0273693107_COVER(Wood2) 9/2/05 9:34 am Page 1 F R A N K W O O D ’ S 2 TENTH EDITION Every year, thousands of students rely on Frank Wood's best-selling books to help them pass their accountancy exams. business b TENTH EDITION Business Accountingis the world’s best-selling textbook on bookkeeping and accounting. Now in its tenth u edition, it has become the standard introductory text for accounting students and professionals alike. s F accounting W New to this edition: Features: i R ➤ Over 120 brand new review questions for exam ➤ Easy-to-follow explanations of contemporary O n practice accounting practice O e A ➤ Two new chapters on Corporate Governance ➤ Clear and logical progression through topics and Public Sector Accounting ➤ Activities designed to reinforce your D s N ➤ Coverage of International Accounting understanding of key concepts s Standards 2005 ➤ Over 300 review questions, including past & K ➤ Additional worked examples for areas of Examination Board questions difficulty such as ratio analysis ➤ Regularly updated Companion Website at S a www.pearsoned.co.uk/woodincluding further W self-test questions and accounting standards A c updates N c O FRANK WOOD & G o O S u ALAN SANGSTER The book is used on a wide variety of courses in accounting and business, both at secondary and tertiary level and for those studying for professional qualifications. It builds on Business Accounting 1to cover T D n advanced aspects of financial accounting. It also covers introductory aspects of management accounting E suitable for use at all levels up to and including professional foundation level courses and first-year R t ’ degree courses. S i n g 'A classic textbook that has set thousands of students on a straight path since it was first 2 published, Wood & Sangster's Business Accountingcan be recommended without reservation to all accounting students.' Dr George Iatridis, University of Athens, Greece and University of Manchester An imprint of Additional student support at www.pearsoned.co.uk/wood Additional student support at www.pearson-books.com www.pearsoned.co.uk/wood BA2_A01.qxd 10/3/05 1:42 pm Page i FRANK WOOD’S 2 business accounting Visit the Business Accounting, tenth editionCompanion Website at www.pearsoned.co.uk/wood to find valuable student learning material including: l Learning objectives for each chapter l Multiple choice questions to help test your learning l Review questions and answers l Links to relevant sites on the web l Searchable online glossary l Flashcards to test your knowledge of key terms and definitions BA2_A01.qxd 10/3/05 1:42 pm Page ii Frank Wood 1926–2000 BA2_A01.qxd 10/3/05 1:42 pm Page iii F R A N K W O O D ’ S 2 business TENTH EDITION accounting FRANK WOOD BSc (Econ), FCA and ALAN SANGSTER BA, MSc, Cert TESOL, CA BA2_A01.qxd 10/3/05 1:42 pm Page iv Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world. Visit us on the World Wide Web at: www.pearsoned.co.uk First edition published in 1967 Second edition published under the Longman imprint in 1972 Third edition published in 1979 Fourth edition published in 1984 Fifth edition published under the Pitman Publishing imprint in 1989 Sixth edition published in 1993 Seventh edition published in 1996 Eighth edition published under the Financial Times Pitman Publishing imprint in 1999 Ninth edition published in 2002 Tenth edition published in 2005 © Frank Wood 1967 © Longman Group UK Limited 1972, 1979, 1984, 1989, 1993 © Pearson Professional Limited 1996 © Financial Times Professional Limited 1999 © Pearson Education Limited 2002, 2005 The rights of Frank Wood and Alan Sangster to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP. ISBN 0 273 69310 7 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Wood, Frank. Frank Wood’s business accounting, 2 / Frank Wood and Alan Sangster.