Dyson_ppr 4/29/05 4:44 PM Page CYAN MAGENTA YELLOW BLACK ACCOUNTING FOR NON-ACCOUNTING STUDENTS Sixth Edition Accounting for Non-Accounting Students has firmly established itself over five editions as the market leading text in its field This highly regarded text offers a clear and non-technical introduction to the basic principles of both financial and management accounting Building on the success of previous editions, this sixth edition places even more emphasis on helping students understand the concepts of accounting and applying what they learn to the real world This new edition includes a wide selection of news articles and real-world accounts allowing students to relate their learning to practice It encourages a confident but critical approach to the range of accounting statements non-specialists are likely to encounter in their professional careers via a range of questions and thought-provoking activities Screenshot © Microsoft Corporation New features Key features • Accessible, well-written and comprehensive introduction to accounting • Each chapter includes a topical article from a newspaper plus related questions • Real-world case studies featuring a broad range of companies • Excellent pedagogy including: ‘Check your learning’, a large variety of student activities, numerous tutorial questions This text is ideal for students from a broad range of disciplines taking a first course in accounting The sixth edition is accompanied by an excellent Website at www.booksites.net/dyson which includes challenging questions, additional case studies and a Lecturer’s Guide John Dyson was formerly Director of Studies of the HeriotWatt University Management Programme, Edinburgh An imprint of www.booksites.net www.pearson-books.com ACCOUNTING FOR NON-ACCOUNTING STUDENTS Sixth Edition Sixth Edition DYSON • New activities test student understanding as they progress through the chapter • New section on why this chapter is important to nonaccountants • New feature details ‘Questions non-accountants should ask’ • New published accounts from a range of companies • New section on recent accounting scandals • Expanded coverage of contemporary issues, including environmental and social accounting • Expanded coverage of international accounting issues • New discussion questions link the news article with the chapter www.booksites.net ACCOUNTING FOR NON-ACCOUNTING STUDENTS J R DYSON J R DYSON Use the online resources for this book at www.booksites.net ACCOUNTING FOR NON-ACCOUNTING STUDENTS A Companion Website accompanies ACCOUNTING FOR NON-ACCOUNTING STUDENTS, 6th edition by J R Dyson Visit the Accounting for Non-accounting Students Companion Website at http://www.booksites.net/dyson to find valuable teaching and learning material including: For Students ● Study material designed to help you improve your results ● Learning objectives for each chapter ● Multiple choice questions to help test your learning ● Glossary explaining terms mentioned in the text ● Extra question material (with answers available to Lecturers) ● Links to relevant sites on the World Wide Web For Lecturers ● A secure, password-protected site with teaching material ● Complete downloadable Lecturer’s Guide ● PowerPoint slides that can be downloaded and used as OHTs ● Multiple choice questions for use in class, together with answers ● Answers to extra question material in the student area ● Extra case studies and guidelines on using them with students Also: This site has a syllabus manager, search functions and email results functions ACCOUNTING FOR NON-ACCOUNTING STUDENTS Sixth Edition J R DYSON Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies around the world Visit us on the World Wide Web at: www.pearsoned.co.uk First edition published in Great Britain under the Pitman Publishing imprint in 1987 Second edition 1991 Third edition 1994 Fourth edition published under the Financial Times Pitman Publishing imprint in 1997 Fifth edition 2001 Sixth edition 2004 © Pearson Professional Limited 1987, 1991, 1994, 1997 © Pearson Education Limited 2001, 2004 The right of John R Dyson to be identified as author of this work has been asserted by him in accordance withthe 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 Publishers 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 273 68385 British Library Cataloguing-in-Publication Data A CIP catalogue record for this book can be obtained from the British Library 10 09 08 07 06 05 Typeset by 30 Printed and bound in Great Britain by Ashford Colour Press Ltd., Gosport v CHAPTER · THE ACCOUNTING WORLD Contents Preface Guided tour of the book Acknowledgements Publisher’s acknowledgements Part INTRODUCTION TO ACCOUNTING xi xvi xviii xix Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions Appendix: Summary of the accounting rules 40 41 41 41 42 43 45 1 The accounting world About this chapter Learning objectives The nature of accounting Why accounting is important for non-accountants Why this chapter is important for non-accountants The development of accounting Branches of accounting The accountancy profession Public and private entities Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 3 10 15 17 22 22 23 23 24 25 Accounting rules 26 About this chapter Learning