Financial accounting a concepts based introduction Written in a very friendly, easy to read style, this excellent financial accounting text will suit beginners as well as more experienced learners Com.
Financial Accounting Written in a very friendly, easy-to-read style, this excellent financial accounting text will suit beginners as well as more experienced learners Comprehensive and up-to-date, it enables readers to explore different angles of financial reporting It makes good use of a number of relevant contemporary examples, which helps with maintaining student motivation Petros Vourvachis, Lecturer in Financial Accounting, Loughborough University, UK Financial accounting is the branch of accounting thought and practice concerned with preparing and providing information for external users of financial statements This textbook helps students to understand the underlying concepts that underpin the theory of financial accounting in the solution of accounting problems This international edition includes learning-path tools at the beginning of each chapter, extracts from the financial statements of listed companies, definitions of key terms and exam examples Unlike other textbooks, Financial Accounting provides analysis of why accountants what they and not just how With such a wealth of accounting models and diagrams intertwined with this analysis, this book guides the reader through all the concepts and practicalities of financial accounting This book is an essential guide for students new to accountancy and finance and an equally useful tool for more experienced students and researchers David Kolitz is Senior Lecturer in Accounting at the University of Exeter, UK A companion website for this book is available at www.routledge.com/cw/kolitz This page intentionally left blank Financial Accounting A concepts-based introduction David Kolitz First published 2017 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2017 David Kolitz The right of David Kolitz to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe 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 Names: Kolitz, David L., author Title: Financial accounting: a concepts-based introduction/David Kolitz Description: Abingdon, Oxon; New York, NY: Routledge, 2017 Identifiers: LCCN 2016024035| ISBN 9781138844964 (hardback) | ISBN 9781138844971 (pbk.) | ISBN 9781315728445 (ebook) Subjects: LCSH: Accounting Classification: LCC HF5635.K792 2017 | DDC 657–dc23 LC record available at https://lccn.loc.gov/2016024035 ISBN: (hbk) 978-1-138-84496-4 ISBN: (pbk) 978-1-138-84497-1 ISBN: (ebk) 978-1-315-72844-5 Typeset in Bembo by Sunrise Setting Ltd, Brixham, UK To Maeve This page intentionally left blank Contents Preface Outline Supplements ix xi xiv PART I A conceptual overview The accounting environment Fundamental accounting concepts 23 The accounting equation and the analysis of transactions 67 PART II The accounting process 101 Recording external transactions 103 Recording internal transactions 144 Preparation and presentation of financial statements 166 Closing entries 193 PART III The accounting process expanded 215 Purchase and sale transactions 217 Analysis journals 259 PART IV Recognition and measurement of the elements of financial statements 285 10 Property, plant and equipment 287 11 Inventory and cost of sales 333 viii Contents 12 Accounts receivable 368 13 Cash and bank 385 14 Accounts payable 409 15 Owner’s equity and non-current liabilities 420 PART V Entity forms 431 16 Partnerships 433 17 Companies 477 PART VI Sundry topics 519 18 Statement of cash flows 521 19 Analysis of financial statements 552 20 Non-business entities 583 21 Incomplete records 601 Index 614 Preface Pedagogical philosophy The literature refers to the procedural and conceptual approaches in the teaching of an introductory accounting course The procedural course is usually described as being concerned mainly with the techniques of double-entry bookkeeping, while the conceptual approach in its pure form moves away from the techniques of accounting for transactions and uses a decision-making approach as the foundation for explaining the need and role of accounting in society It is submitted that the procedural approach places too much emphasis on how to perform various techniques rather than why these techniques are performed It is proposed that this may not develop the student’s ability to apply the techniques to practical situations On the other hand, the application of the pure conceptual approach places little emphasis on the techniques of double-entry bookkeeping The concepts model integrates the conceptual and procedural approaches to the teaching