FINANCIAL ACCOUNTING An International Introduction Lecturer Resources ON THE WEBSITE For password-protected online resources tailored to support the use of this textbook in teaching, please visit www.pearsoned.co.uk/alexander A01_ALEX2993_06_SE_FM.indd 1 14/01/16 7:14 AM A01_ALEX2993_06_SE_FM.indd 2 06/01/16 7:39 PM Sixth edition Financial accounting an international introduction David Alexander and Christopher Nobes with an appendix on Double-entry Bookkeeping by Anne Ullathorne A01_ALEX2993_06_SE_FM.indd 3 01/08/16 12:18 PM PEARSON EDUCATION LIMITED Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk __________________ First published 2001 (print) Second edition published 2004 (print) Third edition published 2007 (print) Fourth edition published 2010 (print) Fifth edition published 2013 (print and electronic) Sixth edition published 2016 (print and electronic) © Pearson Education Limited 2001, 2004, 2007, 2010 (print) © Pearson Education Limited 2013, 2016 (print and electronic) The rights of David Alexander and Christopher Nobes to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. 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Title: Financial accounting : an international introduction / David Alexander and Christopher Nobes ; with an appendix on Double-entry Bookkeeping by Anne Ullathorne. Description: Sixth edition. | Harlow, England ; New York : Pearson, [2016] Identifiers: LCCN 2015046559 (print) | LCCN 2015047885 (ebook) | ISBN 9781292102993 | ISBN 9781292103013 (PDF) Subjects: LCSH: Accounting. | Financial statements Classification: LCC HF5686.I56 A427 2016 (print) | LCC HF5686.I56 (ebook) | DDC 657--dc23 LC record available at http://lccn.loc.gov/2015046559 10 9 8 7 6 5 4 3 2 1 20 19 18 17 16 Printed in Slovakia by Neografia NOTE THAT ANY PAGE CROSS-REFERENCES REFER TO THE PRINT EDITION A01_ALEX2993_06_SE_FM.indd 4 01/07/16 12:52 PM contents Foreword to the first edition xi Preface xiii acknowledgements xv abbreviations xvi Part 1 thE contExt oF accounting 1 1 introduction 3 Objectives 3 1.1 Purposes and users of accounting 4 1.2 Entities 7 1.3 Accounting regulation and the accountancy profession 10 1.4 Language 12 1.5 Excitement in accounting 13 1.6 The path ahead 14 Summary 14 Multiple choice questions 15 Exercises 16 2 Some fundamentals 17 Objectives 17 2.1 Introduction 18 2.2 The balance sheet 18 2.3 The income statement 25 2.4 Two simple equations 31 2.5 How cash flows fit in 32 Summary 34 Multiple choice questions 34 Exercises 35 3 Frameworks and concepts 39 Objectives 39 3.1 Introduction 40 3.2 Underlying concepts 42 3.3 The IASB’s list of qualitative characteristics 45 3.4 A hierarchy of concepts and some inconsistencies 47 3.5 The reporting entity 49 Summary 50 v A01_ALEX2993_06_SE_FM.indd 5 01/06/16 12:56 PM Contents References and research 50 Multiple choice questions 51 Exercises 51 4 The regulation of accounting 53 Objectives 53 4.1 Introduction: various ways to regulate accounting 54 4.2 Legal systems 55 4.3 Examples of regulation 56 4.4 The regulation of International Standards 62 4.5 SMEs and partnerships 62 Summary 63 References and research 64 Multiple choice questions 64 Exercises 65 5 International differences and harmonization 66 Objectives 66 5.1 Introduction: the international nature of the development of accounting 67 5.2 Classification 68 5.3 Influences on differences 75 5.4 Harmonization of financial reporting 85 5.5 The International Accounting Standards Board 91 Summary 94 References and research 95 Multiple choice questions 96 Exercises 97 6 The contents of financial statements 99 Objectives 99 6.1 Introduction 100 6.2 Balance sheets (statements of financial position) 101 6.3 Comprehensive income 107 6.4 The 2013 Directive’s formats 114 6.5 Statements of changes in equity 116 6.6 Cash flow statements 116 6.7 Notes to the financial statements 119 6.8 Other general