objectives Why this chapter is important for non-accountants Historical development Boundary rules Measurement rules Ethical rules A conceptual framework 26 27 27 28 30 32 36 38 Part FINANCIAL ACCOUNTING 47 Recording data 48 About this chapter Learning objectives Why this chapter is important for non-accountants The accounting equation Double-entry book-keeping Working with accounts A ledger account example Balancing the accounts The trial balance Trial balance errors Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 48 49 49 50 52 54 60 61 63 66 68 68 69 70 70 71 Sole trader accounts 79 About this chapter Learning objectives Why this chapter is important for non-accountants The basic accounts Cash versus profit 79 80 80 80 81 vi CONTENTS Preparation An illustrative example Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 83 84 87 88 88 88 89 89 Why this chapter is important for non-accountants Manufacturing accounts Service entity accounts Not-for-profit entity accounts Government accounts Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 144 145 150 153 156 157 158 158 159 160 160 Last minute adjustments 93 About this chapter Learning objectives Why this chapter is important for non-accountants Stock Depreciation Accruals and prepayments Bad and doubtful debts A comprehensive example Accounting profit Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 93 94 94 95 97 100 102 105 108 109 109 110 110 111 112 Cash flow statements 163 163 165 119 About this chapter Learning objectives Why this chapter is important for non-accountants Accounting profit and cash Construction FRS1 format An illustrative example Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions Company accounts About this chapter Learning objectives Why this chapter is important for non-accountants Limited liability Structure and operation The profit and loss account The balance sheet A comprehensive example Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 119 120 Case studies 120 121 122 127 128 130 134 134 135 135 136 136 Other entity accounts 143 About this chapter Learning objectives 143 144 Preparation of financial statements Accounting policies Cash flow statements Part FINANCIAL REPORTING 165 165 167 171 174 176 177 177 177 178 178 185 187 190 193 Information disclosure 194 About this chapter Learning objectives Why this chapter is important for non-accountants Disclosure User groups Sources of authority 195 195 195 196 197 199 CONTENTS Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 205 205 206 206 207 207 10 The annual report 208 About this chapter Learning objectives Why this chapter is important for non-accountants Introductory material Chairman’s statement Operating and financial review Directors’ report Corporate governance Remuneration report Shareholder information Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 208 210 210 210 212 214 215 216 218 219 220 220 221 221 222 223 11 The annual accounts 224 About this chapter Learning objectives Why this chapter is important for non-accountants Setting the scene Auditors’ report Group profit and loss account Group statement of total recognized gains and losses Group balance sheet Group cash flow statement Notes to the accounts Periodic summary Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 225 226 226 227 231 231 234 235 237 239 240 242 242 243 243 244 245 12 Interpretation of accounts 246 About this chapter Learning objectives Why this chapter is important for non-accountants Nature and purpose of interpretation Basic procedure Ratio analysis Profitability ratios Liquidity ratios Efficiency ratios Investment ratios An illustrative example Interpretation guide Drawing conclusions Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions Appendix: Summary of the main ratios 246 247 247 248 250 253 253 256 258 260 264 270 272 274 274 275 276 277 277 283 13 Contemporary issues 285 About this chapter Learning objectives Why this chapter is important for non-accountants Overview Accounting scandals Company law reform Internationalization Revenue recognition Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 286 286 286 287 288 295 297 301 304 304 305 305 306 307 Case studies The communication of financial information Interpretation of accounts 308 312 vii viii CONTENTS Part MANAGEMENT ACCOUNTING 317 14 Foundations 318 About this chapter Learning objectives Why this chapter is important for non-accountants Nature and purpose Historical review Main functions Behavioural considerations Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 318 319 319 319 320 322 325 327 327 328 328 329 329 15 Direct costs 331 About this chapter Learning objectives Why this chapter is important for non-accountants Responsibility accounting Classification of costs Direct materials Direct labour Other direct costs Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 332 332 333 334 335 337 342 343 344 344 345 345 346 346 16 Indirect costs 349 About this chapter Learning objectives Why this chapter is important for non-accountants Production overhead A comprehensive example Non-production overhead Predetermined absorption rates Activity based costing 349 350 350 351 358 360 362 363 Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 367 367 368 369 