Financial Accounting

Preface 5

Part 1 Basic issues in accounting 7

1 Why accounting? 9

1.1 Accounting in organizations  9

1.2 Accounting in everyday life 10

1.3 The organization’s external environment  12

1.4 Key stakeholders 15

1.5 Why you should study accounting 19

2 What is accounting? 21

2.1 A definition of accounting  21

2.2 The accounting process  23

2.3 Actors in the accounting system 28

2.4 The overall structure of the book  33

3 What does the end product of accounting look like? 35

3.1 Financial statements  35

3.2 Cash flow statement 36

3.3 Income statement 38

3.4 Balance sheet 40

3.5 Basic relationships in accounting  43

4 The basics of recording transactions and making adjusting and closing entries 49

4.1 Double-entry accounting system  51

4.2  Key concepts of accounting and their link to different account types  55

4.3  Logics related to recording transactions and closing entries – Vent Consulting  57

Part 2 Financial reporting 81

5 Balance sheet 83

5.1  The link between balance sheet and income statement 84

5.2 Definitions and measurement 86

5.3 Non-current assets 92

5.4 Current assets  101

5.5 Liabilities  105

5.6 Provisions 106

5.7 Equity 108

6 Income statement 113

6.1 Definitions 114

6.2 Revenues 116

6.3 Expenses 120

6.4 Effects of changes in value  130

6.5  The format and earnings measures in the income statement 134

7 Cash flow statement 139

7.1 From earnings to cash flow 140

7.2 Why prepare a cash flow statement?  141

7.3 The structure of a cash flow statement  143

7.4 Preparing a cash flow statement  145

8 Disclosures 169

8.1 Where and how disclosures are provided 170

8.2 The purpose of disclosures 172

8.3 Common mandatory disclosures 176

9 Sustainability reporting 185

9.1 Issues  185

9.2 History  187

9.3 Regulation 188

9.4 Sustainability reporting in practice  192

9.5 Quality and effects of reporting 196

10 Consolidated financial statements 203

10.1 What is a group? 204

10.2 What are consolidated financial statements?  205

10.3 The purpose of consolidated financial statements 206

10.4  Method for preparing consolidated financial statements 210

Part 3 Regulation and principles 221

11 Regulation of accounting 223

11.1 Why we need accounting rules 224

11.2 Government or private regulation 226

11.3 International accounting regulation 229

11.4 Principle- or rules-based accounting  231

12 Accounting principles 235

12.1 Principles and their significance 236

12.2 Basic assumptions  237

12.3 Principles for measurement and accruals  239

12.4 Objectives of accounting 244

Part 4 Financial statement analysis 253

13 Financial statement users 255

13.1 Reasons for financial statement analysis 256

13.2 Shareholders 258

13.3 Creditors 262

13.4 Tax authorities 263

13.5 Other stakeholders 264

14 Financial ratios 269

14.1 General discussion on financial ratios  270

14.2 Profitability 274

14.3 Efficiency 284

14.4 Financial strength  287

14.5 Cash-flow based ratios  290