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Preface
This book is aimed at introducing non-accounting students to the fundamentals
of financial and management accounting in a clear and practical way. It is par-
ticularly suitable for degree courses, both at undergraduate and masters level,
where students are being introduced to accounting for the first time. It could be
used to support a year-long course or, in part, to accompany one which runs for a
semester.
This book brings accounting to life through the provision of a fully integrated
case study that runs throughout. It follows the experiences of Sam Smart from the
point at which he is considering starting his own business, printing sports kits for
local football teams, through to managing a global sports business, manufactur-
ing and distributing a wide range of equipment and clothing. As his business ex-
pands, Sam faces key business decisions such as how to manage his cash, price his
products, assess new product launches, and evaluate the viability of the business’s
international retail outlets.
As the Smart business grows and develops each chapter explains the issues and vii
problems it is facing. In order to explore and resolve the problems posed, relevant
accounting techniques are introduced. In this way, the techniques are not studied
in isolation but are used immediately to inform the accounting and finance deci-
sions that the business faces. As a result, the use and understanding of various
techniques are immediately applied to a practical scenario. In the early planning
stages, students consider how profit is measured and key financial statements are
explained. As the business grows, management accounting areas are then cov-
ered, including the areas of planning and controlling the business.
By using an integrated case study throughout, students will be able to see the
implications of decisions made across a range of financial and management ac-
counting issues. The demonstration exercises in each chapter focus mainly on the
Smart case, but occasionally introduce other business scenarios, thereby encour-
aging students to make connections between topics that are usually taught as ap-
parently disparate subject areas. This is a far more coherent approach than that
offered by more conventional texts.
This book is written from the perspective of business students, rather than
adapting an accounting textbook. As each topic is covered, the focus is on equip-
ping students to understand the main principles such that they are able to analyse,
interpret, and question the accounting information that they may well encounter
in a business context. As far as possible, unnecessary jargon is avoided and the
Preface

focus is on meeting the needs of business and management students who do not
necessarily plan to become accountants, but who will need a sound appreciation
of accounting and finance in order to communicate and succeed in the business
world.
The third edition incorporates discussion of integrated accounting and carbon
reporting. For the first time, two additional chapters covering double-entry book-
keeping are included in the book. These chapters also give a more integrated
discussion of accounting concepts.
The book has been specifically written with the needs of non-accountants in
mind. Not only is it based on a teaching method employed at Oxford Brookes Uni-
versity for more than ten years, but also business students have been involved in
reviewing the chapters and have found the approach to be very accessible, as the
case study approach brings the subject to life.
Lecturers choosing to adopt this book will find that each chapter lends itself to
providing an interactive teaching session with appropriate demonstration exer-
cises and ponder points throughout. PowerPoint slides are available to accom-
pany each chapter, as well as detailed solutions to all demonstration exercises and
practice questions. Two additional case studies are included, one, based on a real-
viii life business, that tests students’ understanding of financial accounting and one
that tests their understanding of management accounting. These can be used as
assessments or as extended seminar tasks. Taken with the assessment guide for
the module, this text and its supporting materials will provide a complete ‘off-the-
shelf’ package with which to deliver a course.
Brief contents
Acknowledgements xvii
How to use this book xviii
How to use the Online Resource Centre xx

Part One: Financial Accounting 1

1 The Cash Budget 3
Sam has a Smart idea

2 Introduction to the Statement of Profit or Loss 18

The business starts trading

3 Balancing the Basics 37

Getting a ‘snapshot’ of Smart Sports

4 Accounting for Depreciation and Bad Debts 55

Smart Sports is called to account
ix
5 Company Finance 75
Growing the business

6 Company Accounts 87
Smart Sports turns corporate

7 The Statement of Cash Flows 108

Where has all the cash gone?

8 Interpreting Financial Statements 130

Exploring India

9 Capital Structure and Investment Ratios 148

Sam gears up

■ Case Study: Financial Accounting 162

Fevertree Drinks plc

Part Two: Management Accounting 169

10 Costs and Break-even Analysis 171
Smart Sports goes into production

11 Absorption and Activity-based Costing 190

Sam’s cost conundrum
Brief contents

12 Budgeting 210
Sam makes a Smart plan

13 Pricing and Costs 230

Can Smart Sports compete?