of introductory accounting by teaching students to understand the why of accounting before considering the how of accounting This impacts on both the order of the teaching of topics and the way in which the various topics are taught Features The requirements and terminology of the latest lAS have been incorporated throughout the book The statement of profit or loss is introduced and used throughout, except where there are items of comprehensive income, where a statement of comprehensive income is used The statement of financial position is used throughout instead of the balance sheet The text takes account of the latest amendments in the Conceptual Framework project as well as the latest relevant International Financial Reporting Standards Learning path tools are included at the beginning of each chapter These include a Business focus section, where a real life scenario is discussed in the context of the chapter contents, as well as a Dashboard, which guides the student on how to study the particular chapter Other features include the Key definitions, highlighted in each chapter, and the Pause and reflect scenarios The former give students a focus when reading the text and are useful for revision purposes The latter are short scenarios, both narrative and numerical, designed to confirm understanding, illustrate a specific point or make the reader think about the meaning and implication of the preceding paragraphs The transactions in the Smart Concepts case study (that runs from Chapters to 7) are grouped into distinct sets to make the case study manageable and understandable to 602 Sundry topics Learning outcomes After studying this chapter, you should be able to the following: Describe the situations giving rise to incomplete records Prepare financial statements from incomplete records Incomplete records 21.1 21.2 21.3 Circumstances giving rise to incomplete records Preparation of financial statements from incomplete records Practical application 21.1 Circumstances giving rise to incomplete records No new concepts are taught in this chapter An understanding of all the concepts taught in this book is required, however, to solve a problem where the accounting records are incomplete There are varying degrees of incompleteness in accounting records The procedures to be adopted when preparing financial statements will depend upon the nature of the records or data available There are various reasons for the records of a business entity being incomplete, for example: • • • • The person compiling the records has inadequate accounting knowledge Financial data is not available because it has been lost, destroyed or stolen The information is incomplete due to fraud Transactions are not recorded on a double-entry basis and therefore the records may not directly provide the information necessary to determine: the financial performance of the entity; the financial position of the entity It is often not feasible or practical for a small business to maintain accounting records using a full double-entry system of book keeping Many small business entities are satisfied with the information they obtain from keeping a record of receipts and payments, and of their accounts receivable and accounts payable A large number of owners of such entities may not know how to correctly record transactions They may record the details of a transaction once only, if at all! Many transactions may not be recorded, leading to incomplete information It is, however, necessary for such business entities to maintain some form of accounting records for the following reasons: • • The owners need to know if the business entity is profitable It is necessary to determine the profits in order to submit information required by the tax authorities Incomplete records • 603 In the case of a partnership, it is essential to know what profits have been made in order to allocate the profits to the partners Every set of circumstances that you will encounter, both in practice and in an exam, will be different However, if the assignment is approached with the conceptual understanding that has been taught in this book, you should be able to reconstruct the information to produce a set of financial statements A typical set of procedures to follow when preparing financial statements from incomplete records is given in the following section 21.2 Preparation of financial statements from incomplete records As mentioned above, the procedure for the preparation of financial statements from incomplete records will vary depending upon the circumstances However, the following guidelines can be adapted to most situations: • • Establish or reconstruct