—10th ed. p. cm. Includes index. ISBN 0-273-69310-7 1. Accounting. I. Title: Business accounting 2. II. Title: Business accounting two. III. Sangster, Alan. IV. Title. HF5635.W8633 2005 657—dc22 2004061993 10 9 8 7 6 5 4 3 08 07 06 05 Typeset in 9.5/11.5pt Sabon by 35. Printed and bound in China. EPC/03 Also available: Frank Wood’s Business Accounting Vol 1 –0273 681494 Book-keeping & Accounts – 0273 685481 Frank Wood’s A-level Accounting – 0273 685325 BA2_A01.qxd 10/3/05 1:42 pm Page v Contents Notes for teachers and lecturers xii Notes for students xiv part 1 Special accounts 1 Accounting for branches 3 2 Hire purchase accounts 29 part 2 Companies 3 Limited companies: general background 49 4 The issue of shares and debentures 55 5 Companies purchasing and redeeming their own shares and debentures 70 6 Limited companies taking over other businesses 94 7 Taxation in company financial statements 113 8 Provisions, reserves and liabilities 130 9 The increase and reduction of the share capital of limited companies 136 10 Accounting standards and related documents 148 11 The financial statements of limited companies: profit and loss accounts, related statements and notes 183 12 The financial statements of limited companies: balance sheets 205 13 Published financial statements of limited companies: accompanying notes 218 14 Cash flow statements 240 15 Contract accounts 264 part 3 Groups 16 Group financial statements: an introduction 277 17 Consolidation of balance sheets: basic mechanics (I) 284 18 Consolidation of balance sheets: basic mechanics (II) 307 19 Intercompany dealings: indebtedness and unrealised profit in stocks 317 20 Consolidated financial statements: acquisition of shares in subsidiaries at different dates 330 21 Intra-group dividends 333 22 Consolidated balance sheets: sundry matters 347 23 Consolidation of the financial statements of a vertical group of companies 356 24 Consolidated profit and loss accounts 369 25 Consolidated financial statements: acquisitions and mergers 378 26 Standards covering subsidiary and associated undertakings and joint ventures 386 v BA2_A01.qxd 10/3/05 1:42 pm Page vi Contents part 4 Financial analysis 27 Accounting ratios 401 28 Interpretation of financial statements 422 part 5 Issues in financial reporting 29 Accounting theory 447 30 Current cost accounting 466 31 Social accounting 482 32 Corporate governance 491 33 Public sector accounting 496 34 Accounting for management control 505 part 6 Costing 35 Elements of costing 517 36 Absorption and marginal costing 531 37 Job, batch and process costing 555 part 7 Budgets 38 Budgeting and budgetary control 573 39 Cash budgets 582 40 Co-ordination of budgets 594 part 8 Standard costing and variance analysis 41 Standard costing 615 42 Materials and labour variances 620 43 Overhead and sales variances 638 part 9 Planning, control and decision making 44 Break-even analysis 657 45 Interest, annuities and leasing 674 46 Capital expenditure appraisal 689 47 The balanced scorecard 707 part 10 The emerging business environment of accounting 48 The supply chain and enterprise resource planning systems 717 49 E-commerce and accounting 724 Appendices 1 Interest tables 731 2 