14 Short-term Decision Making 248

Decision time

15 Investment Appraisal Techniques 265

Smart4sport.com

16 Measuring and Reporting Performance 286

Smart success

■ Case Study: Management Accounting 306

Orchid Products

Part Three: Double-entry Bookkeeping 309

17 Double-entry Bookkeeping I 311
x Recording Sam’s business transactions

18 Double-entry Bookkeeping II 334

Sam makes his adjustments

Wider Reading 349

Answers to Demonstration Exercises and Practice Questions 352
Glossary 458
Index 467
Detailed contents
Acknowledgements xvii
How to use this book xviii
How to use the Online Resource Centre xx

Part One: Financial Accounting 1

1 The Cash Budget 3
Sam has a Smart idea
Why should managers understand accounting? 4
The cash budget 5
Accounting concepts 5
Timings of receipts and payments 9
Calculation of the gross profit and gross profit margin 12
True or false? 15
Practice questions 15
xi
2 Introduction to the Statement of Profit or Loss 18
The business starts trading
When are sales and purchases made? 20
Measuring profit 21
Double-entry bookkeeping 21
Types of account 23
The trial balance 24
Capital versus revenue expenditure 26
Capital versus revenue income 27
The statement of profit or loss 27
Calculating the cost of sales 28
Preparing the statement of profit or loss 29
True or false? 32
Practice questions 33

3 Balancing the Basics 37

Getting a ‘snapshot’ of Smart Sports
Assets and liabilities 38
The statement of financial position 39
Accruals and prepayments 44
True or false? 52
Practice questions 52
Detailed contents

4 Accounting for Depreciation and Bad Debts 55

Smart Sports is called to account
What is depreciation? 56
The straight-line method 57
The reducing-balance method 60
Disposals of non-current assets 62
Bad and doubtful debts 63
Uses and limitations of the statement of financial position 68
True or false? 70
Practice questions 71

5 Company Finance 75
Growing the business
The nature of limited companies 76
Share capital 78
The stock exchange 80
Venture capital 81
Loan capital and debentures 82
xii Retained profits 82
Reporting requirements 83
True or false? 85
Practice questions 85

6 Company Accounts 87
Smart Sports turns corporate
The statement of profit or loss 88
The statement of changes in equity 89
The statement of financial position 94
Intangible assets 98
Revaluing assets 98
The statement of comprehensive income 99
Corporate governance 101
True or false? 103
Practice questions 103

7 The Statement of Cash Flows 108

Where has all the cash gone?
The statement of cash flows 109
Sources of cash flow 112
Non-current assets and the statement of cash flows 113
 
Detailed contents 

Movements in working capital 114

Tax, interest, and dividends 118
What to look for in a statement of cash flows 121
Managing cash 122
True or false? 123
Practice questions 124

8 Interpreting Financial Statements 130

Exploring India
Ratio analysis 131
The pyramid of ratios 132
Profitability ratios 133
Liquidity ratios 136
Control of working capital 138
The working capital cycle 140
True or false? 145
Practice questions 145

9 Capital Structure and Investment Ratios 148 xiii

Sam gears up
Capital structure 149
Investment ratios 154
Limitations of ratio analysis 158
True or false? 159
Practice questions 160

■ Case Study: Financial Accounting 162

Fevertree Drinks plc

Part Two: Management Accounting 169

10 Costs and Break-even Analysis 171
Smart Sports goes into production
Management accounting 172
Fixed and variable costs 173
Contribution 178
Break-even analysis 179
The margin of safety 183
Interpreting break-even analysis 184
Detailed contents

Assumptions underlying break-even analysis 185

True or false? 187
Practice questions 187

11 Absorption and Activity-based Costing 190

Sam’s cost conundrum
Direct and indirect costs 191
Absorption costing 192
Calculating a blanket rate 192
Over and under recovery 193
Calculating a departmental rate to fully cost the product 195
Activity-based costing 202
True or false? 207
Practice questions 207