the financial position at the end of the previous period Reconstruct information relating to the key areas of performance measurement: cash and credit sales; cash and credit purchases; other income and expenses • • • Identify any capital contributions from owners and any distributions to owners Determine any relevant adjustments at the end of the period Prepare the financial statements 21.3 Practical application Donald (a university friend of Simon’s) assisted Michael and Minnie to form a private company called Euro Products Limited in October 20X5 They sell cuddly toys that are imported from France Donald, who was an accountancy student, helped Michael and Minnie prepare the financial statements for the 20X6, 20X7 and 20X8 year ends He, however, graduated from university at the end of 20X8 with honours and left the country to work in Paris This put Michael and Minnie in a predicament and as a result, no accounting records have been kept for the 20X9 year They have now come to you to ask for assistance in preparing the financial statements for the year ended 30 September 20X9 They have given you several boxes of papers from which you are able to ascertain the following: The opening balances per the trial balance at October 20X8: C Ordinary share capital Retained earnings Loans from shareholders Land Motor vehicles: cost 350 000 74 525 100 000 400 000 200 000 604 Sundry topics Furniture and fittings: cost Computer equipment: cost Motor vehicles: accumulated depreciation Furniture and fittings: accumulated depreciation Computer equipment: accumulated depreciation Inventory Accounts receivable Insurance paid in advance Cash on hand Accounts payable Lights and water payable Telephone payable Bank overdraft 65 000 34 000 97 600 15 400 17 000 84 256 25 022 546 547 55 262 217 654 98 713 They banked their takings periodically after paying the following amounts in cash: Salaries Staff wages Repairs and maintenance C1 000 per week (each, to Michael and Minnie) C456 per week (each, to six employees) C14 262 The cash on hand at 30 September 20X9 amounted to C963 A loan was taken out on March 20X9 from Scrooge Bank in order to purchase a new motor vehicle The loan bears interest at per cent pa, which is payable on 28 February each year in arrears The loan is repayable in five years’ time The land was revalued on 30 September 20X9 to C450 000 Euro Products had acquired the land two years ago with the intention of building its own premises Depreciation is provided as follows: Motor vehicles – 20 per cent per annum on the reducing balance method Furniture & fittings – 10 per cent per annum on cost Computer equipment – 25 per cent per annum on cost All the items have a nil residual value Bank account 6.1 Michael and Minnie were not able to record any transactions in a journal and ledger, and thus not have a general ledger bank account They were, however, able to work through the bank statements of Euro Products Limited and summarise the deposits and payments as follows: C Balance per bank statement at 30/09/X8 (overdraft) Deposits Deposits from sales Deposit – loan Payments Acquisition of motor vehicle Delivery charges outwards (76 616) 280 559 150 000 (150 000) (134 876) Incomplete records Insurance Advertising Lights and water Rent Repairs and maintenance Salaries Telephone Payments to suppliers Balance per bank statement at 30/09/X9 605 (14 940) (52 548) (40 817) (54 000) (46 874) (232 994) (7 806) (1 532 964) 86 124 6.2 The bank statement balance at 30 September 20X8 did not agree with the balance in the 20X8 financial statements There was an outstanding cheque for C22 097 (payable to Pop Importers Limited, which only cleared the bank on October 20X8 There were no outstanding deposits at 30 September 20X8 6.3 The last three cheques made out on 28 September 20X9 did not clear the bank account until October 20X9: Cheque no 1128 Cheque no 1129 Cheque no 1130 6.4 Accounts payable (Pop Importers) Advertising Repairs and maintenance C100 800 C3 981 C2 121 An amount of C26 874 was deposited into the bank account on 30 September 20X9 This amount was processed by the bank on October 20X9 An inventory count was conducted at 30 September 20X9 The cost price of this inventory was C78 425 Included in the total inventory of C78 425 were items at a cost price of C26 896, which, according to Minnie, will only be able to be sold for C24 218 In addition to the inventory counted above, there was C12 658 of goods on consignment from Quick Quack Merchandise In September 20X9, for the first time Michael decided to import goods directly from an overseas supplier, Mars Distributors Plc Goods to the value of C24 