370 370 17 Budgeting 375 About this chapter Learning objectives Why this chapter is important for non-accountants Budgeting and budgetary control Procedure Functional budgets A comprehensive example Fixed and flexible budgets Behavioural consequences Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 376 376 376 377 378 382 382 387 390 391 391 392 392 393 393 18 Standard costing 399 About this chapter Learning objectives Why this chapter is important for non-accountants Operation Cost variances A comprehensive example Sales variances Operating statements Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 399 400 400 401 407 410 415 416 418 419 419 420 420 421 19 Contribution analysis 426 About this chapter Learning objectives Why this chapter is important for non-accountants 427 427 427 CONTENTS Sources of finance Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 493 496 497 497 497 498 499 22 Emerging issues 504 About this chapter Learning objectives Why this chapter is important for non-accountants The business environment Changes in management accounting Activity based management Better budgeting Environmental accounting and reporting Performance measurement Product life cycle costing Social accounting and reporting Strategic management accounting Target costing Value chain analysis Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 504 505 Marginal costing Contribution Assumptions Format Application Charts and graphs Criticisms Formulae An illustrative example Limiting factors Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 428 429 430 431 432 434 439 440 442 444 447 447 448 448 449 449 20 Specific decisions 453 About this chapter Learning objectives Why this chapter is important for non-accountants Decision making Cost classification Closure and shutdown decisions Make or buy decisions Pricing decisions Special orders Questions non-accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 453 454 454 454 457 459 461 463 467 469 470 470 471 472 472 21 Capital investment 476 Fixed and flexible budgets Standard cost operating statements Pricing About this chapter Learning objectives Why this chapter is important for non-accountants Background Main methods Selecting a method Net cash flow 476 477 Appendices 477 477 478 491 491 505 505 507 509 510 511 514 517 518 520 521 522 524 524 525 526 527 527 Case studies Further reading Discount table Answers to activities Answers to tutorial questions Index 529 531 533 535 536 537 542 572 ix 302 PA R T · F I N A N C I A L R E P O R T I N G The detail behind these cases is sparse We not know how and why they incurred revenue discrepancies but the initial decisions to deal with them all had the effect of inflating turnover (i.e sales) which in turn would have increased profits They may all have been genuine errors of judgement In other cases this may not have been so As turnover became an important performance indicator company executives would naturally want to make it as big as possible That way their salaries, bonuses, share options and careers would all be enhanced But in fairness it is not always easy to determine when certain incomes should be taken to the profit and loss account and when others should be carried forward on the balance sheet This has always been the case but it has become more difficult as business activity has become more complex, especially in the new IT and telecommunications industries It would now be helpful if we defined what is meant by ‘revenue’ Definition The International Accounting Standards Committee Foundation (IASCF) equates ‘revenue’ with ‘income’ and it has adopted the following definition: Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.’ IASCF, Revenue recognition, 2003 The Accounting Principles Board in the USA has a similar, albeit more convoluted, definition: Gross increases in assets or gross decreases in liabilities recognized and measured in conformity with generally accepted accounting principles that result from those types of profit-directed activities of an enterprise that can change owners’ equity APB Statement No 4, Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises, American Institute of Certified Public Accountants, October 1970, para 134; quoted in Davies, M., Paterson, R and Wilson, A (1999) UK GAAP, 6th edition, Croydon: Butterworths In effect, these definitions indicate that revenue is basically an increase in net assets during a particular period after allowing for any new capital contributed by the owners and the withdrawal of any old capital What problem, then, arises in ‘recognizing’ it? Recognition Traditional historical accounting is transaction based, i.e we enter activities in the books of accounts as and when they have occurred Periodically we want to know how a business has done and so we ascertain by how much the owners’ capital has increased during a particular accounting period (after allowing for new capital and withdrawals of capital) The problem is that some transactions not relate entirely to the accounting period that we are dealing with and that they have an impact over several periods So we have to distinguish between so-called ‘capital’ and ‘revenue’ items and we have to match ‘revenue income’ with ‘revenue expenditure’ This exercise