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