213 were ordered from the supplier in Paris on 15 September 20X9 The goods were transported by road from Paris to Rotterdam, where they were loaded onto a ship The terms of the contract were FOB Rotterdam The ship left Rotterdam on 29 September 20X9 Michael and Minnie mark up their goods at 66.67 per cent above cost 10 An accounts receivable listing was maintained on a monthly basis 10.1 The list of accounts receivable at 30 September 20X9 was as follows: Customer Floppy Dog Toy Shop Goof ’s Toy Bar The Little Cabin Beautiful Animals Daisy Toy World Dark Wing Distributors White Soft Toys Total Amount C 17 623 35 241 213 122 24 125 22 525 12 165 119 014 606 Sundry topics 10.2 10.3 At the year end, Dark Wing Distributors had become insolvent and no cash was expected to be received from them Beautiful Animals, on the other hand, had not paid their account for five months as they were experiencing financial difficulties 11 Apart from the goods purchased from Mars Distributors Plc (see above), Euro Products had only purchased their goods from one supplier, Pop Importers Limited 11.1 The statement received from Pop Importers Limited at 30 September 20X9 showed the following: Date Description Doc 31/08/X9 04/09/X9 10/09/X9 12/09/X9 25/09/X9 30/09/X9 Balance Payment Invoice Credit note Invoice Balance R254 I4785 C478 I4821 Debit 252 400 151 200 21 222 252 20 712 294 334 11.2 Credit 138 882 294 334 On scrutinising the statement you discover the following: • • • The payment made on 28 September 20X9 had not been credited on the statement The credit note C478 should have been for C4 225 The August statement balance was overstated by C400 This had still not been corrected on the September statement 12 Michael informs you that they had failed to keep a record of inventory that they had taken as gifts for customers at Christmas They are happy for you to determine the figure 13 The telephone account and lights and water account for September 20X9 were only received in October: Lights and water Telephone C3 536 C732 14 The amount paid for insurance was for a contract taken out on January 20X9 in respect of insurance cover for the period ending 31 December 20X9 15 The taxation expense for the year is C39 170 You are required to: a) Prepare a statement of comprehensive income for Euro Products Limited for the year ended 30 September 20X9 b) Prepare a statement of changes in equity of Euro Products Limited for the period ended 30 September 20X9 c) Prepare a statement of financial position of Euro Products Limited at 30 September 20X9 Incomplete records 607 Solution: Practical application a) Statement of comprehensive income EURO PRODUCTS LIMITED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20X9 Sales Cost of sales Opening inventory 01/10/X8 Purchases Goods available for sale Closing inventory 30/09/X9 Gross profit Operating expenses Advertising Bad debts Delivery expenses Depreciation Gifts Insurance Lights and water Rent Repairs and maintenance Salaries Telephone Wages (W1) (W4) (1 594 114 − 520) (W3/4) (W5) (52 548 + 981) (22 525 + 122) (Q6 given) (W6) (W5) (W7) (W8) (Q6 given) (46 874 + 14 262 + 121) (232 994 + (2 × 000 × 52)) (W8) (456 × × 52) (W2) C 662 375 (1 600 103) 84 256 591 594 675 850 (75 747) 062 272 (932 846) 56 529 25 647 134 876 52 980 520 14 751 41 136 54 000 63 257 336 994 884 142 272 Finance cost Interest on loan Profit before taxation Taxation (W8) (7 000) 122 426 (39 170) (Note 15 given) Profit for the period Other comprehensive income Revaluation Total comprehensive income 83 256 50 000 133 256 b) Statement of changes in equity EURO PRODUCTS LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER 20X9 Balance at October 20X8 Total comprehensive income Balance at 30 September 20X9 Ordinary share capital Revaluation surplus Retained earnings C 350 000 — 350 000 C — 50 000 50 000 C 74 525 83 256 157 781 Total C 424 525 133 256 557 781 608 Sundry topics c) Statement of financial position EURO PRODUCTS LIMITED STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 20X9 ASSETS Non-current assets Land and buildings Motor vehicles Furniture and fittings Computer equipment Current assets Inventory (W5) Goods in transit Accounts receivable Insurance paid in advance Cash and cash equivalents Note C 716 020 450 000 214 420 43 100 500 (Q1, 3, and W6) (Q8 given) (Q10: 119 014 − 22 525 − 122) (W7) (W9: Bank) + (Q2: Cash – given) 204 121 75 747 24 213 93 367 735 059 920 141 EQUITY AND LIABILITIES Share capital and reserves Ordinary share capital Revaluation surplus Retained earnings 557 781 350 000 50 000 157 781 (Q1 given) (Q4 given: 450 000 – 400 000) Non-current liabilities Loans