is often quite difficult and we have to CHAPTER 13 · CONTEMPORARY ISSUES 303 use our judgement If we are in doubt, we use the prudence rule and treat a transaction in such a way that it will understate profits and overstate any losses Those transactions that relate to more than one accounting period can cause particular difficulty For example, in determining how much of the cost of fixed assets should be written off during each year that they are in use There is a similar problem with those sales that generate income over several time periods In which period and how much is it fair to take this to the profit and loss account as ‘turnover’? This question raises what is called the ‘timing problem’ There are three possible approaches We summarize them below The critical events approach By adopting this approach we would take the revenue when the most critical event in the operating cycle has occurred There are several points when this can be done: (a) when production has been completed; (b) when a sale has been made; (c) on delivery of the goods or services; and (d) when the cash is collected The accretion approach This approach recognizes revenue during the production process The most common example of this approach is long-term contract work when some profit is taken as the contract nears completion The revenue allocation approach This approach is a combination of the critical events approach and the accretion approach It involves taking some of the sale price, for example, at the point of sale and the rest in stages, perhaps upon completion and during the warranty period The future You will be able to see from the above outline that revenue recognition in some cases requires considerable judgement and expertise It has always done so, but even more is involved in dealing with complex developments and arrangements in the new industries So what is the accountancy profession doing to help? There is no UK accounting standard that deals specifically with revenue recognition FRS (Substance of transactions) deals indirectly with the issue and more guidance has been given in an ASB Exposure Draft issued in February 2003 called ‘Amendment to FRS “Reporting the Substance of Transactions”: Revenue Recognition ED’ The ASB also issued a Discussion Paper in 2001 but this is not being taken any further as the ASB waits for a new international standard on the subject The current international standard is IAS 18: Revenue The IASB is currently working on the subject in conjunction with the FASB The project is intended to develop a comprehensive set of principles for revenue recognition It is hoped that this will eliminate the inconsistencies in current practice Details of the project are contained in the International Accounting Standards Committee Foundation’s project update called Revenue recognition, published in 2003 The IASB expect to publish an Exposure Draft in 2004, so it will obviously be some time before an up-to-date standard becomes available A building has now been under construction for three years It is expected to be completed in two years’ time The agreed contract price is £500,000 The costs to date are £300 000 and it is expected that another £100 000 will be spent on the building before it is completed What profit would you include in the profit and loss account for Year 3? Activity 13.5 304 PA R T · F I N A N C I A L R E P O R T I N G ! Questions non-accountants should ask By its very nature this chapter may soon become out of date You might have to adapt the following questions, therefore, to accommodate new issues ● Have we renewed all our accounting practice to ensure that we will not be accused of any accounting irregularity? ● If we are in doubt about how to treat a certain accounting issue, we adopt a highly prudent approach? ● Are we certain that our accounting methods are not driven largely by the need to improve our financial performance indicators? ● Have we considered the implications of the Government’s reform of company law on our company? ● Have we allowed for the incorporation of International Accounting Standards into our financial reports at the earliest possible opportunity? ● Are we sure that our policies on the recognition of revenue in respect of all our sales and contracts are robust enough to respond to any critical examination of them? Conclusion This chapter has concentrated on some contemporary issues in financial accounting and reporting at the time of writing in the spring of 2003 In two or three years they may be no longer an issue or quite as contemporary The last two to three years has seen an explosion in the number of articles published on ‘accounting scandals’ It is not clear whether there are now more scandals than there used to be or whether more publicity is now given to those that occur It is possible that the sheer scale and impact of the Enron scandal in the USA has triggered a spate of newspaper articles that would otherwise have gone unreported While many of these cases relate to the USA, the UK has also experienced a number of high-profile accounting irregularities Notwithstanding such occurrences, according to the White Paper on company law reform published in 2002, the British Government is not proposing to change the legislative