Global Financial Accounting and Reporting: Principles and Analysis

544 Pages·2013·13.31 MB·English

by  Walter Aerts

t h i r d e d i t i o n
W a l t e r a e r t s
P e t e r W a l t o n
Global Financial
Accounting and Reporting:
Principles and Analysis
Australia  Brazil  Japan  Korea  Mexico  Singapore  Spain  United Kingdom  United States
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Global Financial Accounting and Reporting: © 2013 Cengage Learning EMEA
Principles and Analysis 3rd Edition
ALL RIGHTS RESERVED. No part of this work covered by the copyright
Walter Aerts and Peter Walton
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ISBN: 978-1-4080-6286-9
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1 2 3 4 5 6 7 8 9 10 – 15 14 13
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Chapter 2 Accounting And AccountAnts iii
b r i e f c o n t e n t s
Preface X
Acknowledgements XI
Structure of the book XII
Walk-through tour XIV
Part 1 The accounting and business environment 1
1 Financial reporting and regulation 2
2 Accounting and accountants 29
Part 2 Basic financial statements 57
3 Measurement concepts and the balance sheet equation 58
4 Accruals accounting 98
5 Non-current assets and depreciation 131
6 Refining the accounting system 165
7 Preparing financial statements 197
Part 3 An introduction to financial statement analysis 215
8 A framework for interpretation 216
9 Financial statement analysis I 231
10 Statement of cash flows 261
Part 4 The financial statements of multinational companies 291
11 The annual report 292
12 Consolidated financial statements 306
13 Operating segments and foreign operations 344
14 Issues in financial reporting by multinationals 379
15 International taxation 412
16 Auditing and corporate governance 429
Part 5 Advanced financial statement analysis 449
17 Financial statement analysis II 450
18 IFRS and the future 484
Further reading 492
Glossary 495
Index 504
iii
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c o n t e n t s
Preface X
Acknowledgements XI
Structure of the book XII
Walk-through tour XIV
Part 1 The accounting and business environment 1
1 Financial reporting and regulation 2
Introduction 2
Using this book 3
Annual financial statements 4
Uses of financial statements 6
Accounting choices 10
Qualitative characteristics 12
Accounting regulation 14
International Financial Reporting Standards 20
Summary 28
Discussion questions 28
2 Accounting and accountants 29
Introduction 29
Accounting function 30
Accounting database 34
Recording transactions 34
Organization of data within the general ledger 36
Control and audit 38
The accounting profession 52
Summary 55
Discussion questions 55
Part 2 Basic financial statements 57
3 Measurement concepts and the balance sheet equation 58
Introduction 59
The balance sheet does not purport to show what the company is worth 60
iV
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contents V
Company characteristics affecting financial reporting behaviour 60
Content of financial statements 64
The basics of accounting measurement 70
Generally accepted accounting principles 71
Conventional measurement bases 76
Accounting for transactions 80
The IASB definition and recognition criteria for elements of
the statement of financial position and the statement of profit or loss 89
Summary 94
Discussion Questions 94
Assignments 94
4 Accruals accounting 98
Introduction 99
Accruals basis of accounting 99
Credit transactions 101
Recognition of revenue 105
Period costs 108
Inventories and profit measurement 109
Inventory accounting techniques 115
Net realizable value 117
Accruals and the working capital cycle 118
Summary 120
Discussion Questions 120
Appendices 120
Assignments 126
5 Non-current assets and depreciation 131
Introduction 132
General valuation principles of non-current assets 133
Expensing non-current assets 136
Accounting for depreciation 144
Specific valuation principles by type of non-current assets 149
Intangible assets 149
Tangible assets 155
Investments 159
Summary 160
Discussion Questions 161
Assignments 161
6 Refining the accounting system 165
Introduction 166
Accruals and deferrals of expenses and revenues 166
Provisions 172
Asset impairment 178
Bad debts and doubtful debts 185
Hidden reserves 187
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Vi contents
Summary 192
Discussion Questions 192
Assignments 193
7 Preparing financial statements 197
Constructing financial statements 197
Accounting adjustments 205
Uses of financial statements 208
Summary 209
Assignments 209
Part 3 An introduction to financial statement analysis 215
8 A framework for interpretation 216
Introduction 217
Financial structure 218
Sources of finance 220
Dividend policy 223
Working capital management 224
Performance measurement 228
Summary 229
Discussion Questions 230
9 Financial statement analysis I 231
Introduction 231
The purpose of analysis 232
Traditional analysis 234
Tools of analysis 236
Management performance ratios 241
Financial strength ratios 247
Analyzing financial statements 250
Summary 254
Assignments 255
10 Statement of cash flows 261
Introduction 262
Usefulness of cash flow information 262
Cash flow cycles 263
Format and structure of the statement of cash flows 264
Cash flows from investing and financing activities 266
Cash flows from operating activities 270
Direct method for reporting operating cash flows 274
Constructing a statement of cash flows 1 277
Disposal of long-term assets 279
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contents Vii
Constructing a statement of cash flows 2 281
Interpretation 284
Presentational differences 286
Summary 287
Discussion Questions 287
Assignments 287
Part 4 The financial statements of multinational
companies 291
11 The annual report 292
Introduction 292
The corporate report 294
Publicity document 297
Statement of comprehensive income 298
Analyzing the annual report 304
Summary 305
Discussion Questions 305
12 Consolidated financial statements 306
Introduction 307
Rationale for consolidated financial statements 311
Control as the basis for consolidation 313
Consolidation basics 314
Acquisition method 316
Goodwill and its subsequent measurement 321
Non-controlling interest 324
Consolidated statement of profit or loss 325
Associates and joint arrangements 329
Disclosure requirements 335
Summary 336
Discussion Questions 337
Assignments 337
13 Operating segments and foreign operations 344
Introduction 345
Stock exchange requirements 345
Segment reporting 346
Foreign currency transactions and foreign operations 356
Primary translation – translating foreign currency transactions in the
functional currency 359
Secondary translation – translating foreign currency financial statements in a
group’s presentation currency 362
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Viii contents
Alternative accounting methods for secondary translation 364
Functional currency and type of foreign operation 370
Hedging a net investment in a foreign operation 373
Summary 374
Discussion Questions 375
Assignments 375
14 Issues in financial reporting by multinationals 379
Introduction 380
Values in accounting 380
Measurement attributes 383
The IASB’s mixed-attribute model 388
Financial instruments 389
Investment property and agriculture 392
Pension obligations 395
Provisions 399
Post reporting period events 401
Discontinued operations 403
Environmental disclosures 404
Intellectual capital 408
Summary 409
Discussion Questions 409
Assignments 410
15 International taxation 412
Introduction 413
Corporate income tax and dividends 414
Deferred taxation 416
International taxation 424
Transfer pricing 425
Tax havens 427
Summary 427
Discussion Questions 428
16 Auditing and corporate governance 429
Corporate governance 430
Statutory audit 437
Issues in international audit 438
Auditor independence 439
Internal control and risk management 441
Audit committee 445
Summary 447
Discussion questions 447
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contents iX
Part 5 Advanced financial statement analysis 449
17 Financial statement analysis II 450
Introduction 450
Investor relations 451
Income smoothing 452
Why earnings fluctuate 453
Professional analysts 457
Quality of earnings 460
Analytical techniques 463
Strategic ratio analysis 466
Shareholder value 473
Summary 475
Assignments 476
18 IFRS and the future 484
Introduction 484
Strategic evolution 485
The IASB’s first decade 487
The 2007 financial crisis 489
The next five years 490
Summary 491
Further reading 492
Glossary 495
Index 504
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