CHAPTER 1
Introduction to financial statements 2
Forms of business organisation 4
Sole proprietorship, partnership and company 4
The financial reporting environment 5
Australian Securities and Investments Commission 6
Financial Reporting Council and Australian Accounting Standards Board 6
Australian Accounting Research Foundation 6
Australian Stock Exchange 6
Users and uses of financial information 7
Internal users 7
External users 8
Financing activities 9
Investing activities 9
Operating activities 10
Assumptions, principles and qualitative characteristics 10
Assumptions and principles 10
Qualitative characteristics 12
Constraints in accounting 15
Financial statements and the basic accounting equation 15
Statement of financial performance 16
Statement of financial position 18
Statement of cash flows 19
Interrelationships of statements 20
The classified statement of financial position 27
Current assets 28
Non-current assets 29
Current liabilities 30
Non-current liabilities 30
Analysing financial statements 31
Ratio analysis 31
Profitability 32
Liquidity 34
Solvency 38
End-of-chapter material
Glossary 46
Demonstration problem 48
Self-study questions 50
Questions 51
Brief exercises 51
Exercises 52
Problems 56
Building business skills 60

CHAPTER 2
The accounting information system 66
The accounting information system 68
Accounting transactions and events 69
Analysing transactions 69
Summary of accounting transactions 74
The account 75
Debits and credits 75
Debit and credit procedures 76
Shareholders' equity relationships 79
Expansion of the basic accounting equation 80
Steps in the recording process 81
The journal 82
Chart of accounts 84
The general ledger 84
Posting 85
The recording process illustrated 86
Summary illustration of journalising and posting 92
The trial balance 95
Limitations of a trial balance 96
End-of-chapter material
Glossary 100
Demonstration problem 100
Self-study questions 103
Questions 104
Brief exercises 104
Exercises 105
Problems 108
Building business skills 113

CHAPTER 3
Accrual accounting concepts 116
Timing issues 118
Revenue recognition criteria 119
Expense recognition criteria 120
Accrual versus cash basis of accounting 122
The basics of adjusting entries 123
Types of adjusting entries 123
Adjusting entries for prepayments 124
Adjusting entries for accruals 131
Summary of basic relationships 135
The adjusted trial balance and financial statements 138
Preparing the adjusted trial balance 138
Preparing financial statements 139
Closing the books 140
Preparing closing entries 140
Preparing a post-closing trial balance 142
Summary of the accounting cycle 143
Appendix: Adjusting entries - using a worksheet 147
End-of-chapter material
Glossary 148
Demonstration problem 149
Demonstration problem 150
Self-study questions 151
Questions 152
Brief exercises 153
Exercises 154
Problems 158
Building business skills 164

CHAPTER 4
Inventories 168
Merchandising operations 170
Operating cycles 171
Inventory systems 171
Recording purchases of inventories 173
Purchase returns and allowances 174
Freight costs 174
Purchase discounts 175
Recording sales of inventories 177
Sales returns and allowances 178
Sales discounts 179
Statement of financial performance presentation 180
Sales revenue 180
Gross profit 181
Other revenue 181
Operating expenses 181
Evaluating profitability 182
Gross profit ratio 182
Operating expenses to sales ratio 184
Appendix: The goods and services tax 187
End-of-chapter material
Glossary 193
Demonstration problem 194
Self-study questions 195
Questions 196
Brief exercises 197
Exercises 197
Problems 199
Building business skills 205

CHAPTER 5
Reporting and analysing inventory 210
Classifying inventory 212
Periodic inventory system 213
Recording inventory transactions 213
Recording purchases of inventory 213
Recording sales of inventory 214
Comparison of entries - perpetual vs. periodic 215
Cost of goods sold 216
Statement of financial performance presentation 218
Inventory cost flow methods - periodic system 220
Specific identification 220
Cost flow assumptions 221
Financial statement effects of cost flow methods 225
Using inventory cost flow methods consistently 227
Valuing inventory at the lower of cost and market 227
Analysis of inventory 228
Inventory turnover ratio 229
Appendix 5A: Inventory cost flow methods - perpetual system 233
Appendix 5B: Inventory errors 237
End-of-chapter material
Glossary 239
Demonstration problem 240
Self-study questions 241
Questions 242
Brief exercises 242
Exercises 243
Problems 246
Building business skills 250

