Fifth Edition
FINANCIAL ACCOUNTING
An Introduction
Pauline Weetman
Professor of Accounting
University of Edinburgh
Financial Times
Prentice Hall
is an imprint of
Contents
Preface to the fifth edition
Guided tour of the book
Publisher's acknowledgements
XV
xxii
xxiv
Part 1 A conceptual framework: setting the scene
Chapter 1 Who needs accounting?
4
4
5
6
7
Real World Case
Learning outcomes
1.1
Introduction
1.2 The development of a conceptual framework
1.3 Framework for the preparation and presentation of financial
statements
Types of business entity
Users and their information needs
General purpose or specific purpose financial statements?
Stewards and agents
Who needs financial statements?
1.9 Summary
Further reading
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Activities for study groups
1.4
1.5
1.6
1.7
1.8
Notes and references
20
20
21
21
22
22
to the terminolO9y of business transactions
Chapter 2 A systematic approach to financial reportingthe accounting equation
Real World Case
Learning outcomes
2.1
2.2
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9
12
17
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20
Introduction
The accounting equation
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28
Contents
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
Defining assets
Examples of assets
Recognition of assets
Defining liabilities
Examples of liabilities
Recognition of liabilities
Defining the ownership interest
Recognition
Changes in the ownership interest
Assurance for users of financial statements
Summary
Further reading
29
31
33
35
36
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38
39
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41
42
44
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Activities for study groups
44
44
45
45
46
Notes and references
46
Supplement: debit and credit bookkeeping
47
49
Test your understanding
Chapter 3 Financial statements from the accounting equation
50
Real World Case
Learning outcomes
50
52
3.1 Introduction
3.2 Who is in charge of the accounting system?
3.3 The accounting period
3.4 The statement of financial position (balance sheet)
3.5 The income statement (profit and loss account)'
3.6 The statement of cash flows
3.7 Usefulness of financial statements
3.8 Summary
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52
53
54
58
59
62
63
Questions
A Test your understanding
B Application
Activities for study groups
64
64
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65
Supplement: using the accounting equation to analyse
transactions
Test your understanding
Chapter 4 Ensuring the quality of financial statements
66
72
73
Real World Case
Learning outcomes
73
74
4.1
4.2
4.3
4.4
75
75
80
82
Introduction
Qualitative characteristics of financial statements
Measurement in financial statements
Views on prudence
Contents
4.5
4.6
4.7
Regulation of financial reporting
Reviewing published financial statements
Summary
84
93
98
Further reading
99
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Activities for study groups
99
99
100
100
101
Notes and references
101
Part 2 Reporting the transactions of a business
Chapter 5 Accounting information for service businesses
104
Real World Case
Learning outcomes
104
105
5.1
5.2
5.3
5.4
5.5
5.6
105
106
109
113
115
118
Introduction
Analysing transactions using the accounting equation
Illustration of accounting for a service business
A process for summarising the transactions: a spreadsheet
Financial statements as a means of communication
Summary
Questions
A Test your understanding
B Application
Supplement: recording transactions in ledger accounts a service business
Test your understanding
Chapter 6 Accounting information for trading businesses
118
118
119
120
132
133
Real World Case
Learning outcomes
133
134
6.1
6.2
6.3
6.4
6.5
6.6
6.7
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135
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140
144
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Introduction
Goods purchased for resale
Manufacturing goods for resale
Illustration of accounting for a trading business
A process for summarising the transactions: a spreadsheet
Financial statements of M. Carter, wholesaler
Summary
Questions
A Test your understanding
B Application
Supplement: recording transactions in ledger accounts:
a trading business
Test your understanding
149
149
150
151
158
Contents
Part 3 Recognition in financial statements
Chapter 7 Published financial statements
160
Real World Case
Learning outcomes
160
162
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11
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165
169
173
176
179
181
185
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190
Introduction
International influences
Accounting framework
Statement of financial position (balance sheet)
Income statement (profit and loss account)
Statement of cash flows
Group structure of companies
Group financial statements
Small and medium-sized entities (SMEs)
Beyond the annual report
Summary
Further reading
Useful websites
191
191
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Activities for study groups
191
191
192
193
193
Notes and references
193
Supplement 7.1: information to be presented on the face of the
balance sheet, as required by IAS 1
195
Supplement 7.2: balance sheet format 1, as prescribed by the
Companies Act 2006
196
Supplement 7.3: information to be presented on the face of the
Income 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) assets
200
Real World Case
Learning outcomes
200
202
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
202
203
205
207
207
209
211
8.9
Introduction
