Financial Accounting

John Stittle, Robert Wearing

• Publisher: SAGE Publications Ltd
• Year: 2008
• Print ISBN: 9781412935036, 9781412935029
• eBook ISBN: 9781446228197
• Edition: 1
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

The SAGE Course Companion on Financial Accounting is an accessible introduction to the subject that will help readers to master key concepts and enhance their thinking skills in line with course requirements. It provides support on how to revise for exams and prepare for and write assessed pieces.

Designed to compliment existing textbooks for the course, the companion provides:

- Easy access to the key issues in Financial Accouting

- Practice questions and sample answers to help you prepare for exams and assignments

- Tips to help you remember key points and earn extra marks

- Helpful summaries of the approach taken by the main course textbooks

- Guidance on the essential study skills required to pass the course

The SAGE Course Companion on Financial Accounting is much more than a revision guide for undergraduates; it is an essential tool that will help readers take their course understanding to new levels and help them achieve success in their undergraduate course.

 

part one
introducing your companion

 

This Sage Course Companion offers you an insider’s guide into how to make the most of your financial accounting course, and extend your understanding of key concepts. It will provide you with essential help with revising for your course exams, preparing and writing course assessment materials, and enhancing and progressing your knowledge and thinking skills in line with course requirements.

It isn’t intended to replace your textbooks or lectures – it is intended to save you time when you are revising for your exams or preparing coursework. Note that RE-vision implies that you looked at the subject the first time round!

The Companion will help you to anticipate exam questions, and gives guidelines on what your examiners will be looking for. It should be seen as a framework in which to organise the subject matter, and to extract the most important points from your textbooks, lecture notes, and other learning materials on your course.

This book is intended to direct you to the key issues in financial accounting. Whichever textbook you are using, the basics are the basics: we have given some guidance on where topics are covered in specific books, but you should read the Companion in parallel with your textbook and identify where subjects are covered in more detail in both your textbook and in your course syllabus.

How to use this book

This book should be used as a supplement to your textbook and lecture notes. You may want to glance through it quickly, reading it in parallel with your course syllabus, and note where each topic is covered in both the syllabus and this Companion. Ideally, you should buy this book at the beginning of your course – it will provide you with a quick explanation of any topics you are having trouble with. But if you buy the book towards the end of your course you should find it a valuable aid in your revision.

Part 2 introduces and explains the important elements of the core syllabus. Your lectures and textbook should give you a good grounding in the basics. However, financial accounting concepts are not always easy to master the first time round, so the more you read and practise typical exercises and questions, the more confident you will feel when you get to the examination.

The sections in Part 2 contain the following features:

 

• Tips to help you remember important points and understand how you can earn additional marks in the exam.
• Numerical examples and questions which you can work through and which will help to reinforce your understanding of basic concepts. Answers are provided to all worked examples and questions.
• Textbook guides where reference is made to appropriate chapters from financial accounting textbooks for additional reading.

There is also a guide to study, writing and revision skills in Part 3 which will help you to learn more efficiently. Learning is best accomplished by seeing the information from several different angles – which is why you attend lectures and tutorials, read the textbook, and read around the subject in general. This book will help you to bring together these different sources.

Finally, it is often remarked that financial accounting is ultimately a means of communicating information; in effect it is the language of business. Do not fall into the trap of thinking that, because something cannot be measured, it does not exist. Although much of financial accounting involves numbers, never forget that a considered and thoughtful approach will help you to appreciate the full significance of those numbers.

part two
core areas of the curriculum

1
introduction to financial accounting, stewardship and regulation

Accounting classifications

Accounting is frequently divided into two major categories:

1	Financial accounting, and
2	Management accounting.

Financial accounting is primarily concerned with recording, processing and presenting historic information for the benefit of users external to the business. This area of accounting is concerned with preparing accounts for a business and then interpreting the information. Financial accounting is subject to a detailed regulatory framework of accounting and legal rules.

Management accounting is aimed at providing information to enable managers to operate, control and plan the future direction of their business. Management accounting includes topics such as costing, budgeting and the planning of resources.

Management accounting is largely unregulated by accounting and legal frameworks.

In this book, we are only concerned with financial accounting.

Financial accounting

In your studies of financial accounting, you must understand how to collect and record data, prepare a trial balance and produce various types of business financial statements. In this book the most important financial statements are covered and these consist of the:

• trading and profit and loss account
• balance sheet
• cash flow statement.

You will also be required to understand the nature of accounting adjustments that businesses frequently have to make to financial data and, importantly, be able to interpret the final financial statements.

You must also understand why financial statements are prepared, their purpose and the types of organisations and individuals who are commonly interested in reading them.

Stewardship

Traditionally, ensuring high standards of ‘stewardship’ has been seen as an important objective of financial accounting. In many businesses, managers and directors are trusted with taking care of business assets on behalf of the legal owners. For example, shareholders are the legal owners of a company’s assets but the directors of a company control and manage the assets on a day-to-day basis on behalf of, or in trust for the shareholders. In other words, the directors are said to have ‘stewardship’ of the company’s assets.

In the UK, the largest companies are referred to as quoted or listed companies, that is they are quoted or listed on the London Stock Exchange. Such companies can be identified by the letters Plc (public limited company) after their name. One of these large companies might have several billion shares and several hundred thousand shareholders. These shareholdings are often fragmented, which means that no single individual on their own is in a position to control the operations of the company. Even large pension funds and insurance companies own only a small proportion of the total shares. In these circumstances, it is often said that in modern large quoted companies there is a separation of ownership and control. Separation of ownership and control means that the shareholders (owners) are separate from the board of directors who control the company. It is therefore vital that the owners receive good quality information (via the financial statements) so that they can judge how well (or, perhaps, how badly!) the company’s affairs are being managed. The auditors also have a major role to play in ensuring that the financial statements which have been prepared by the company’s accountants, give a true and fair view of its financial performance and financial position at the accounting year end.

Accountability

Stewardship is usually linked with the term accountability. In a business, ‘accountability’ means explaining your actions and decisions. For example, the directors of a company will have to be accountable to the shareholders because they are looking after (i.e. have ‘stewardship’) of the company’s assets. At the end of the financial year, the directors will explain what they have achieved with the shareholders’ assets – such as the level of profits they have obtained by using the assets. The directors’ explanation is conventionally communicated to shareholders through the preparation of the annual report and accounts.

Over the years the annual report and accounts have become more and more complex. It...

Table of contents

• Cover Page
• Dedication
• Title page
• Copyright
• Contents
• Part One Introducing your companion
• Part Two Core areas of the curriculum
• Part Three Success in your exams: study, writing and revision skills (in collaboration with David McIlroy)
• Glossary
• References
• Index