framework underpinning financial reporting practices in the UK It proposes that Parliament lay down some legislative guidelines but the detailed application of them will be left to some private sector bodies Thus the present system will largely remain intact There are changes on the international front By 2005 quoted companies in the EU will have had to incorporate IASB International Financial Reporting Standards into their financial reports It is hoped that, in the meantime, other companies will adopt them on a voluntary basis Thus there will be no need for British accounting standards except on issues that are of relevance only to the UK The IASB is also working with the FASB in the USA, so it is possible that IFRSs will become acceptable in America, thereby enabling overseas companies to seek a stock exchange listing much more easily in that country CHAPTER 13 · CONTEMPORARY ISSUES 305 One specific accounting topic of major importance is that relating to revenue recognition No clear authoritative professional guidance is currently available about this issue It is an urgent matter because old accounting guidelines cannot cope with the new industries that have been created in recent years and the complex financial arrangements that have been devised The IASB is working to produce an IFRS but one is not expected before 2005 Accounting scandals are not necessarily all fraud related Reported accounting irregularities may be caused by genuine alternative methods of dealing with particular issues The Government is proposing to reform company law It does not propose to interfere directly in accounting practice The new Act will lay down a broad framework A number of private sector bodies will be responsible for dealing with the detail The system will be very similar to the present one By 2005 all EU quoted companies will have to ensure that their financial accounts and reports comply with International Accounting Standards The IASB and the FASB are working towards making IFRSs acceptable in the USA Revenue recognition is a complex major issue in financial reporting The IASB is currently working on a proposal that could lead to an IFRS within the next few years Check your learning The answers to these questions may be found within the text What is meant by an ‘accounting scandal’? Why is meant by ‘an accounting irregularity’? Is this the same as doing something unlawful? What appears to be the main driving force that has apparently caused more ‘accounting irregularities’ to occur in recent years? What responsibility have auditors had for such irregularities? List three reasons why company audits may not be completely independent What is the ‘expectations gap’? How might it be bridged? How many Companies Acts have there been since the Second World War? 10 What accounting approach is the Government proposing in the new Companies Act? 11 What the following initials mean: (a) FRC; (b) ASB; (c) FRRP; (d) CLRC; (e) SB; (f) RRP? Key points 306 PA R T · F I N A N C I A L R E P O R T I N G 12 Name two additional financial statements that may become compulsory for quoted companies in the new Act 13 For what actions will criminal proceedings be brought? 14 How many members of the EU are there expected to be by 2004? 15 What was the IASC and what is the IASB? 16 Where is the IASB based? 17 What are the two names for accounting standards associated with the IASB? 18 What type of company in the EU will be required to adopt International Accounting Standards by 2005? 19 Suggest two reason why the USA is reluctant to adopt the IASB’s accounting standards 20 What is the SEC? 21 What is revenue? 22 What is meant by the term ‘revenue recognition’? 23 What are the two accounting rules that cause a problem over recognizing revenue? 24 What are the three approaches that may be adopted in dealing with the timing problem associated with revenue recognition? 25 What is the IASB doing to deal with the problem? News story quiz Remember the news story at the beginning of this chapter? Go back to that story and re-read it before answering the following questions This article indicates that as far as the UK is concerned it is likely that the requirement to adopt IASs will apply to more than just quoted companies Clearly, the EU’s proposal and the British Government’s ideas are a major step towards the eventual harmonization on a worldwide basis of accounting practice Questions What reasons might the EU have for requiring quoted companies to adopt IASs? Do you think that all companies should also be required to adopt IASs? What are the specific cost implications for non-quoted companies using IASs? Are there any benefits for them? What you think is meant by the statement ‘IAS could mean a big change for hundreds of private UK firms, which will have to alter the way they account for areas of their business ’? [emphasis added] CHAPTER 13 · CONTEMPORARY ISSUES Tutorial questions 13.1 Examine the respective role and responsibilities of the various parties that may have been implicated in a number of recent accounting scandals 13.2 Comment on the Government’s proposals for company law reform 13.3 Should accounting policies be harmonized (i.e brought closer together) or standardized (i.e made the same)? 