Answers to review questions 735 3 Glossary 804 Index 808 vi BA2_A01.qxd 10/3/05 1:42 pm Page vii Supporting resources Visit www.pearsoned.co.uk/woodto find valuable online resources Companion Website for students l Learning objectives for each chapter l Multiple choice questions to help test your learning l Review questions and answers l Links to relevant sites on the web l Searchable online glossary l Flashcards to test your knowledge of key terms and definitions FFoorr iinnssttrruuccttoorrss l Complete, downloadable Solutions Manual l PowerPoint slides that can be downloaded and used as OHTs AAllssoo:: The Companion Website provides the following features: l Search tool to help locate specific items of content l E-mail results and profile tools to send results of quizzes to instructors l Online help and support to assist with website usage and troubleshooting For more information please contact your local Pearson Education sales representative or visit www.pearsoned.co.uk/wood BA2_A01.qxd 10/3/05 1:42 pm Page viii Guided tour of the book Part opening part chapter 5 4 The issue of shares and debentures ISSUES IN FINANCIAL REPORTING Learning objectives After you have studied this chapter, you should be able to: Learning objectives lexplain the terminology relating to the issue of shares and debentures ldescribe the steps in the process of issuing of shares and debentures outline what you will lrecord the accounting entries relating to the issue of shares and debentures lmake the necessary entries in the ledger accounts when shares are forfeited need to have Introduction learned by the end In this chapter, you’ll learn about the alternatives available to companies when they wish to issue shares and of the various entries to be made in the ledger accounts. of the chapter. You’ll learn about how to record the issue of shares at a price greater than their nominal value and how to record the issue of shares to existing shareholders, rather than to non-shareholders wishing to purchase them. You will also learn about the difference in accounting entries made when debentures (a form of loan capital) rather than shares, are issued. Introduction This part looks at the theories upon which accounting practice is 4.1 The issue of shares based, considers issues affecting accounting and financial rceopnoterxtitn ogf atnhde erenvviierwonsm theen tp ilna cweh oifc ha cbcuosuinnteisnsg einnftoitrimesa otipoenr iant eth.e TcihenWe tc htooesn te onshfs uaisrrseeu st ihnaegr e cs ohissastur oeesfd c,d aotnhin ebyge s mvoea irysy rbheeil gaphtia.v yAealsby laien ,r seeisigtunhlitefi,r c t(haane) t n icmuommmbepedarir aoetfde l sytho ao trnhe esa piaspmsluioceuadnt imtosnu r,se toc ber iev( bseu)d f.bfiy- instalments. Issues of shares may take place on the following terms connected with the price of the shares: 2390 ACcucroreunntt icnogs tth aecocroyunting 446467 1S£h1a eraecsh i.ssued at par. This would mean that a share of £1 nominal value would be issued for 31 Social accounting 482 2Shares issued at a premium. In this case a share of £1 nominal value would be issued for more 32 Corporate governance 491 than £1 each, say for £3 each. 3334 PAcucboliucn steincgto fro ra cmcaonuangtienmgent control 540956 Nm19oi8gt0eh.:t Ahta voen be eteimn eis,s suheadr efos rc £o3u leda cbhe. iHssouweedv aetr , at hdisis wcoausn et.x pTrheusss,l ys hfoarrebsid edaecnh ino ft h£e5 Cnoommpinaanli evsa Alucet Ac4ti.v1ity Wyohuy t hdion kyo cuo mthpinakn iceosm avpoaindi ebse minagy i nw itshhi st