CHAPTER 6
Accounting subsystems 256
Basic concepts of accounting information systems 258
Principles of accounting information systems 258
Developing an accounting system 259
Control accounts and subsidiary ledgers 260
Example 261
Advantages of subsidiary ledgers 262
Special journals 264
Sales journal 264
Cash receipts journal 267
Purchases journal 270
Cash payments journal 272
Effects of special journals on general journal 275
Computerised accounting information systems 276
Basic features of computerised systems 276
Advantages and disadvantages of computerised systems 277
End-of-chapter material
Glossary 281
Demonstration problem 282
Self-study questions 283
Questions 283
Brief exercises 284
Exercises 285
Problems 289
Building business skills 297

CHAPTER 7
Internal control, cash and receivables 302
Internal control 304
Principles of internal control 305
Limitations of internal control 309
Cash 311
Internal control over cash 311
Bank reconciliation 313
Managing and monitoring cash 320
Assessing cash adequacy 322
Receivables 324
Accounting for receivables 324
Managing receivables 333
Appendix: Operation of the petty cash fund 342
End-of-chapter material
Glossary 344
Demonstration problem 345
Self-study questions 346
Questions 348
Brief exercises 348
Exercises 349
Problems 351
Building business skills 356

CHAPTER 8
Reporting and analysing non-current assets 360
Property, plant and equipment 362
Determining the cost of property, plant and equipment 363
Accounting for property, plant and equipment 367
Property, plant and equipment records 380
Intangible assets 381
Accounting for intangible assets 382
Types of intangible assets 383
Other non-current assets 385
Self-generating and regenerating assets 386
Natural resources 386
Reporting and analysing issues 388
Reporting non-current assets in the financial statements 388
Analysis and interpretation 388
End-of-chapter material
Glossary 395
Demonstration problem 396
Demonstration problem 396
Self-study questions 397
Questions 398
Brief exercises 398
Exercises 399
Problems 402
Building business skills 405

CHAPTER 9
Reporting and analysing liabilities and shareholders' equity 410

Section 1: Shareholders' equity
The corporate form of organisation 412
Characteristics of a corporation 413
Forming a company 415
Shareholder rights 415
Share issue considerations 416
Issue of shares 416
Accounting for the private issue of shares 417
Accounting for the public issue of shares 417
Reporting on shareholders' equity 418
Dividends 420
Cash dividends 420
Share dividends 421

Section 2: Liabilities
Current liabilities 424
Notes payable 424
Payroll and payroll deductions payable 425
Revenues received in advance 426
Current maturities of long-term debt 426
Non-current liabilities 427
Why issue unsecured notes or debentures? 427
Characteristics of unsecured notes and debentures 428
Determining the market value of unsecured notes and debentures 429
Accounting for issues of unsecured notes and debentures 430
Redeeming unsecured notes and debentures at maturity 431
Redeeming unsecured notes and debentures before maturity 431
Financial statement analysis 432
Liquidity ratios 432
Solvency ratios 434
End-of-chapter material
Glossary 439
Demonstration problem 440
Self-study questions 441
Questions 442
Brief exercises 442
Exercises 443
Problems 445
Building business skills 448

CHAPTER 10
Statement of cash flows 452
The statement of cash flows: purpose and format 454
Purpose of the statement of cash flows 454
Classification of cash flows 455
Significant non-cash activities 456
Format of the statement of cash flows 456
The company life cycle 457
Usefulness of the statement of cash flows 459
Preparing the statement of cash flows 460
Determining the net increase/decrease in cash (Step 1) 462
Determining net cash provided/used by operating activities (Step 2) 462
Determining net cash provided/used by investing activities (Step 3) 466
Determining net cash provided/used by financing activities (Step 4) 466
Completing the statement of cash flows 467
Reconciliation of net profit to cash provided/used by operations (indirect method) 467
Summary of reconciliation of net profit to net cash provided by operating activities (indirect method) 471
Using cash flows to evaluate a company 474
Free cash flow 474
Capital expenditure ratio 475
Assessing liquidity, solvency, and profitability using cash flows 476
End-of-chapter material
Glossary 483
Demonstration problem 483
Self-study questions 485
Questions 486
Brief exercises 486
Exercises 487
Problems 490
Building business skills 496

CHAPTER 11
Financial statement analysis 500
Earning power and irregular items 502
Extraordinary items 503
Fundamental errors 504
Changes in accounting estimates 505
Changes in accounting policies 506
Discontinuing operations 506
Comparative analysis 507
Horizontal analysis 508
Vertical analysis 511
Ratio analysis 514
Liquidity ratios 514
Solvency ratios 517
Profitability ratios 519
Limitations of financial statement analysis 525
Estimates 525
Cost 525
Alternative accounting methods 526
Atypical data 526
Diversification 526
End-of-chapter material
Glossary 531
Demonstration problem 532
Self-study questions 533
Questions 533
Brief exercises 534
Exercises 535
Problems 538
Building business skills 545