13.4 Explain why revenue recognition is a major problem in accounting practice Further practice questions, study material and links to relevant sites on the World Wide Web can be found on the website that accompanies this book The site can be found at www.booksites.net/dyson 307 CASE S T U DY Learning objectives The communication of financial information After preparing this case study you should be able to: ● identify significant features contained in a company’s profit and loss account, balance sheet and cash flow statement; ● describe the financial performance of a company using the above statements; ● prepare a chairman’s report based on the information extracted from the profit and loss account, balance sheet and cash flow statement and from other sources Background Synopis Location Dundee, Scotland Company Bett Brothers plc Bett Brothers plc is a housebuilding and property company based in Dundee, Scotland The company has two divisions: Bett Homes and Bett Properties Bett Homes is divided into three geographical divisions (Scotland, the Northwest, and the Northeast) It also includes Bett Partnerships It works with local authorities and housing associations to provide what the company calls ‘affordable homes’ Bett Properties operates throughout the UK mainly with joint venture partners on various projects The Appendix includes Bett Brothers plc consolidated profit and loss account for the year ended 31 August 2002, a consolidated balance sheet as at that date, and a consolidated cash flow statement for the year In order to minimize the amount of data presented in this case study, a statement of total recognized gains and losses, a note of the historical cost profits and losses, the company’s balance sheet, a note reconciling the net cash flow to the movement in net debt, and the notes to the accounts are all excluded from the Appendix The average monthly number of persons employed by the Group during the year was as follows: 2002 2001 Housebuilding and related activities 226 194 Pubs and hotels – 223 Property investment and development 4 –––– –––– 230 421 –––– –––– –––– –––– Discontinued activities during the year included Pitkerro Plumbing and Inns These activities were sold on September 2000 and September 2001 respectively Interest rates were low during the year and demand for housing was strong The commercial property market, however, was much less buoyant Interest rates were expected CASE STUDY 309 to remain low in 2002 and the housing market for 2002 (especially in the southeast of England) was likely to be strong The outlook for the commercial property market was not as optimistic Required: Based on the above information and that contained in the Appendix, draft a chairman’s statement covering the year to 31 August 2002 Bett Brothers plc Consolidated profit and loss account for the year ended 31 August 2002 2002 £000 Group turnover from continuing operations including share of joint venture Share of joint ventures’ turnover Group turnover from continuing operations Group turnover from discontinued operations Group turnover Cost of sales Gross profit Other operating expenses (net) Operating profit Operating profit from continuing operations Operating profit from discontinued operations Operating profit Share of operating profit in joint ventures Profit on sale of discontinued operations Profit on ordinary activities before interest Interest payable (net) Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit for the financial year Dividends paid and proposed (see note below) Retained profit for the year 2001 £000 Earnings per ordinary share 116 280 (2 205) –––––– 114 075 – –––––– 114 075 (90 318) –––––– 23 757 (5 856) –––––– 17 901 –––––– 17 901 – –––––– 17 901 984 515 –––––– 19 400 (2 246) –––––– 17 154 (3 472) –––––– 13 682 (2 423) –––––– 11 259 –––––– –––––– 87.00p 83 182 (4 161) –––––– 79 021 049 ––––– 87 070 (70 963) ––––– 16 107 (6 109) ––––– 998 ––––– 282 716 ––––– 998 191 – ––––– 12 189 (2 129) ––––– 10 060 (1 650) ––––– 410 (2 009) ––––– 401 ––––– ––––– 53.27p Ordinary: Interim paid per share Final proposed per share 4.20p 11.00p 3.65p 9.10p Note: Dividends paid and proposed Ordinary: Interim paid 4.20p per share [2001 – 3.65p per share] Final proposed 11.00p per share [2001 – 9.10p per share] 2002 £000 668 1755 ––––– 2423 ––––– ––––– 2001 £000 571 1438 ––––– 2009 ––––– ––––– Appendix 310 PA R T · F I N A N C I A L R E P O R T I N G Consolidated balance sheet at 31 August 2002 Fixed assets Tangible assets Investments Own shares Joint ventures – share of gross assets – share of gross liabilities Current assets Stocks Debtors Cash at bank and in hand Creditors Amounts falling due within one year Net current assets Total assets less current liabilities Creditors Amounts falling due after more than one year Net assets Called-up equity share capital Share premium Revaluation reserve Profit and loss account Equity shareholders’ funds 2002 £000 2001 £000 581 ––––– 13 023 ––––– 416 16 643 (14 091) –––––– 968 –––––– 549 –––––– – 20 649 (17 167) ––––– 482 ––––– 16 505 –––––– 104 806 14 272 791 –––––– 120 869 –––––– 73 353 619 35 ––––– 81 007 ––––– (45 199) –––––– 75 670 –––––– 82 219 –––––– (36 783) ––––– 44 224 ––––– 60 729 ––––– (20 000) –––––– 62 219 –––––– –––––– 192 607 125 