op oisssituieo ns?hares at a discount and how do 55 A wide range of exhibitsoffer clear examples of accounting practice and methodology. Chapter 36lAbsorption and marginal costing Chapter 8lProvisions, reserves and liabilities 36.12 Using marginal costs smhoovuelmd eevnetsr; more eitt cao suitluda btieo an gwehneerrea li tr ewseoruvled a scucfofeurn ltotshsa bt eccoauulsde boef ufosreedi gfonr c aunrrye pnucyrp eoxsceh. ange rate Let’s test what you’re just learnt in another example. A company produces five products and has See Section 8.3 for a further look at general reserves. the following cost and sales data. It can sell exactly 100 of each product it manufactures. Total fixed costs are £4,800, apportioned: A £5 (100), B £7 (100), C £11 (100), D £15 (100), E £10 Such transfers are an indication to the shareholders that it would be unwise at the time of the (100), i.e. £4,800 total. Exhibit 36.9 presents this in a table. transfer to pay out all the available profits as dividends. The resources represented by this part of the profits should be retained, at least for the time being. Revenue reserves can be called upon in Exhibit 36.9 future years to help swell the profits shown in the profit and loss appropriation account as being available for dividend purposes. This is effected quite simply by debiting the particular reserve Violet Ltd Products account and crediting the profit and loss appropriation account. CoDsti rpeectr luanbiot:ur and materials A£8 B£9 1C£6 D2£ 5 1E£1 Ac8ti.v1ity Wevheyry dthoi nyogu in t hthinek p srpoefictia al nredv leonssu ea crceosuenrvte (sw ahriec hu sise,d i,t srealtfh, ear r tehvaenn usiem rpelsye rlevaev)?ing Variable manufacturing costs 7 8 10 13 14 MFixaerdg icnoaslt csost 155 177 2161 3185 2150 8.3 General reserve Full cost 20 24 37 53 35 Selling price per unit 30 21 31 80 20 A general reserve is one that can be used for any purpose. For example, it may be needed because ovof ltuhme ee fofef cttr aodf ei nrfleamtiaoinns: athsseu smame ae fcoorm tphae nnye xnte etdhsr e£e4 y,0ea0r0s wbuotr kthinagt dcaupriintagl tihna 2t 0tXim3e ,a nthde tgheant etrhael Activitiesoccur bmtlehevae Oedr rlgisensi scn outoafhl nltae tc loiflon ufps ulttrleh. o cdeIdo? nufs uYtcE ltbolxs au chcso iokibssnnti,t toco i3nawn6lulc y.teu1h dAl0aa a,t t a siypo nborndoeu. fd DoYcura ocaentu.p i opsceneaea n sri h fat oolfsuo oblldl eos ecwpeer iaownsfigeht ataohtbn ilwsley .ob wSurihlhndoeg unhsl adtmvh peoe rrhsoeea dlppluirpncoegtfini opte ndrti h coiafef n piB srf, oo lCedlsl uosa cwntthdiioan Enng lacaheamlevlln epotnlh u oooenvt ft e pspprr crooooiffiscm setpissebr oialtnyhrfice itrfis sed npatiaorssoten rsabci blebgeu ymett nhe2.eed5r , as ptla hemrree escce eovrnmvote:lp utiahmnnesey twe oawodfir lktlo rifsan tdgpil ealc yahaipnasi vgtie att lho dreniemdlqy u ioni£ru 4e2tm, 00ae0Xsn0 3dt wi.wv Toiidlrrlek anninndosgswf ei crsba repoi nin£tgea5 l,aw 0wn0anh0yui. c taIohfl ftrherqouuegnhtoluy t the Exhibit 36.10 Ac8ti.v2ity Itnh itse armnds loefa tvhineg a tmhoe uanmt oouf nwt otrrkainnsgfe crarepdit ainl, pwrhoafitt ias nthde l odsisf?ference between doing book to test your (1) (2) (3) cfueallFs-ceoo lplsotrw opdirnuicgcini ngg, Ucspoirnsotgidn mugc,a icnreggai nEsea l aIgltpnorogoredetu hccoeesr t aailnnl gd sopOhny othf e‘i to’sth beert thearn tdo, biet msaafey tjhuasnt bsoe rtrhye’, cino nthseisr vcaatsiesm to c roenstvreicntt idoinv iadsesnedrtsi nbge ciatsueslef ,t hwei tfhu nad ps hthileoy- understanding of Sales:EBCDA 111110000000000 ×××××£££££2238301100 B, C83,,a00n00£d00 E 8323o,,,,n0011l0000£y0000 i28323te,,,,,00011m00000£s00000 wdunitshseo oeeasnTyuds ec, hl a,drwt ierhs wwehd et iei hrittsnteh ehhbv,n a daeti rhfrnlle eaaeuthanwh eovrce eelreyfdsser, u eoswiterlshmtsre ei vr ctt tee hqoha sauupe utre la ebdsniavtdu t piei soblunoi nunstuu u seetotisc h nftsrh eoe et m sh stftsiueeahm rn hyevbed aeabs ss?alhe a ts aYeon ntrx ceehebceseheee. dy oostIet slnfaeddi v rrp et eeihrurn osecsa ,afie o mpw tntmrshovho aoeueofimrrmn teta tes aesrnden nelo o,tvdi tnfea o ltsdflofo.it iqsecs sstrru hr iaisaiadbiplsr lup.e,f tur Ttecohndahpedp i rbssioi tyaiwabs tlw ein soiooaennrmryg sta eoricoatnfcif nemo dtfsuihfifevensecir t idoeeb.e dnvuInf etst dlriioy-t-, new concepts. TLeostsalC roesvtse:nue 11,000 16,200 18,200 other reserves. DVair11re00iac00tb ××llaeccb mooossautt nrpp uaeefnrra dppc trrmuoorddaitnuuegccrtt icaolss:ts: ((££3230)) 32,,300000 ((££5388)) 53,,880000 ((££6592)) 65,,920000 8.4 Capital reserves Fixed costs (do not change) 4,800 4,800 4,800 A capital reserveis a reserve which is notavailable for transfer to the profit and loss appropri- Total costs (10,100) (14,400) (16,900) ation account to swell the profits shown as available for cash dividend purposes. Most capital Net profit 900 1,800 1,300 rweislel rbvee ss eceann lnateevre rth baet ubtoilnisuesd s hfoarr ecsa msha dyi bvied iesnsude pdu arsp oa s‘enso –n -ncoatsihc’e dtihvei duesned o.f the word ‘cash’, as it Let us look at the ways in which capital reserves are created. 543 131 viii BA2_A01.qxd 10/3/05 1:42 pm Page ix A number of worked examplesare provided Learning outcomesrevisit and reinforce to guide you through more difficult concepts. the major topics covered in the chapter. Chapter 23lConsolidation of the financial statements of a vertical group of companies Part 3lGroups Profit and Loss 16.9 Teaching method £000 £000 MMiinnoorriittyy iinntteerreesstt SS12 143 PS1 6105 This topic can be taught and learnt using either of two methods. One is to focus on the journal Cost of control S1: pre-acquisition 4 S2 35 entries required; this is quite abstract and, many feel, more difficult to understand than the other Cost of control S2: pre-acquisition 9 method. Accordingly, the method used in this book for teaching consolidated financial state- Cost of control: goodwill written off 20 ments is that of showing the adjustments needed on the face of the consolidated balance sheet, Balance to consolidated balance sheet 11600 110 tboegceatuhseer: with any workings required to explain the amounts included. This approach is adopted isll CMoisnto orift yc oinntterorel s8t0 2%0%×× 1×010 G£e0n010e082ral ResSe1r vbealance b/d £0110000 1Wphawdeaherjpuaf pbots eterimnsmli iehen vnatgehpt, se po t oeuhnnnree i cnjtnohegesbe,sc rafieasars tcystheao e cr oraty rflt ychat uhactleocna o bthhuiaoaenllvnaptiisnn n.yc ggoeW tuesoe hn t leotabre beitue longisre idivvaoeeerurs esst talhmay an‘ ubttdr,ci a rhtgdch ie’vees ye a-senosuyi uebearr j v ewctciloetaew, ay uar ’tn nhseddorxe o pntruhslogatatahnt jn auiadtts ic.ito s oSnt meoh a oopbsfwile ee wrxian hbtsgolea e ttts hoteioeesf double-entry adjustments made in ledger accounts. Now, let’s look at the same example but, this time, with the addition of proposed dividends. 