Preface to the Fourth Edition xvii About the Author xxi Acknowledgements xxii PART I Context of Accounting 1 1 Introduction to Accounting 3 Accounting, accountability and the account 3 Introducing the functions of accounting 5 A short history of accounting 6 The role of financial accounting 7 The role of management accounting 8 Recent developments in accounting 10 The relationship between financial accounting and management accounting 12 A critical perspective 13 Conclusion 15 References 15 Questions 16 2 Accounting and its Relationship to Shareholder Value and Corporate Governance 17 Capital and product markets 17 Shareholder value-based management 18 Shareholder value, strategy and accounting 21 Company regulation and corporate governance 23 The regulation of companies 23 Corporate governance 23 Principles of corporate governance 24 Responsibility of directors 24 Audit 25 Audit committees 25 Stock Exchange Listing Rules 26 Risk management, internal control and accounting 26 A critical perspective 27 Conclusion 28 References 28 Websites 28 Questions 29 3 Recording Financial Transactions and the Principles of Accounting 30 Business events, transactions and the accounting system 30 The double entry: recording transactions 31 Extracting financial information from the accounting system 35 Basic principles of accounting 37 Accounting entity 37 Accounting period 37 Matching principle 38 Monetary measurement 38 Historic cost 38 Going concern 39 Conservatism 39 Consistency 39 Cost terms and concepts: the limitations of financial accounting 39 Conclusion 41 References 41 Questions 42 4 Management Control, Accounting and its Rational-Economic Assumptions 44 Management control systems 44 Planning and control in organizations 47 Non-financial performance measurement 51 A theoretical framework for accounting 55 Conclusion 56 References 56 Websites 58 5 Interpretive and Critical Perspectives on Accounting and Decision Making 59 Research and theory in management control and accounting 60 Alternative paradigms 62 The interpretive paradigm and the social construction perspective 65 Culture, control and accounting 67 The radical paradigm and critical accounting 68 Power and accounting 70 Case study 5.1: easyJet 71 Ethics and accounting 74 Case study 5.2: Enron 76 Case study 5.3: WorldCom 77 Conclusion 77 References 78 PART II The Use of Financial Statements for Decision Making 81 6 Constructing Financial Statements: IFRS and the Framework of Accounting 83 International Financial Reporting Standards (IFRS) 84 Framework for the Preparation and Presentation of Financial Statements 85 Objectives of financial statements 86 Qualitative characteristics of financial statements 86 Elements of financial statements 87 Concepts of capital maintenance 88 True and fair view 88 Reporting profitability: the Statement of Comprehensive Income 89 Reporting financial position: the Statement of Financial Position 92 Accruals accounting 94 Depreciation 95 Specific IFRS accounting treatments 97 Accounting for sales taxes 98 Accounting for goodwill and impairment testing 98 Accounting for research and development expenditure 99 Accounting for leases 99 Reporting cash flow: the Statement of Cash Flows 100 Differences between the financial statements 102 Illustration 102 A theoretical perspective on financial statements 103 Agency theory 104 A critical perspective on financial statements and accounting standards 105 Conclusion 105 Reference 106 Websites 106 Appendix: IFRS as at 1 January 2011 106 Questions 107 7 Interpreting Financial Statements 111 Annual Reports 111 The context of financial statements 113 Ratio analysis 113 Profitability 115 Return on (shareholders ) investment (ROI) 115 Return on capital employed (ROCE) 115 Operating margin (or operating profit/sales) 116 Gross margin (or gross profit/sales) 116 Overheads/sales 116 Sales growth 116 Liquidity 117 Working capital 117 Acid test (or quick ratio) 117 Gearing 117 Gearing ratio 117 Interest cover 117 Activity/efficiency 118 Asset turnover 118 Working capital 119 Managing receivables 119 Managing inventory 120 Managing payables 121 Managing working capital 121 Shareholder return 122 Dividend per share 122 Dividend payout ratio 122 Dividend yield 122 Earnings per share (EPS) 123 Price/earnings (P/E) ratio 123 The relationship between financial ratios 123 Interpreting financial statements using ratios 125 Profitability 125 Liquidity 126 Gearing 126 Activity/efficiency 126 Shareholder return 126 Using the Statement of Cash Flows 127 Case study 7.1: HMV Group interpreting financial statements 127 Limitations of ratio analysis 135 Case study 7.2: Carrington Printers an accounting critique 135 Alternative theoretical perspectives on financial statements 138 Intellectual capital 138 Institutional theory 139 Corporate social responsibility 140 Sustainability and the triple bottom line 141 Global Reporting Initiative 142 Applying different perspectives to financial statements 142 Conclusion 143 References 144 Website 144 Questions 144 8 Accounting for Inventory 152 Introduction to inventory 152 Flow of costs 153 Cost formulas for inventory 153 Inventory valuation under the weighted average method 154 Inventory valuation under FIFO 155 Retail method 155 Net realizable value 156 Methods of costing inventory in manufacturing 156 Long-term contract costing 159 Management accounting statements 161 Conclusion 162 Questions 162 PART III Using Accounting Information for Decision Making, Planning and Control 167 9 Accounting and Information Systems 169 Introduction to accounting and information systems 169 Methods of data collection 170 Types of information system 171 