58 295 –––––– 62 219 –––––– –––––– (10 000) ––––– 50 729 ––––– ––––– 161 407 314 44 847 ––––– 50 729 ––––– ––––– Consolidated cash flow statement Year ended 31 August 2002 Net cash outflow from operating activities Dividends received from joint ventures Interest paid UK corporation tax paid Capital expenditure and financial investment Disposals Equity dividends paid Cash outflow before financing Financing (see note below) Increase in cash in the year 2002 £000 (13 199) 014 (1 457) (2 537) (564) 12 791 (2 106) ––––– (6 058) 10 231 –––––– 173 –––––– –––––– 2001 £000 (4 785) 157 (1 035) (1 440) (483) – (1 871) ––––– (9 457) 10 054 –––––– 597 –––––– –––––– CASE STUDY Consolidated cash flow statement Year ended 31 August 2002 Note: Issue of ordinary share capital New borrowings 2002 £000 231 10000 ––––– 10231 ––––– ––––– 2001 £000 54 10000 ––––– 10054 ––––– ––––– 311 CASE S T U DY Learning objectives Interpretation of accounts After preparing this case study you should be able to: ● evaluate a set of financial statements for a public limited company; ● identify the main changes in the company’s financial position over a period of time; ● summarize the information contained within such statements Background Synopsis Location Scotland Company Robert Wiseman Dairies plc Robert Wiseman Dairies is a public limited company Its head office is in East Kilbride, near Glasgow The Group’s turnover and profits arise wholly from the supply and distribution of fresh processed milk and cream It operates entirely in the UK with dairies at Aberdeen, Glasgow and Manchester The average number of persons employed by the Group during 2002 was 2692 (2302 on production and distribution, and 390 on administration) The company was originally a small family business In recent years it has expanded rapidly It has done this partly by natural growth and partly through acquiring other companies It became a public company in 1994 Appendix shows the Group’s consolidated profit and loss account, balance sheet and consolidated cash flow statement for each of the five years March/April 1998, 1999, 2000, 2001 and 2002 respectively Appendix contains some accounting ratios based on those financial statements Required: Analyze the company’s financial performance for the five years 1998 to 2002 inclusive CASE STUDY Appendix 313 Robert Wiseman Dairies PLC Consolidated profit and loss accounts For the year ended Turnover Existing operations Acquired operations Cost of sales Gross profit Other operating expenses (net) Costs of re-organization of acquired business Total other operating expenses Operating profit Existing operations Acquired operations Interest receivable Interest payable Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit for the financial year Dividends paid and proposed on ordinary shares Retained profit for the period Earnings per ordinary share Earnings per ordinary share before costs of re-organization of acquired business Costs of re-organization of acquired business Basic earnings per share Fully diluted earnings per share 4.4.98 £000 3.4.99 £000 1.4.00 £000 ––––––– 252 721 (195 061) ––––––– 57 660 ––––––– (39 687) ––––––– 257 168 (193 634) ––––––– 63 534 ––––––– (43 780) ––––––– (39 687) ––––––– ––––––– (43 780) ––––––– 286 322 376 ––––––– 286 698 (218 842) ––––––– 67 856 ––––––– (48 751) (243) ––––––– (48 994) ––––––– –––––– 19 754 –––––– 87 (398) –––––– 19 443 (5 505) –––––– 13 938 (3 679) –––––– 10 259 –––––– 19 255 (393) –––––– 18 862 –––––– 82 (1 060) –––––– 17 884 (4 980) –––––– 12 904 (3 820) –––––– 084 –––––– –––––– 17 973 –––––– 90 (383) –––––– 17 680 (5 310) –––––– 12 370 (3 379) –––––– 991 –––––– 14.87p 16.58p 16.42p 15.26p 15.20p 31.3.01 £000 30.3.02 £000 300 182 355 953 15 103 ––––––– 371 056 (287 267) ––––––– 83 789 ––––––– (64 072) (875) ––––––– (64 947) ––––––– ––––––– 300 182 (226 505) ––––––– 73 677 ––––––– (53 359) ––––––– (53 359) ––––––– 20 318 20 201 (1 359) –––––– –––––– 20 318 18 842 –––––– –––––– 43 19 (1 879) (2 327) –––––– –––––– 18 482 16 534 (5 546) (4 960) –––––– –––––– 12 936 11 574 (3 760) (3 822) –––––– –––––– 176 752 –––––– –––––– 15.69p 15.69p 15.33p (0.77p) 14.56p 14.55p 314 PA R T · F I N A N C I A L R E P O R T I N G Balance sheets As at Fixed assets Goodwill Tangible assets Investments Current assets Stocks Debtors Cash at bank and in hand Creditors: Amounts falling due within one year Net current (liabilities) Total assets less current liabilities Creditors: Amounts falling due after more than one year Provision for liabilities and charges Net assets Capital and reserves Called-up share capital Share premium account Special reserve Profit and loss account Merger reserve arising on consolidation Capital redemption reserve Equity shareholders’ funds 4.4.98 £000 1.4.00 £000 31.3.01 £000 30.3.02 £000 730 104 606 589 128 776 688 136 690 –––––– 66 481 –––––– 283 20 532 715 –––––– 29 530 –––––– (40 323) –––––– (10 793) –––––– 55 688 617 82 285 363 –––––– 86 265 –––––– 306 21 242 175 –––––– 31 723 –––––– (50 759) –––––– (19 036) –––––– 67 229 –––––– 108 336 –––––– 078 21 869 273 –––––– 34 220 –––––– (49 101) –––––– (14 881) –––––– 93 445 –––––– 132 365 –––––– 614 22 172 653 –––––– 28 439 –––––– (60 304) –––––– (31 865) –––––– 100 500 –––––– 140 378 –––––– 114 29 