from shareholders Loan from Scrooge Bank Current liabilities Accounts payable Expenses payable Taxation payable 250 000 100 000 150 000 112 360 (W3: Pop Importers: 37 709) + (Q8: Mars: 24 213) 61 922 (Q15) 11 268 39 170 920 141 EURO PRODUCTS LIMITED NOTES TO THE FINANCIAL STATEMENTS AT 30 SEPTEMBER 20X9 1) Non-current assets Cost 30/09/X8 Acquisitions Revaluation 30/09/X9 Land Motor vehicles Furniture and fittings Computer equipment Total C C C C C 400 000 200 000 150 000 65 000 34 000 350 000 65 000 34 000 699 000 150 000 50 000 899 000 50 000 450 000 Incomplete records Accumulated depreciation 30/09/X8 Depreciation 30/09/X9 Carrying amount 609 — — — 97 600 37 980 135 580 15 400 500 21 900 17 000 500 25 500 130 000 52 980 182 980 450 000 214 420 43 100 500 716 020 2) Accounts receivable C Accounts receivable Allowance for doubtful debts (Q10: 119 014 − 22 525) (Q10) 96 489 (3 122) 93 367 3) Cash and cash equivalents C Bank Cash (W9) (Q2 given) 096 963 059 4) Expenses payable C Lights and water payable Telephone payable Interest payable (W8) (W8) 536 732 000 11 268 Workings 1) Sales Accounts receivable Details C Balance Sales 25 022 662 375 Balance 687 397 96 489 Accounts receivable listing 119 014 (22 525) ∗96 489 Details Cash (W2) Bad debts Balance∗ C 568 383 22 525 96 489 687 397 610 Sundry topics The accounts receivable amount for the statement of financial position is calculated from the information in point 10 of the example The listing shows that, at the year end, accounts receivable totalled C119 014 However, in 10.2, the information indicates that the amount owing by Dark Wing Distributors needs to be written off as a bad debt By reconstructing the accounts receivable account, the sales figure is calculated 2) Cash receipts Cash Details Balance Accounts receivable (cash received) C 547 568 383 Details Bank (actual deposits) Bank (outstanding deposit) Wages (52 × × 456) Repairs and maintenance Salary (1 000 × × 52) Balance 568 930 C 280 559 26 874 142 272 14 262 104 000 963 568 930 In order to reconstruct the accounts receivable account, the total cash received from customers is required To calculate this, you need to reconstruct the cash account The example gives the opening and closing balance of the cash account, the amount of cash banked, an outstanding deposit and amounts paid for in cash The difference in the cash account is therefore the cash received from customers 3) Purchases Accounts payable: Pop Importers Details Bank∗ Bank (cheques in transit) C 510 867 100 800 Balance∗∗ 37 709 649 376 Details Balance Purchases (including inventory for gifts) C 55 262 594 114 649 376 C ∗ Payments – from bank X8 outstanding cheque Current year’s payments ∗∗ Supplier’s reconciliation Balance per supplier’s statement Adjusted for: Payment not on statement Mistake on credit note Gifts Cast error from August not adjusted Balance per accounting records 532 964 (22 097) 510 867 C 138 882 (98 280) 27 (2 520) (400) 37 709 Incomplete records 611 To determine the purchases figure, you need to reconstruct the accounts payable account The example gives an opening balance but not a closing one, therefore the only way to determine the closing balance is to a suppliers’ reconciliation with the information from point 11 in the example The rest of the information is supplied in the example – that is, payments made 4) Gifts Cost GP/MU SP 100.00 66.67 GP % = 66.67/166.67 = 40% 166.67 Therefore: C Cost GP/MU 100.00 597 425∗ 66.67 SP 166.67 662 375 (W1) C Cost of sales∗ (1 597 425 + 678) Inventory 30 September 20X8 (opening) Purchases (W3) Inventory 30 September 20X9 (closing) Gifts 600 103 84 256 594 114 (75 747) (2 520) Using sales and the GP %, cost of sales (before the inventory write-down) is first calculated The cost of sales is then adjusted to the amount of the inventory write-down of C2 678, then by using the opening inventory, purchases and closing inventory, the cost of gifts is calculated 5) Inventory C Inventory at cost Inventory write-down Final inventory balance (26 896 – 24 218) 78 425 (2 678) 75 747 6) Depreciation C Motor vehicles – old Motor vehicles – new Furniture and fittings Computer equipment 20% 20% 10% 25% C102 400 C150 000 C65 000 C34 000 (1 year) (7 months) (1 year) (1 year) 20 480 17 500 500 500 52 980 612 Sundry topics 7) Insurance paid in advance Insurance paid in advance Details Balance b/d Bank Balance b/d C 546 14 940 18 486 735 Details Insurance expense Balance c/d∗ C 14 751 735 18 486 ∗14 940 × 3/12 = 735 By reconstructing the insurance paid in advance account and using the information in point 14 of the example, you can determine the insurance expense for the