Untitled-3.indd 3 09/08/15 12:47 am FRANK WOOD’S 2 BUSINESS ACCOUNTING A01_WOOD5050_13_SE_FM.indd 1 17/07/15 4:43 pm Frank Wood 1926–2000 A01_WOOD5050_13_SE_FM.indd 2 17/07/15 4:43 pm FRANK WOOD’S 2 BUSINESS ACCOUNTING THIRTEENTH EDITION ALAN SANGSTER BA, MSc, PhD, Cert TESOL, CA Formerly authored by Frank Wood BSc (Econ), FCA A01_WOOD5050_13_SE_FM.indd 3 17/07/15 4:43 pm Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk First edition published 1967 Second edition published under the Longman imprint in 1972 Third edition published 1979 Fourth edition published 1984 Fifth edition published 1989 Sixth edition published 1993 Seventh edition published 1996 Eighth edition published under the Financial Times Pitman Publishing imprint in 1999 Ninth edition published 2002 Tenth edition published 2005 Revised tenth edition published 2007 Eleventh edition published 2008 Twelfth edition published 2012 Thirteenth edition published 2016 (print and electronic) © 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, 2007, 2008, 2012, 2016 (print and electronic) The rights of Alan Sangster and Frank Wood to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the authors’ and the publisher’s rights and those responsible may be liable in law accordingly. Pearson Education is not responsible for the content of third-party internet sites. ISBN: 978-1-292-08505-0 (print) 978-1-292-08510-4 (PDF) 978-1-292-08507-4 (eText) 978-1-292-08508-1 (ePub) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for the print edition is available from the Library of Congress 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 Front cover image: Getty Images Print edition typeset in 9.5/11.5pt Sabon LT Pro by 71 Printed and bound by L.E.G.O. S.p.A., Italy NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION A01_WOOD5050_13_SE_FM.indd 4 17/07/15 4:43 pm Contents Notes for teachers and lecturers ix Notes for students xii The Last Lecture xx Acknowledgements xxi part 1 Special accounts 1 Accounting for branches 3 2 Purchases by instalments 29 3 Contract accounts 47 part 2 Companies 4 Limited companies: general background 59 5 The issue of shares and loan notes 66 6 Companies purchasing and redeeming their own shares and loan notes 81 7 Limited companies taking over other businesses 106 8 Taxation in company financial statements 125 9 Provisions, reserves and liabilities 142 10 The increase and reduction of the share capital of limited companies 148 11 Accounting standards, related documents and accounting ethics 160 12 The financial statements of limited companies: statements of profit or loss, related statements and notes 207 13 The financial statements of limited companies: statements of financial position 225 14 Published financial statements of limited companies: accompanying notes 241 15 Statements of cash flows 261 part 3 Groups 16 Group financial statements: an introduction 279 17 Consolidation of statements of financial position: basic mechanics (I) 286 18 Consolidation of statements of financial position: basic mechanics (II) 311 19 Intercompany dealings: indebtedness and unrealised profit in inventory 321 20 Consolidated financial statements: acquisition of shares in subsidiaries at different dates 335 21 Intra-group dividends 339 22 Consolidated statements of financial position: sundry matters 351 23 Consolidation of the financial statements of a group of companies 361 v A01_WOOD5050_13_SE_FM.indd 5 17/07/15 4:43 pm Contents 24 Consolidated statements of profit or loss and statements of comprehensive income 371 25 Business combinations: purchase method accounting 380 26 Standards covering subsidiaries, associates and joint arrangements 385 part 4 Financial calculations and analysis 27 Interest, annuities and leasing 399 28 Accounting ratios 414 29 Interpretation of financial information 435 part 5 Issues in financial reporting 30 Theories of accounting-related choice 461 31 Theories of accounting practice 473 32 Current cost accounting 490 33 Social and environmental reporting and integrated reporting 506 34 Corporate governance 521 35 Public sector accounting 526 36 Accounting for management control 535 part 6 The emerging business environment of accounting 37 The supply chain and enterprise resource planning systems 547 38 E-commerce and accounting 554 39 Forensic accounting 562 part 7 Costing 40 Elements of costing 569 41 Absorption and marginal costing 583 42 Job, batch and process costing 610 part 8 Budgets 43 Budgeting and budgetary control 629 44 Cash budgets 639 45 