799 286 –––––– 38 199 –––––– (63 330) –––––– (25 131) –––––– 115 247 (5 176) (4 080) –––––– 46 432 –––––– –––––– (4 922) (4 636) –––––– 57 671 –––––– –––––– (20 043) (6 192) –––––– 67 220 –––––– –––––– (20 812) (28 158) (8 086) (9 429) –––––– –––––– 71 602 77 660 –––––– –––––– –––––– –––––– 379 13 420 062 24 443 (3 872) 463 14 833 062 34 185 (3 872) 488 15 239 062 43 303 (3 872) 995 811 15 697 16 209 062 062 47 178 52 680 (3 872) (3 872) 542 770 –––––– –––––– 71 602 77 660 –––––– –––––– –––––– –––––– 66 481 –––––– 46 432 –––––– –––––– 3.4.99 £000 –––––– 57 671 –––––– –––––– –––––– 67 220 –––––– –––––– 315 CASE STUDY Consolidated cash flow statements For the year ended Net cash inflow from operating activities Returns on investments and servicing of finance Interest received Interest element of finance lease payments Other interest paid Net cash outflow from returns on investments and servicing of finance UK corporation tax paid Capital expenditure and financial investment Purchase of goodwill Purchase of tangible fixed assets Sales of tangible fixed assets Sales of goodwill previously written off to reserves Sales of fixed assets investments Net cash outflow for capital expenditure and financial investment Acquisitions and disposals Acquisition of business Net overdraft acquired with subsidiary undertaking Cash at bank and in hand acquired with subsidiary undertakings Net cash outflow for acquisitions and disposals Equity dividends paid Cash outflow before management of liquid resources and financing Financing Issue of ordinary share capital Share issue expenses Purchase of shares New loans Repayment of loans Capital element of finance lease payments Net cash inflow from financing Increase/(decrease) in cash for the year 4.4.98 £000 29 831 ––––– 3.4.99 £000 31 144 ––––– 1.4.00 £000 28 360 ––––– 87 (12) (371) ––––– 87 (6) (392) ––––– 82 (13) (902) ––––– 38 (60) (1 653) ––––– 27 (69) (2 391) ––––– (296) ––––– (2 634) ––––– (311) ––––– (4 273) ––––– (833) ––––– (6 274) ––––– (1 675) ––––– (3 251) ––––– (2 433) ––––– (2 914) ––––– (123) (25 650) 472 279 (22 927) 645 31 (54) (31 755) 383 15 (47) (25 476) 827 25 ––––– ––––– (25) (31 613) 380 34 363 ––––– ––––– ––––– (25 022) ––––– (22 251) ––––– (28 861) ––––– (31 411) ––––– (23 671) ––––– (1 087) (59) (2 138) (88) (3 061) ––––– ––––– (1 146) ––––– (3 458) ––––– 547 ––––– (1 679) ––––– (3 770) ––––– (3 747) ––––– ––––– (2 105) ––––– (3 766) ––––– (1 182) ––––– (295) ––––– (13 057) ––––– (4 999) ––––– (4 263) ––––– 14 044 (586) 000 (9 019) (182) ––––– 257 ––––– 075 ––––– ––––– 573 000 (4 197) (57) ––––– 319 ––––– 24 ––––– ––––– 431 21 776 (4 939) (304) ––––– 16 964 ––––– 907 ––––– ––––– 31.3.01 £000 35 085 ––––– 30.3.02 £000 30 626 ––––– (2 105) 507 (5 316) 15 290 (15 131) (747) ––––– (5 397) ––––– (10 396) ––––– ––––– 556 (2 275) 21 802 (12 307) (771) ––––– 005 ––––– 742 ––––– ––––– 316 Appendix PA R T · F I N A N C I A L R E P O R T I N G Selected accounting ratios For the year ended Return on capital employed (profit before taxation/ average shareholders’ funds) Return on capital employed (profit after taxation/ average shareholders’ funds) Return on capital employed (profit before taxation and interest/average shareholders’ funds + long-term loans) Gross profit Mark-up Operating profit/turnover Current assets Acid test Stock turnover Fixed assets turnover Trade debtor collection period Trade creditor payment period Dividend yield Dividend cover Earnings per share Price/earnings Capital gearing 4.4.98 3.4.99 1.4.00 31.3.01 30.3.02 49.6% 37.4% 28.6% 26.6% 22.2% 34.7% 26.8% 20.7% 18.6% 15.5% 44.0% 22.8% 29.6% 7.1% 0.7: 0.6: 45.4 3.8 27 days 38 days 1.9% 3.7 14.87p 14.6 10.0% 34.7% 24.7% 32.8% 7.7% 0.6: 0.5: 45.1 3.1 26 days 45 days 2.3% 3.8 16.58p 11.3 7.9% 22.9% 23.7% 31.0% 6.6% 0.7: 0.6: 52.2 2.7 24 days 47 days 5.3% 3.4 15.26p 5.5 23.0% 22.5% 24.5% 32.5% 6.8% 0.5: 0.4: 58.9 2.3 23 days 51 days 4.6% 3.4 15.69p 6.6 22.5% 18.3% 22.6% 29.2% 5.1% 0.6: 0.5: 65.8 2.7 24 days 44 days 4.1% 3.0 14.56p * 8.0 * 26.7% * 15.33p and 7.6p respectively before costs of re-organization of acquired business Notes: Some ratios have been calculated using a simple average for the year Details of the cost of sales are not disclosed in the accounts Details of trade debtors and trade creditors are shown in a note to the accounts The item in the balance sheet ‘provision for liabilities and charges’ has not been included as a longterm loan The provision relates mainly to a provision for deferred taxation Additional information may be obtained by logging on to the web (search: Robert Wiseman Dairies plc) ... statements Part FINANCIAL REPORTING 16 5 16 5 16 7 17 1 17 4 17 6 17 7 17 7 17 7 17 8 17 8 18 5 18 7 19 0 19 3 Information disclosure 19 4 About this chapter Learning objectives Why this chapter is important for non- accountants... questions 11 9 12 0 Case studies 12 0 12 1 12 2 12 7 12 8 13 0 13 4 13 4 13 5 13 5 13 6 13 6 Other entity accounts 14 3 About this chapter Learning objectives 14 3 14 4 Preparation of financial statements Accounting. .. example Accounting profit Questions non- accountants should ask Conclusion Key points Check your learning News story quiz Tutorial questions 93 94 94 95 97 10 0 10 2 10 5 10 8 10 9 10 9 11 0 11 0 11 1 11 2 Cash