatory framework, 293–321

conceptual framework, 311–19

corporate governance, 307–11

regulatory framework, 300–2

traditional corporate model, 295–300

UK, 302–7

regulatory response to creative accounting, 394

relationship between cash and profit, 216–18

relevance, 317

relevant information, 317, 529

relevant range, 543

reliability, 316

Rentokil Initial, 136, 139, 297–9

replacement cost, 325, 326–9

report format, 272–4

reserves, 180, 181

residual income, 500

resources, 561

responsibility budgeting, 500–1

restating the figures, 378

retained profits, 618–19

return on capital employed, 253

return on investment, 500

return on sales, 500

revaluation, 114

revaluation reserve, 180

revenue budget, 486, 487

revenue recognition, 380

revenues and expenses, 31

review of operations, 354, 368

RI (residual income), 500

rights issue, 620, 620

ringfencing, 162

risk and reward, 299

ROI (return on investment), 500

Rolls-Royce, 115, 382

ROS (return on sales), 500

Rover, 306, 409

Royal Society for the Protection of Birds (RSPB), 4

royalties, 63

Safeway, 548

Sage, 76

Sainsbury, J., plc, 13–14, 92, 94, 548

cash flow activities, 231–2

competitors, 561

dividends, 174, 175

and fixed costs, 547

sale and buy back of inventory, 617

sales, 89–92

sales budget, 485

sales generation, 89

sales maximisation, 400

sales price variance, 513

sales quantity variance, 513, 518

SAS, 418

Scottish Media Group, 58

scrap, 585

SEC see Securities Exchange Commission

Securities Exchange Commission, 373, 404, 412, 420

self-interest, 40, 337

sensitivity analysis, 600

service costing, 469–70

service economy model, 431

service industries, 431, 452

setting standards, 511

share capital, 61, 620

share price, 261, 262

shareholder analysis, 359

shareholders, 299–300

shares and share options, 170, 376–7

Shell, 85

shopping, 480

short-term decision making, 436–7, 527–53

break-even analysis, 542–6

contribution analysis, 531–3

contribution graph, 546–7

decision making, 528–9

range of decisions, 533–40

throughput accounting, 540–1

vs long-term decisions, 439

short-term financing, 608–18

external financing, 615–18

internal financing, 609–16

Smith Report, 307

SmithKline Beecham, 338

social and environmental accounting statement, 354

social environment, 560

social trends, 560

sole trades, 161–2

sources of finance, 403, 439, 562–7

product life cycle analysis, 563–6

product portfolio matrix, 566–7

value chain analysis, 562–4

see also management of working capital

special purpose entities, 389

spending to budget, 497–8

spheres of influence, 405

SPPs (special purpose entities), 389

Stagecoach Group, plc, 128–9

standard cost variances, 433, 511–20

calculating individual variances, 518–19

flexing the budget, 516–17

standard costing, 433, 509, 508–26

interpretation of variances, 520–1

limitations, 509

nature of, 510–11

standard cost variances, 511–20

standardisation, 414

see also convergence

standardised format, 188

Standards Advisory Council, 417

standards, behavioural aspects, 520

Standing Interpretations Committee, 417

stars, 566

statement of cash flows, 34–6, 208–46, 342, 344, 346, 347

cash and the bank account, 212–16

context, 212

importance of cash, 210–11

preparation of cash flow statement, 218–32

relationship between cash and profit, 216–18

statement of cash flows, preparation, 218–32

direct method, 219–20

indirect method, 220–32

statement of changes in equity, 348–9

statement of comprehensive income (SOCI), 31, 83–103, 181, 205, 342, 344, 345, 346

capital and revenue expenditure, 100

context, 84–5

cost of sales, 92–4

definitions, 86–8

expenses, 95–7

gross profit, 95

interpretation of, 101

layout, 88–9

limitations of, 101

listed companies, 100

main components, 89–97

net profit, 97

other income, 95

profit, 97–100

revenue or sales, 89–92

statement of corporate governance, 354

statement of directors’ responsibilities for financial statements, 357–9

statement of financial position (balance sheet), 32–4, 104–26, 163, 172, 182, 206, 107, 342, 344, 346