statement of comprehensive income and the insurance paid in advance for the statement of financial position 8) Expenses payable Telephone payable Details Bank Balance c/d C 806 732 538 Details Balance b/d Telephone expense Balance b/d C 654 884 538 732 Lights and water payable Details Bank Balance c/d C 40 817 536 44 353 Details Balance b/d Lights and water expense Balance b/d C 217 41 136 44 353 536 Interest on loan C150 000 (0.08 × 7/12 months) C7 000 C Total expenses payable Telephone Lights and water Interest 732 536 000 11 268 The telephone and lights and water expenses are calculated by reconstructing the respective liability accounts Interest is calculated from the date that the loan was taken out Incomplete records 613 9) Bank reconciliation C Balance per bank statement Less outstanding cheques Add outstanding deposit Balance per Euro Products’ records 1128 1129 1130 Supplier Advertising Repairs and maintenance 86 124 100 800 981 121 (106 902) 26 874 096 To determine the bank balance for the statement of financial position, a bank reconciliation needs to be performed using the information in point of the example Bibliography Incomplete records: New approaches to an old problem www.accountingweb.co.uk/article/ incomplete-records-new-approaches-old-problem/546379 (Accessed 19 September 2014) Index The page numbers in bold are the primary reference for the entry account 77, 110, 127 accounting equation 69, 70, 71, 72, 73, 74, 75, 76, 77 accounting information system 10, 11, 26, 440 accounting standards 14, 18, 19, 20, 25 accounts payable control account 263, 268 accounts payable (subsidiary) ledger 263, 267, 268 accounts payable turnover ratio 567 accounts receivable control account 263, 264 accounts receivable (subsidiary) ledger 263, 264 accounts receivable turnover ratio 566 accrual basis 31, 45, 63, 64, 146, 170, acid test or quick ratio 563 adjusting entries 146, 147, 148 annual report 12, asset 5, 6, 34, 35, 36, 172, 173, 175, 176, 290, 291, 335, 336, 355, 370 bad debts 371 bank reconciliation 392, 393, 394 business entities – types 9, 10 business ownership carrying amount 300, 302 cash and cash equivalents 387, 523, 524 cash basis 27, 63 cash discount 229, 236 cash flow 26, 27, 523, 524, 525, 526, 527 closing entries 195, 196 collection period for accounts receivable 566 common size financial statements 557, 558 company: articles of association 479, 490; debenture 483, 485; debenture issue 507; debenture issue at a discount 509; debenture issue at a premium 507, 511, 512; debenture issue at par 507; director 9, 480, 481, 490; formation 489, 490; limited by guarantee 9, 479, 480, 481; limited by shares 9, 479, 480; listing 482, 501; memorandum of association 479, 489; private 9, 479, 480; public 9, 479, 480; share capital 425, 483; share issue 480, 501, 504; shareholder 8, 9, 479, 481; stewardship 33, 491 comparative statements 559 conceptual framework 14, 25, 26, 32, 169 consistency 171 control account 262, 263 copyrights 290 corporation tax 491, 492 cost model 318 current assets 175, 176 current liabilities 176, 177, 426 current ratio 563 debt equity ratio 569 debt ratio 569 delivered at terminal (DAT) 342 depreciation 153, 299; depreciable amount 299, 300, 301 depreciation method: diminishing balance 303; straight line 303; units of production 303, 304 depreciation period 301 depreciation of significant parts 307 distributable reserves 486 dividend: cumulative 484; final 486, 493; interim 486, 493; non-cumulative 484 dividends payable 486 dividends per share 574 dividend yield 576 double entry accounting 106 doubtful debts 371; allowance for 371, 372, 377 earnings per share (EPS) 574 earnings yield 575 Index entity concept 31, 32; accounting entity 31, 32, 424; legal entity 8, 31, 424 equity 5, 6, 38, 422, 423, 424, 425, 437, 438, 489 equity instrument 483 equity ratio 569 expense 5, 6, 34, 41, 174, 175 expenses paid in advance 150 expenses payable 151, 209 external transactions 69, 106 face value 426 fair presentation 170 fair value 315, 319, 322 fair value less costs of disposal 315 fields of accounting activity: auditing 21; financial accounting 7, 10, 21; management accounting 7, 21; taxation 21 financial asset 370, 411 financial instrument 370, 411 financial liability 411 financial statements 10, 11, 12, 16, 33, 34, 44, 168, 178 financing activities 27, 525, 542 free on board (FOB) 341 generally accepted accounting practice/ principles (GAAP) 18, 19, 20 general purpose financial reporting 14, 32, 168, 169 general purpose financial statements 168, 169 going concern 170, 171 goods in transit 340, 341, 342 goods on consignment 342 goodwill 290, 456, 457, 458, 459, 465 