CHAPTER 12
Introduction to management accounting 552
Management accounting basics 554
Comparing management accounting and financial accounting 555
Ethical standards for management accountants 555
Management functions 556
Management cost concepts 557
Manufacturing costs 557
Product vs. period costs 558
Manufacturing costs in financial statements 559
Statement of financial performance 560
Statement of financial position 562
Cost concepts: a review 563
Contemporary developments in management accounting 564
Service industry needs 564
Technological change 564
Globalisation 565
E-commerce 566
Product life cycles 566
Quality 566
Focus on activities 567
Final comment 567
Appendix: Accounting cycle for a manufacturing entity 570
End-of-chapter material
Glossary 573
Demonstration problem 574
Self-study questions 575
Questions 576
Brief exercises 577
Exercises 578
Problems 581
Building business skills 586

CHAPTER 13
Cost accounting systems 590
Cost accounting systems 592
Non-manufacturing entities 592
Overhead application 593
Job order costing and process costing 593
Job order costing 595
Job cost flows 595
Job cost sheet 597
Determining overhead rates 598
Accounting procedures 599
Reporting job cost data 600
Under- or overapplied manufacturing overhead 601
Non-manufacturing businesses 602
Process costing 604
Uses of process costing 604
Process cost flow 604
Accounting procedures 605
Equivalent units 608
Production cost report 610
Activity-based costing 612
Traditional costing systems 612
Activity-based costing 613
Activity-based costing in manufacturing industries 614
Benefits and limitations of activity-based costing 616
Value-added vs. non-value-added activities 617
Hierarchy of activity levels 618
Activity-based costing in service industries 619
End-of-chapter material
Glossary 626
Demonstration problem 626
Self-study questions 628
Questions 629
Brief exercises 629
Exercises 630
Problems 634
Building business skills 640

CHAPTER 14
Cost-volume-profit relationships 644
Cost behaviour analysis 646
Variable costs 646
Fixed costs 647
Mixed costs 649
Absorption vs. variable costing 651
Comparison statements of financial performance 652
Rationale for variable costing 653
Cost-volume-profit analysis 654
Basic assumptions 654
Contribution margin 655
Break-even analysis 656
Margin of safety 660
Target net profit 660
CVP for profit planning 661
Using CVP analysis with multiple products 663
CVP statement of financial performance 666
End-of-chapter material
Glossary 669
Demonstration problem 670
Self-study questions 671
Questions 672
Brief exercises 672
Exercises 673
Problems 675
Building business skills 678

CHAPTER 15
Budgeting 682
Budgeting basics 684
Budgeting and accounting 685
The benefits of budgeting 685
Essentials of effective budgeting 685
Length of the budget period 686
The budgeting process 686
Budgeting and long-range planning 686
The master budget 687
Preparing the operating budgets 688
Sales budget 688
Production budget 688
Direct materials budget 689
Direct labour budget 690
Manufacturing overhead budget 691
Selling and administrative expense budget 692
Budgeted statement of financial performance 692
Preparing the financial budgets 693
Cash budget 693
Budgeted statement of financial position 696
Budgeting in non-manufacturing entities 698
Merchandising entities 698
Service entities 698
Not-for-profit organisations 699
Government entities 699
Budgetary control 699
Static budget reports 700
Flexible budgets 702
Developing the flexible budge t704
Flexible budget - a case study 705
Flexible budget reports 706
Management by exception 707
The concept of responsibility accounting 708
Controllable vs. non-controllable revenues and costs 710
Responsibility reporting system 710
Types of responsibility centres 712
Responsibility accounting for cost centres 713
Responsibility accounting for profit centres 713
Responsibility accounting for investment centres 715
Principles of performance evaluation 717
End-of-chapter material
Glossary 722
Demonstration problem 723
Self-study questions 724
Questions 725
Brief exercises 725
Exercises 726
Problems 729
Building business skills 734

CHAPTER 16
Incremental analysis and capital budgeting 740
Steps in management decision making 742
Incremental analysis 743
How incremental analysis works 743
Types of incremental analysis 744
Qualitative factors 749
Capital budgeting 749
Cash flow information 750
Net present value method 751
Internal rate of return method 756
Additional considerations 758
Other capital budgeting techniques 761
End-of-chapter material
Glossary 765
Demonstration problem 766
Self-study questions 766
Questions 767
Brief exercises 768
Exercises 768
Problems 771
Building business skills 775

APPENDIX A
Colorado Group Ltd 2002 annual report (abridged) 781

APPENDIX B
Time value of money 823

Index 837