balancing, reason for, 112

context, 106

definitions, 107–8

in annual report, 335, 346

interpretation, 122–3

layout, 108–9

limitations, 121–2

listed companies, 123

main components, 110–20

statement of financial position, components, 110–20

contingent liabilities, 119

current assets, 114–17

current liabilities, 117–19

equity (capital employed), 119–20

non-current assets, 112–14

non-current liabilities, 119

Statement of Principles (ASB), 313

stewardship, 307, 313–14, 337–8

and decision making, 342

stock turnover ratio, 257

stockholders see shareholders

stocks see inventories

stock-taking, 379

straight-line method of measuring depreciation, 112, 113

stratagem, 622

strategic choice of future direction, 573–6

exploit inherent strengths, 573–5

external diversification, 576

strategic management accounting, 432, 438, 554–80

appraisal of current business position, 558, 568–73

assessment of current business position, 558, 559–67

nature of, 557–9

strategic choice of future direction, 558, 573–6

strategic thinking, 556

strategy, 555, 556

implementation of, 559

stress, 342

structure of accounting organisations, 10

student loans, 38

subsidiaries, 361–3

subsidiary statements, 348–50

note on reconciliation of net cash flow to movement in net debt, 350

note on historical cost profits and losses, 350

statement of changes in equity, 348–9

sunk costs, 529

supermarkets, 256, 257, 548, 611

supplementary notes, 188

suspicion, 497

sustainability information, 354

Swatch, 418

SWOT analysis, 438, 568–70, 576

Sydney Opera House, 584

‘T’ account, 61–2, 64, 65, 71–2

T.I.P. Europe plc, 393

Taffler, Richard, 274

tally sticks, 9

tangible fixed assets, 327

target costing, 470

tax avoidance, 16

tax evasion, 16

taxation, 16–17, 173, 175, 404–5, 600

Taylor, A.J.P., 581, 584

technology, 10, 432, 560

television manufacture, 451

tendering, 538

Tesco, 41, 118, 180, 344–6

annual report, 344–51, 355, 359–61

Auditors’ report, 355

competitors, 561

costing, 448

financial graphs, 361

financial highlights, 359, 360

fixed costs, 547

interest cover, 264

Note on Historical Cost Profits and Losses, 350

Notes to the Accounts, 351

Performance Graph, 355

Reconciliation of Net Cash Flow to Movement in Net Debt Note, 350

share capital, 61

Statement of Cash Flows, 345, 347

Statement of Changes in Equity, 348

Statement of Comprehensive Income (SOCI), 345, 346

Statement of Directors’ responsibilities, 357

vertical analysis, 266

throughput accounting, 540–1

time value of money, 587

Time Warner, 58

timeliness, 317

Tiphook, 385

tools of the trade, 429

Topcom, 478

total absorption costing, 433, 435, 449, 452, 453, 457, 458

total depreciation, 113

Toyota, 170, 361, 400, 414

trade payables (creditors), 30, 117

budget, 485, 488

trade payables collection period, 255–6

trade receivables, 116

budget, 485, 486, 487

debt factoring, 616

invoice discounting, 616–17

trade receivables collection period, 255, 256

trade unions, 470

trading account, 95, 96

traditional corporate model, 295–300

auditors, 296–9

directors, 295–6

shareholders, 299–300

traditional costing, 452–8

absorption of costs into products, 455

allocate indirect costs to departments, 454

classification, 454

overhead recovery rate, 454

reallocate service support department costs to production departments, 454

recording, 453–4

traditional product costing, 458

trial balance, 70, 73–4, 130–4

adjustments to, 134–42

to balance sheet, 130–4

to profit and loss account, 130–4

true and fair view, 302

Turnbull Committee, 307

turnover, 89, 193

Tweedie, David, 417

UBS, 418

UBS Global Management, 210

UBS Phillips and Drew, 208, 211, 381, 385–6

UITK see Urgent Issues Task Force

uncontrollable costs, 433, 500

understandability, 317

United Kingdom

accounting standards, 303–7

accounting system, 411–12

Companies Acts, 302

regulatory framework, 302–7

true and fair view, 302–3

unique features of accounting system, 412

United States

acceptance of IAS standards, 419

accounting system, 412–13

Financial Accounting Standards Board, 311

financial reporting and capital markets, 413

standards, 419–20

unprofitable products, 535–6

untapped markets, 573

Urgent Issues Task Force, 305

users

of accounting system, 402–3

accounts, 6–8

users’ and preparers’ interests, 376

valuation of inventory, 462–5

measures, 464–5

non-production overheads, 462

value chain analysis, 562–4

value to the business model, 325

variable costs, 436, 437, 513–14, 531

variable overheads, 509, 510, 514, 517, 521, 540

variances, 433, 511–20

calculating individual, 518–19

interpretation of, 520–1

verifiability, 316

vertical analysis, 266–7

Vodafone, 115, 139, 361, 576

rates of return, 591

Volkswagen, 4

Volkswagen, 418

WACC (weighted average cost of capital), 623–5

Wal-Mart, 361, 448, 561

Wall Street crash, 412

warranties, 379

wearing out of assets, 98–100

weighted average cost of capital, 623–5

Weinstock, Arnold, 303

Welch, Jack, 210

Wembley Stadium, 379

Wetherspoon, J.D., 41, 359

cash flow statement, 227–8, 229–30

corporate governance, 309–11

corporate social responsibility, 354

dividends, 260, 261

internal control, 309

what-if analysis, 532–3, 543

whisky, 617

Wildavsky, Aaron, 483

wine and spirit business, 617

Wirtschaftsprüfer, 405

Woolworth, F.W., 611

work-in-progress, 115

working capital adjustments, 222

world top economic entities, 401

WorldCom, 100, 338, 373, 375, 387, 413

capitalising of costs, 383

restating the accounts, 378

Xerox, 413

Z score model, 274

zero based budgeting, 483