gross profit 182, 337 gross profit percentage 337, 571 headline earnings 578 impairment of assets 314, 315, 316, 317, 321, 322 income 5, 6, 10, 34, 38, 39, 173, 174 income receivable 149, 208 income received in advance 148 income tax 491, 492 incorporated entity 7, 8, 31, 424, 440 intangible assets 290, 457 internal control 21, 22, 388 interest cover ratio 570 interest rate: effective 427; market 507; nominal 426 internal rate of return 427 internal transactions 69, 146, 147 International Accounting Standards Board (IASB) 3, 14, 19, 20, 25, 26, 166 615 International Financial Reporting Standards (IFRS) 3, 14, 19, 20, 21, 23, 26, 166, 168, 170, 436, 585 inventory: cost 254, 338, 339, 340; cost formula: FIFO 349, 350; cost formula: specific identification 349, 350; cost formula: weighted average 349, 351; definition 336; lower of cost and net realisable value 355, 356, 357, 358; net realisable value 356, 357, 358; periodic system 223, 224; perpetual system 223; recognition 335, 336; shortages 344, 345, 346, 347; transport costs 339, 340 inventory holding period 565 inventory turnover ratio 564 investing activities 27, 525, 541 investment properties 290 investors 5, 6, 11, 14, 15, 69, 70, 169, 170, 437 joint and several liability 436 journal: cash payments 263, 275; cash receipts 263, 271; general 109, 110, 127, 263; petty cash 281; purchases 263, 267; purchases returns 280; sales 263, 264; sales returns 280 ledger – general 110, 111, 127 liability 36, 37, 70, 173, 176, 177 limited liability 8, 481 mark-up on cost 337, 338 mark-up percentage 571 materiality 17, 19, 171 nominal value 426 non-business entity: accumulated fund 585, 586, 587; characteristics 6, 584, 585; deficit 585; income and expenditure statement 585, 594; receipts and payments statement 593, 594; special fund 585, 586, 587; subscriptions 591; surplus 585 non-current assets 175, 176 non-current liabilities 176, 177, 425, 426 non-distributable reserves 486, 487 operating activities 27, 524, 525, 529, operating cycle 175, 176 other comprehensive income 178, 179 partnership: admission of a partner 450; appropriation account 424, 441, 448; capital account 425, 437, 438; current account 425, 437, 438; dissolution 462; formation 438; profit-sharing ratio 448, 450, 451 616 Index patents 290 payment period for accounts payable 568 posting 110, 111 preliminary costs 503 present value 427 price earnings ratio 575, 576 private company 9, 479, 480 profit 5, 6, 11, 95, 96, 179 profit or loss account 196, 200 profit percentage 572 property, plant and equipment: cost 294, 296; definition 290; disposals 311; recognition criteria 291 public company 9, 479, 480, 482 qualitative characteristics 16, 17, 18, 19, 26, 45, 171 recognition criteria 45, 172, 173, 290 recognition of assets 172 recognition of expenses 174, 175 recognition of income 173, 174 recognition of liabilities 173 recoverable amount 315, 316 remittance advice 413 residual value 300, 309, 310 retained earnings 425, 486 return on ordinary shareholders’ equity ratio 573 return on total assets ratio 573 revaluation model 318 revalued amount 318 settlement discount 226, 232 shareholder 8, 9, 480, 481 share issue costs 504 share premium 503 shares: bonus issue 493; capitalisation issue 493, 494; no par value 483, 484; ordinary 484; par value 483, 484; participating preference 484; preference 484; redeemable preference 484 statement of cash flows 10, 33, 34, 44, 527; direct method 527, 530; indirect method 527, 537 statement of changes in equity 10, 11, 33, 34, 44, 78, 187 statement of comprehensive income 178, 179, 180, 181, 182, 183 statement of financial position 10, 11, 12, 26, 33, 34, 44 statement of profit or loss 10, 11, 12, 26, 33, 34, 38, 44, 178, 179 subsidiary ledgers 262, 263 supplier’s reconciliation statement 413 tangible assets 290 time period concept 146, 147 total asset turnover ratio 572 total comprehensive income 179 trade discount 230, 237 trading account 196, 197 trial balance: pre-adjustment 106, 146, 147, 154; post-adjustment 146, 147, 154 unincorporated entity 7, 8, 31, 424, 440, 441 useful life 300, 301, 309, 310 users of financial information 6, 15 value in use 315, 316 ... Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Names: Kolitz, David L. , author Title:... produced by management for external users The annual report of a listed company typically contains many parts, including financial and nonfinancial information The financial statements form part of... main areas These fields of activity are financial accounting, management accounting, auditing and taxation 1.7.1 Financial accounting Financial accounting provides information to users who are