12 Budgeting 210
Sam makes a Smart plan
The advantages of budgets 211
xiv The process of budgeting 213
Preparation of a budget 215
Problems of budgeting 221
Budgets to monitor performance and flexible budgeting 222
Variance analysis 224
Questioning assumptions 226
True or false? 227
Practice questions 227

13 Pricing and Costs 230

Can Smart Sports compete?
Using cost information to price your product 231
Discounts and distribution margins 234
Choosing the appropriate costing method 235
Pricing and product strategy 239
Optimum pricing 239
Target costing 240
Life-cycle costing 241
Transfer pricing 243
True or false? 245
Practice questions 246
 
Detailed contents 

14 Short-term Decision Making 248

Decision time
What are relevant revenues and costs? 249
Make or buy decisions 253
Limiting factors 255
Upgrading equipment 258
Closure of sites or discontinuing products 259
True or false? 262
Practice questions 262

15 Investment Appraisal Techniques 265

Smart4sport.com
Investment appraisal techniques 266
Accounting rate of return 266
Payback period 270
Net present value 273
Discounting to present value 274
Internal rate of return 276
True or false? 281 xv
Practice questions 281

16 Measuring and Reporting Performance 286

Smart success
Performance measurement: strategy and objectives 287
Financial and non-financial performance measurement 288
Key performance measures 289
Benchmarking 291
The balanced scorecard 292
Customer profitability analysis 296
Integrated reporting 299
Environmental accounting and carbon reporting 300
Corporate governance 300
Ethics 301
True or false? 303
Practice questions 304

■ Case Study: Management Accounting 306

Orchid Products
Detailed contents

Part Three: Double-entry Bookkeeping 309

17 Double-entry Bookkeeping I 311
Recording Sam’s business transactions
The accounting equation 312
Double-entry bookkeeping 314
Debits and credits 315
Balancing off accounts 319
Preparation of the trial balance 321
Preparing the financial statements 322
The statement of profit or loss as a T-account 323
True or false? 329
Practice questions 330

18 Double-entry Bookkeeping II 334

Sam makes his adjustments
Accounting concepts 335
Double-entry bookkeeping for adjusting entries 337
Accounting for gains and losses on the sale of non-current assets 339
xvi Accounting for inventory 340
Adjusting the trial balance 344
Preparing the financial statements 344
True or false? 346
Practice questions 347

Wider Reading 349

Answers to Demonstration Exercises and Practice Questions 352
Glossary 458
Index 467
Acknowledgements
The authors would like to acknowledge the many people who helped us in writ-
ing this book, especially our colleagues at Oxford Brookes University. In particu-
lar, we are grateful to Richard Jeffs for his lasting inspiration. We wish to thank
Howard Brown for allowing us the opportunity to build upon a teaching approach
adopted by Oxford Brookes over the years. We also would like to acknowledge
‘On-hand Sports’, a business set up by one of our former students, which provided
the idea for the case study theme.
We would like to thank Nicola Hartley, Tomas Furby, and Amber Stone-Galilee
for their encouragement and support throughout the development and creation
of this edition.
The authors and publishers would like to thank the following people, for their
comments and reviews throughout the process of developing this and previous
editions and the Online Resource Centre:

Dr Hafez Abdo, Nottingham Trent University

David Bence, University of Bath
Dr Mary Bishop, University of West of England
Eric Owusu Boahen, University of East London xvii
Emma Coles, Oxford Brookes University
Ian Crawford, University of Bath
Mark Jackson, University of Technology, Jamaica
Martin Kelly, Queen’s University Management School, Belfast
Chou Chee Ling, INTI University, Malaysia
Dr David McAree, University of Ulster
Elisavet Mantzari, University of Westminster
Carol Masters, University of Southampton
Dr Emmanuil Noikokyris, University of Essex
Jim O’Hare, University of Leicester
Shirley Powell, Oxford Brookes University
John Playle, Oxford Brookes University
Libby Scott, London South Bank University
Atish Soonucksing, University of Surrey
Rennie Tjerkstra, University of Kent
Prof. Dr Thomas Vogler, Ingolstadt University of Applied Sciences, Germany
Iain Ward-Campbell, Bradford University
Eva Wittbom, Stockholm University

Thanks also to those reviewers who chose to remain anonymous.