2This would be a much lengthier and more costly book if all of the double entry accounts were shown. It is better for a first look at consolidated financial statements to be an introduction to 23.6 A worked example with proposed dividends tIfh ey osuu bcjaenct u onndleyr,s rtaanthde rth teh acno nbsootlhid aante din fitrnoadnucciatilo snt aatnemd ean vtse rsyh odwetna iilned t hains abloysoiks ,o yfo tuh ew siullb hjeacvte. a firm foundation which will enable you, in your future studies, to tackle the more difficult Taking the same companies as in Example 1 but in this case the companies have proposed divi- and complicated aspects of the subject. dends at 31 December 20X5 of P Ltd £16,000; S1 Ltd £5,000; S2 Ltd £20,000. The balance sheets would have appeared: Balance Sheets as at 31 December 20X5 Learning outcomes Fixed assets P Ltd£00400 S1 Ltd£0004 S2 Lt£d00207 Y1ouO rsdhionualrdy nshoawr ehhaoveld leerasr gnet:nerally have voting rights, a right in the net assets of Investments the company, and a right to an interest in profits earned. NeSSthh caaurrreersse iinnnt SSa12ssets (as before) 1491 256 28 23POrredfineraerny cseh asrheahroelhdoelrdse rrse cdeoi vneo ct oupsiueasl olyf hthaev efi nanany cvioatli nsgta rtiegmhtesn.ts for the Dividends to be received (80% of S1) 4 (75% of S2) 15 company whose shares they hold, but not for any company whose shares are 104 50 55 owned by the company they hold their shares in. RSPhreoatafireitn caeandpd pi tlraoolsfis tass f aotr 3210.X152.20X4 £00204 40 £0005 10 £00105 20 4Cwthoietnh gs firoonliuadpna ct–ei adnl o fistnt jaautnsectm itahelen s tptsaa itrneecmnoter pncootsmr apptrianonvgyi dt’she e os wrheanlr eaevchaconoltdu denartssta di nfao tpraa a.rlel ncto umnpdaenriteask iinng s (seebelow) 24 20 – 5The status of ‘subsidiary undertaking’ is dependent upon the existence of control GPreonpeorsael dr edsievrivdeends 4186 12055 2105 6o‘Cvoenr ttrhoal’t iusn ddeetretramkiinnge db yb ya nwohtehtehre ern ‘tdiotym.inant influence’ can be exerted, 104 50 55 not simply by the level of investment in the company. Note: Retained profit P S1 S2 Net profits 20X5 36 10 20 LessProposed dividends (16) (5) (20) Answers to activities PSA1 d8 d705%D%i vo iofd fSe 1Sn2 d× ×s5 r2e0ceivable 204 155 –– 16.1Pepxreecrhmfeairnte gtnhece efm os rht otah rinee hflgourleednaectrees r t hhraiesv kde et chfiaesriyo lnee xsmsp earrkisiieknn gic neo ,ft htthheeeir c oiornmdviepnsaatnrmyy e.snhta rtehhaonld oerrds igneatr yv oshtianrge hrioglhdtesr st.h aInt 24 20 – 361 282 Chapter 19lIntercompany dealings: indebtedness and unrealised profit in stocks Review questions Each chapter ends with a selection of Ncoomtep:r iUsensle osrsd ointahreyr wshisaer eisn doifc £a1te eda, cthh.e share capital of the companies in these review questions practice questionsto prepare you for 19.1Prepare a consolidated balance sheet from the following details as at 31 March 20X6. your examinations. Parent Balance Sheet as at 31 March 20X6 £ £ Investment in subsidiary: 50,000 shares bought 31.3.20X5 105,000 Fixed assets 140,000 245,000 Stock 26,000 BDaenbktors 340,,000000 60,000 Less: Creditors (3,000) 57,000 302,000 Share capital 200,000 Profit and loss: As at 31.3.20X5 45,000 Profit for 20X6 50,000 95,000 General reserve 7,000 302,000 Subsidiary Balance Sheet as at 31 March 20X6 £ £ Fixed assets 104,000 Stock 19,000 Debtors 14,000 Bank 6,000 143,000 Less: Creditors (7,000) 136,000 Share capital 50,000 Profit and loss: As at 31.3.20X5 35,000 Profit for 20X6 51,000 86,000 136,000 During the year, Parent sold goods which had cost £1,100 to Subsidiary for £1,800. None of these gooAdts t hhaed b baleaennc eso slhde beyt dthaete b Paalarenncet oshweeest Sduabtsei.diary £2,000. ‘ 323 ix