Co-ordination of budgets 651 part 9 Standard costing and variance analysis 46 Standard costing 673 47 Materials and labour variances 678 48 Overhead and sales variances 696 vi A01_WOOD5050_13_SE_FM.indd 6 17/07/15 4:43 pm Contents part 10 Planning, control and decision-making 49 Breakeven analysis 715 50 Capital expenditure appraisal 732 51 The balanced scorecard 750 Appendices 1 Interest tables 757 2 Answers to review questions 761 3 Glossary 834 Index 839 Supporting resources Visit www.pearsoned.co.uk/Wood to find valuable online resources For instructors ● Complete Solutions Manual for answers within the book ● PowerPoint slides that can be downloaded and used for presentations vii A01_WOOD5050_13_SE_FM.indd 7 17/07/15 4:43 pm Dedication For Aparecida who thinks this is what it is not and not what it is. viii A01_WOOD5050_13_SE_FM.indd 8 17/07/15 4:43 pm Notes for teachers and lecturers This textbook has been written so that a very thorough introduction to accounting is covered in two volumes. The split into two volumes is made in recognition of the fact that many students new to accounting will find all that they require in Frank Wood’s Business Accounting 1. This second volume completes the coverage of the financial accounting and management accounting parts of many examinations in accounting and should be suitable for anyone studying intermediate and final level financial accounting or anyone studying management ac- counting at introductory and intermediate levels on courses at school, college, or university; or studying for qualifications from the LCCI, Association of Accounting Technicians, the Institute of Secretaries and Administrators; or for qualifications of any of the six UK and Irish Chartered Accountancy bodies. As examination syllabuses are constantly being revised, it would not make sense to be too specific as to which chapters would be needed by students taking each of the various examinations. How- ever, Financial Accounting and Financial Reporting are covered in Chapters 1–39 and Management Accounting is covered in Chapters 40–51. While management accounting has evolved to a point where changes in practice are limited, and the double entry method of bookkeeping and the fundamentals of financial accounting have long been established, the same is not true of financial reporting. Far from being the never- changing subject many perceive it to be, it is in a constant state of change. The current major ongoing change, begun in 2005 and still ongoing, is the switch from domestic accounting rules to international rules. Specifically, the rules that had been developed in the UK since 1970, known as Statements of Standard Accounting Practice (SSAPs) and Financial Reporting Stand- ards (FRSs), are being phased out. In their place most businesses are now using International GAAP, i.e. International Financial Reporting Standards (IFRSs) and International Accounting Standards (IASs). Some small and medium-sized businesses continue to use UK standards. These were con- solidated and revised in 2013 and 2014 and now have simpler requirements more in keeping (in terms of length and detail, but not in substance) with those issued under International GAAP. It now seems only a matter of time before all businesses will be using International GAAP. A number of changes have been made in this new edition, some topics have moved within the book, some new ones have been added, and all the content has been updated. Major changes include: ● The term ‘Income statement’ has been replaced throughout with, ‘Statement of profit or loss’. This is in line with the IFRS. The change was requested by a number of users of the book who felt it more appropriate, not simply because it was recommended by the IASB, but because it reflected more accurately the content of the statement. ● Chapter 2 has been retitled Purchases by instalments to better reflect its contents. ● Chapter 11 has been renamed Accounting standards, related documents and accounting eth- ics. It has been updated to incorporate international standards in issue in February 2015 and a new section, 11.49, Professional ethics, has been added in response to requests that students be made aware of this aspect of accountancy practice. ● Chapter 12, The financial statements of limited companies: statements of profit or loss, related statements and notes, now includes a new Section 12.2 which contains what was previously in Sections 19 and 21 of Chapter 29, Accounting theory. ix A01_WOOD5050_13_SE_FM.indd 9 17/07/15 4:43 pm