disclosure requirements 119 6.9 Wider disclosure considerations: corporate social reporting, Corporate governance and ethics 122 Summary 124 References and research 125 Multiple choice questions 125 Exercises 126 vi A01_ALEX2993_06_SE_FM.indd 6 01/08/16 11:55 AM Contents 7 Financial statement analysis 127 Objectives 127 7.1 Introduction 128 7.2 Ratios and percentages 128 7.3 Profit ratios 129 7.4 Profitability ratios 135 7.5 Liquidity ratios 142 7.6 Interest cover 143 7.7 Funds management ratios 143 7.8 Introduction to investment ratios 145 7.9 Some general issues about ratios 146 Summary 149 Multiple choice questions 150 Exercises 152 Part 2 FInancIal RePoRTIng Issues 159 8 Recognition and measurement of the elements of financial statements 161 Objectives 161 8.1 Introduction 162 8.2 Primacy of definitions 162 8.3 Hierarchy of decisions about assets and liabilities 164 8.4 Income (including revenue) and expenses 174 Summary 180 References and research 181 Multiple choice questions 181 Exercises 183 9 Tangible and intangible non-current assets 185 Objectives 185 9.1 Preamble: a tale of two companies 186 9.2 Introduction 187 9.3 The recognition of assets 188 9.4 Should leased assets be recognized 190 9.5 Depreciation of cost 193 9.6 Impairment 205 9.7 Measurement based on fair value 207 9.8 Investment properties 211 9.9 A mix of values 211 Summary 212 References and research 213 Multiple choice questions 213 Exercises 215 vii A01_ALEX2993_06_SE_FM.indd 7 01/08/16 11:55 AM Contents 10 inventories 217 Objectives 217 10.1 Introduction 218 10.2 Counting inventory 220 10.3 Valuation of inventory at historical cost 221 10.4 Inventory flow 222 10.5 Other cost methods 226 10.6 Valuation of inventory using exit values 227 10.7 Practice 228 Summary 229 References and research 231 Multiple choice questions 231 Exercises 232 11 Financial assets, liabilities and equity 234 Objectives 234 11.1 Introduction 235 11.2 Cash and receivables 236 11.3 Investments 238 11.4 Liabilities 241 11.5 Equity 246 11.6 Reserves and provisions 250 11.7 Comparisons of debt and equity 253 Summary 254 References and research 255 Multiple choice questions 256 Exercises 256 12 accounting and taxation 257 Objectives 257 12.1 Introduction 258 12.2 International differences in the determination of taxable income 260 12.3 Tax rates and tax expense 262 12.4 Deferred tax 263 Summary 267 References and research 267 Multiple choice questions 267 Exercises 268 13 cash flow statements 270 Objectives 270 13.1 Introduction 271 13.2 An outline of the IAS 7 approach 272 13.3 Reporting cash flows from operating activities 274 13.4 The preparation of cash flow statements 275 13.5 A real example 280 Summary 283 viii A01_ALEX2993_06_SE_FM.indd 8 01/06/16 12:56 PM Contents References and research 283 Multiple choice questions 283 Exercises 284 14 group accounting 286 Objectives 286 14.1 Introduction: the group 287 14.2 Investments related to the group 290 14.3 Accounting for the group 293 14.4 Uniting/pooling of interests 302 14.5 The equity method 303 14.6 Conclusion on group relationships 305 Summary 306 References and research 306 Multiple choice questions 307 Exercises 308 15 Foreign currency translation 311 Objectives 311 15.1 Introduction 312 15.2 Transactions 312 15.3 Translation of financial statements 315 15.4 A numerical illustration 316 Summary 318 References and research 319 Multiple choice questions 319 Exercises 320 Part 3 analySiS 323 16 Financial appraisal 325 Objectives 325 16.1 Introduction 326 16.2 More on investment ratios 326 16.3 Interpreting the balance sheet 333 16.4 Valuation through expectations 335 16.5 Valuation through market values 335 16.6 Accounting policies and financial appraisal 336 16.7 Creative accounting 344 Summary 345 References and research 345 Multiple choice questions 346 Exercises 347 ix A01_ALEX2993_06_SE_FM.indd 9 01/06/16 12:56 PM