Business processes 173 Internal controls for information systems 174 Developing information systems 176 Conclusion 177 References 177 10 Marketing Decisions 178 Marketing strategy 178 Cost behaviour 180 Costvolumeprofit analysis 181 Breakeven with multiple products 185 Operating leverage 186 Limitations of CVP analysis 187 Alternative approaches to pricing 188 Cost-plus pricing 188 Target rate of return pricing 189 Optimum selling price 189 Special pricing decisions 190 Transfer pricing 192 Segmental profitability 192 Case study 10.1: Retail Stores plc the loss-making division 194 Customer profitability analysis 196 Case study 10.2: SuperTech using accounting information to win sales 198 Conclusion 199 References 199 Questions 200 11 Operating Decisions 203 The operations function 203 Managing operations manufacturing 205 Managing operations services 207 Accounting for the cost of spare capacity 208 Capacity utilization and product mix 209 Theory of Constraints 211 Operating decisions: relevant costs 212 Make versus buy? 212 Equipment replacement 213 Relevant cost of materials 214 Total quality management and the cost of quality 217 Environmental cost management 218 Case study 11.1: Quality Printing Company pricing for capacity utilization 218 Case study 11.2: Vehicle Parts Company the effect of equipment replacement on costs and prices 220 Case study 11.3: Quality and waste at Planet Engineering 222 Conclusion 223 References 223 Questions 224 12 Human Resource Decisions 228 Human resources and accounting 228 The cost of labour 229 Relevant cost of labour 231 Case study 12.1: The Database Management Company labour costs and unused capacity 234 Case study 12.2: Trojan Sales the cost of losing a customer 236 Conclusion 238 References 238 Questions 238 13 Overhead Allocation Decisions 243 Cost classification 243 Product and period costs 243 Direct and indirect costs 245 The overhead allocation problem 247 Shifts in management accounting thinking 248 Alternative methods of overhead allocation 250 Variable costing 250 Absorption costing 251 Over- or under-recovery of overhead 255 Activity-based costing 256 Differences between absorption and activity-based costing 258 Contingency theory 260 International comparisons 261 Management accounting in Japan 262 Behavioural implications of management accounting 263 Case study 13.1: Tektronix Portables division 266 Case study 13.2: Quality Bank the overhead allocation problem 267 Conclusion 269 References 269 Questions 271 14 Strategic Investment Decisions 276 Strategy 276 Capital expenditure evaluation 277 Accounting rate of return 279 Payback 281 Discounted cash flow 282 Net present value 282 Internal rate of return 284 Comparison of techniques 285 Case study 14.1: Goliath Co. investment evaluation 286 Conclusion 288 References 288 Appendix: Present value factors 288 Questions 290 15 Performance Evaluation of Business Units 293 Structure of business organizations 293 The decentralized organization and divisional performance measurement 296 Absolute profit 296 Return on investment 297 Residual income 297 Controllability 298 Case study 15.1: Majestic Services divisional performance measurement 299 Transfer pricing 302 Transaction cost economics 304 Conclusion: a critical perspective 305 References 306 Questions 307 16 Budgeting 310 What is budgeting? 310 The budgeting process 311 The profit budget 313 Case study 16.1: Superior Hotel service budget example 314 Case study 16.2: Sports Stores Co-operative Ltd retail budget example 316 Case study 16.3: Telcon Manufacturing manufacturing budget example 317 Cash forecasting 319 Case study 16.4: Retail News Group cash forecasting example 320 A behavioural perspective on budgeting 323 A critical perspective: beyond budgeting? 325 Case study 16.5: Svenska Handelsbanken is budgeting necessary? 326 Conclusion 327 References 328 Questions 328 17 Budgetary Control 333 What is budgetary control? 333 Flexible budgeting 334 Variance analysis 335 Case study 17.1: Wood s Furniture Co. variance analysis example 336 Sales variance 338 Cost variances 339 Materials variance 340 Labour variance 342 Overhead variances 344 Reconciling the variances 345 Criticism of variance analysis 346 Cost control 347 Applying different perspectives to management accounting 348 Conclusion 349 References 349 Questions 350 18 Strategic Management Accounting 354 Strategic management accounting 354 Accounting techniques to support strategic management accounting 357 Value chain and supply chain management 357 Human resource accounting 358 Activity-based management 358 Lifecycle costing 360 Target costing 361 Kaizen costing 362 Just-in-time 362 Backflush costing 363 Lean production and lean accounting 363 Case study 18.1: TNA and strategic management accounting 365 Conclusion 367 References 368 Further reading 368 Books 369 Articles published in the following journals 369 PART IV Supporting Information 371 Introduction to the Readings 373 Reading A 375 Questions 375 Further reading 375 A Cooper and Kaplan (1988). How cost accounting distorts product costs 376 Reading B 388 Questions 388 Further reading 388 B Otley, Broadbent and Berry (1995). Research in management control: an overview of its development 389 Reading C 407 Questions 407 Further reading 407 C Covaleski, Dirsmith and Samuel (1996). Managerial accounting research: the contributions of organizational and sociological theories 408 Reading D 439 Questions 439 Further reading 439 D Dent (1991). Accounting and organizational cultures: a field study of the emergence of a new organizational reality 440 Glossary of Accounting Terms 471 Solutions to Questions 485 Index 543