Definitions
Recognition
Users' needs for information
Information provided in the financial statements
Usefulness of published information
Depreciation: an explanation of its nature
Reporting non-current (fixed) assets and depreciation in
financial statements
Summary
216
224
Contents
Further reading
224
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Activities for study groups
224
225
225
226
227
Notes and references
227
Supplement: recording non-current (fixed) assets and depreciation
Test your understanding
228
237
Chapter 9 Current assets
238
Real World Case
Learning outcomes
238
240
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8
9.9
9.10
9.11
9.12
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241
241
243
246
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249
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256
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258
Introduction
Definitions
The working capital cycle
Recognition
Users' needs for information
Information provided in the financial statements
Measurement and recording
Inventories (stocks) of raw materials and finished goods
Receivables (debtors)
Prepayments
Revenue recognition
Summary
Questions
A ,fest your understanding
B Application
C Problem solving and evaluation
Activities for study groups
259
259
260
261
262
Notes and references
262
Supplement: bookkeeping entries for (a) bad and doubtful debts;
and (b) prepayments
Test your understanding
263
267
Chapter 10 Current liabilities
268
Real World Case
Learning outcomes
268
269
10.1 Introduction
10.2 Definitions
10.3 Recognition
10.4 Users' needs for information
10.5 Information provided in the financial statements
10.6 Measurement and recording
10.7 Accruals and the matching concept
10.8 Liabilities for taxation
10.9 Summary
269
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272
273
274
276
279
280
Contents
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Activities for study groups
281
281
281
282
282
Notes and references
283
Supplement: bookkeeping entries for accruals
284
286
Test your understanding
Chapter 11 Provisions and non-current (long-term) liabilities
Real World Case
Learning outcomes
287
287
289
11.1 Introduction
11.2 Users' needs for information
11.3 Information provided in the financial statements
11.4 Provisions
11.5 Deferred income
11.6 Non-current (long-term) liabilities
11.7 Summary
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Activities for study groups
Notes and references
289
290
291
294
296
298
304
Supplement: bookkeeping entries for provisions and deferred income
Test your understanding
307
Chapter 12 Ownership interest
Real World Case
Learning outcomes
12.1
Introduction
12.2 Definition and recognition
12.3 Presentation of ownership interest
12.4
Statement of changes in equity
12.5 Users' needs for information
12.6 Information provided in the financial statements
12.7 Dividends
12.8 Issue of further shares on the Stock Exchange
12.9 Summary
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Activities for study groups
j.
Notes and references
Supplement: a spreadsheet for adjustment to a trial balance
at the end of the accounting period
Test your understanding
304
304
305
305
306
306
308
309
309
310
311
311
312
320
321
322
326
327
330
330
330
331
332
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338
Contents
Part 4 Analysis and issues in reporting
Chapter 13 Ratio analysis
Real World Case
Learning outcomes
13.1 Introduction
13.2 A note on terminology
13.3 Systematic approach to ratio analysis
13.4 Investors' views on risk and return
13.5 Pyramid of ratios
13.6 Use and limitations of ratio analysis
13.7 Worked example of ratio analysis
13.8 Linking ratios to the statement of cash flows
13.9 Summary
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Chapter 14 Reporting corporate performance
Real World Case
Learning outcomes
14.1
Introduction
14.2
Operating and financial review (OFR) and business review
14.3
Other guidance in analysis
14.4
Segmental information
14.5
Off-balance-sheet finance
14.6
Corporate social responsibility
14.7
Corporate governance
14.8
Developing issues: 'present fairly' and 'true and fair view'
14.9
Measurement of value
14.10 Developing issues: how valid is the stakeholder model?
14.11 Summary
Further reading
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Activities for study groups
Notes and references
Chapter 15 Reporting cash flows
Real World Case
Learning outcomes
15.1 Introduction
15.2 Cash and cash equivalents
15.3 The direct method and the indirect method
15.4 Preparing a statement of cash flows: the indirect method
15.5 Preparing a statement of cash flows: the direct method
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342
350
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360
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385
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392
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399
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401
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405
413
Contents
15.6 Interpretation of cash flow information
15.7 Illustration
15.8 Summary
Further reading
Questions
A Test your understanding
B Application
C Problem solving and evaluation
Notes and references
414
415
419
419
419
420
420
421
423
Financial accounting terms defined
G1
Appendices
I
Information extracted from annual report of Safe and
Sure Group pic, used throughout Financial Accounting
II Solutions to numerical and technical questions in
Financial Accounting
A1
Index
Supporting resources
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