Financial Accounting For Dummies - UK (eBook)

Financial Accounting For Dummies 1
Contents at a Glance 7
Table of Contents 9
Introduction 19
About This Book 20
Conventions Used in This Book 20
What You’re Not to Read 21
Foolish Assumptions 21
How This Book Is Organised 21
Icons Used in This Book 24
Where to Go from Here 24
Part I: Getting Started with Financial Accounting 25
Chapter 1: Seeing the Big Picture of Financial Accounting and International Accounting 27
Knowing the Objective of Financial Accounting 28
Getting to Know the Users of Financial Statements 31
Understanding the Key Characteristics of Financial Accounting Information 33
Understanding the Limitations of Financial Accounting 37
Considering Your Ethical Responsibilities 38
Introducing the Conceptual Framework of Financial Accounting 41
Chapter 2: Making a Career in Financial Accounting 43
The Making of a Financial Accountant 43
Considering Your Employment Opportunities 49
Looking at the Future of Financial Accounting 52
Chapter 3: Introducing the Primary Financial Statements 55
Understanding How Healthy a Business Actually is 56
Reporting Assets and Liabilities in the Balance Sheet 57
Posting Profit or Loss: The Income Statement/Profit and Loss Account 62
Showing Us the Money: The Statement of Cash Flows 65
Chapter 4: Acronym Alert! Setting the Standards for Financial Accounting 71
Walking through the Origins of Number Crunching 72
Understanding the Role of the Professional Bodies 73
Following Regulatory Issues 77
Part II: Looking at Some Accounting Basics 83
Chapter 5: Doing the Books: The Process behind Financial Accounting 85
Shedding Some Light on Bookkeeping 86
Analysing the Effect of Business Transactions 86
Getting to Grips with Journals 91
Bringing It All Together in the Ledger 100
Chapter 6: Taking a Butcher’s at Accounting Methods Under UK GAAP and IFRS 105
Distinguishing between Key Accounting Methods 106
Sorting through Standards for Other Types of Accounting 108
Considering the Conceptual Framework and Other Principles 111
Part III: Bonding with the Balance Sheet 115
Chapter 7: Looking at Assets 117
Homing in on the Historic Cost Convention 118
Keeping Track of Non-Current ( Long-Term) Assets 119
Learning about Current Assets 123
Studying the Asset Section of the Balance Sheet 130
Chapter 8: Grappling with Liabilities 133
Seeing How Businesses Account for Liabilities 134
Keeping Control of Current Liabilities 135
Planning for Long-Term Obligations 142
Accounting for Bond Issuances 144
Chapter 9: Examining the Equity Section 149
Distinguishing between Different Types of Business Entities 150
Sifting Through Share Capital 153
Recording Retained Earnings 155
Spotting Reductions in Shareholders’ Funds 155
Seeing Increases in Shareholders’ Funds 158
Seeing a Sample Equity Section of the Balance Sheet 159
Part IV: Investigating Income and Cash Flow 161
Chapter 10: Understanding Profit or Loss 163
Presenting the Profit and Loss Account in One of Two Ways 163
Defining Different Types of Businesses 166
Examining Income Statement Sections 168
Watching Out for Unusual Income Statement Items 178
Arriving at the Final Product 180
Chapter 11: Figuring Out the Statement of Cash Flows under UK GAAP and IFRS 183
Understanding the Difference between Cash and Profit 184
Getting to Grips with the Statement of Cash Flows 185
Walking through the Cash Flow Sections 186
Recognising Methods for Preparing the Statement of Cash Flows 193
Interpreting the Statement of Cash Flows 195
Looking at Two Sample Statements of Cash Flows 196
Chapter 12: Discovering and Understanding Depreciation 199
Discovering How Depreciation Affects All Financial Statements 200
Mastering Costs 202
Distinguishing between Depreciation Methods 206
Preparing a Depreciation Schedule 211
Chapter 13: Dealing with and Accounting for Inventory 213
Discovering How the Valuation of Inventory Affects the Accounts 213
Seeing How Service Organisations Deal with Inventory 214
Classifying Inventory 215
Getting to Know Inventory Valuation Methods 219
Preparing an Inventory Worksheet 223
Doing It Right Under IFRS: Knowing the Restrictions 223
Part V: Analysing the Financial Statements 225
Chapter 14: Using Ratios and Other Tools 227
Learning about Liquidity 228
Measuring Profitability 232
Exploring the Cash Position 236
Analysing Financial Statements 239
Chapter 15: Delving into the Disclosures 243
Touching on How Corporate Governance Works 243
Recognising How Companies Work in the UK 245
Reviewing the Notes to the Financial Statements 247
Putting the Onus on the Preparer 256
Chapter 16: Reporting to Shareholders 259
Seeing Why Private and Public Companies Treat Annual Reports Differently 260
Fulfilling Three Purposes 261
Reading the Annual Report to Shareholders 263
Making Sense of Other Sections in the Annual Report 267
Part VI: Tackling More Advanced Financial Accounting Topics 273
Chapter 17: Accounting for Business Combinations 275
Explaining What Constitutes a Merger or Acquisition 276
Dealing with a Business Combination 277
Reviewing Issues Affecting Mergers and Acquisitions 282
Dealing with Investments in Other Companies 287
Classifying Types of Reconstructions 291
Chapter 18: Accounting for Income Taxes 293
Identifying Accounting Profit versus Taxable Profit 294
Taking Advantage of Tax Losses 299
Presenting a Side-by-Side Comparison of Book Values and Tax Calculations 301
Taking Deferred Tax Liabilities or Assets to the Balance Sheet 302
Seeing the Difference between UK GAAP and IFRS for Deferred Tax 303
Chapter 19: Accounting for Leases 305
Reviewing Lease Basics 305
Accounting by the Lessee 308
Accounting by the Lessor 313
Chapter 20: Reporting Changes in Policies and Estimates and Correcting Errors 317
Coping with Accounting Changes 317
Correcting Errors 325
Part VII: The Part of Tens 329
Chapter 21: Ten Financial Accounting Shenanigans 331
Reporting Revenue in the Wrong Period 331
Massaging the Figures: Reporting Fictitious Income 332
Getting Income Classification Wrong 333
Failing to Record Liabilities 333
Reporting Liabilities in the Wrong Period 334
Inflating Asset Values 334
Changing Accounting Policies Inappropriately 335
Failing to Disclose Related-Party Transactions 336
Capitalising Expenses Inappropriately 337
Hiding Reportable Contingencies 337
Chapter 22: Ten Industries with Special Accounting Standards 339
Airlines 339
Finance Companies 340
Franchisors 341
Oil and Gas Companies 341
Government Contractors 342
Healthcare Entities 342
Film Production Companies 343
Not-for-Profit Organisations 343
House Builders 344
Computer Software 344
Index 347
About the Authors 363
Dedication 365
Author’s Acknowledgments 365