 How to use this book Customer
OUP
Book Title
Accounting: A Smart Approach 3e
Stage
Revise 2
Supplier
Thomson Digital
Date
29 March 2017

Chapter Eight
Interpreting Financial Statements

Running Case Study

Customer Book Title Stage Supplier Date Case Study
OUP
Each chapter opens with our running case
Accounting: A Smart Approach 3e Revise 1 Thomson Digital 27 Feb 2017 How to analyse financial statements

study, following Sam Smart as he sets up his Smart Sports Ltd has been trading for several years. Started by Sam Smart, it began by
printing and selling team kits and has since expanded into India.
own business and considers the financial infor- In 2021, Sam’s friend Raja went into business with Sam to open up the retail market

Chapter
needed toSeventeen
for Sam’s sports clothing in India. Raja rented two shop units, one in an established ar-
mation make this venture succeed. cade in Delhi, and the other in a new shopping arcade in Mumbai. Completely separate
accounting records are kept for each shop.

Double-entry
Applying accounting techniques to Sam’s busi- In January 2022, Sam rings Raja to let him know that he is planning a trip to India to
visit the shops. He lets him know that he has fixed some dates in February to visit Raja in
ness throughout the textbook truly brings the
Bookkeeping I to understand
India and that he is looking forward to visiting the shops and discussing how well they
are doing. Raja explains that the Delhi shop is bigger than the Mumbai shop and that
subject to life and allows you he cannot see how any useful comparison can be made. Sam believes there must be
a way to compare how well the two shops are doing and decides to do some research
Recording
why accounting Sam’s
is relevant to business. into this before he leaves.
Sam researches how to go about interpreting accounting information and finds that 131
Customer
OUP
business transactions Book Title
Accounting: A Smart Approach 3e
Stage
Revise 2
Supplier
Thomson Digital
Date
29 Mar 2017
ratio analysis is a widely accepted method used by accountants and non-accountants
alike.

Learning Outcomes
Part One Learning outcomes
Financial Accounting
At the end of this topic, you should be able to:
A bulleted
Terminologyoutline of the main concepts and
● use the double-entry system to prepare T-accounts to record business transactions ideas Ratioindicates what
analysis can be used you
to highlight can expect
underlying to immedi-
trends not always learn
Managing cash
Customer ● balance off T-accounts at the end of an accounting period ately obvious from the figures themselves.

OUP ● extract a trial balanceAccounting:

Book
from T-accounts
Title
A SmartandApproach
understand
3e its uses
Stage
Revise 2
311 from
Supplier
Thomson Digital eachDate
chapter.
29 March 2017
It is clearly important that any business wishing to succeed must ensure that it
● prepare a statement of profit or loss and a statement of financial position, starting
Ratio analysis
carefully controls not only its profitability but also its liquidity.
from the trial balance.
Terminology
Types of ratio
Terminology Ratios can be classified as follows:
Chapter Eleven
Introduction
Liquidity means the level of cash, bank, and other liquidAbsorption and
assets available to
Terminology,
Category of ratio
the Activity-based Costing
in
Whatline with international ac-
it reveals
Profitability how successfully the business is trading
Before reading
business.
statement
The this chapter,
liquidity
of profit as
meet its liabilities or they
of ayou should must
business
loss. fall due.
have covered the content
be sufficient to allowof Chapter 2 on the
the company to
counting standards, is explained throughout
Liquidity how easy it is for the business to pay its way
Efficiency how effectively the short-term assets and liabilities of the
b)Weifhave
theall done some
business bookkeeping
actually madeat35,000
one timeunits
or another,
and for example£90,000
incurred to record
the chapters, and collated to form a conveni-
in overhead

xviii
Customer Book Title
business are being managed. Stage Supplier Date
the receipt of some income and noting against it our actual or anticipated
All areas of working capital need to be carefully monitored and controlled. Man- expenses.
costs? OUP Accounting: A Smart Approach 3e Revise 1 Thomson Digital 27 Feb 2017
Bookkeeping
aging inventory
c) if be
well-defined
should
is concerned
will ensurewith
thein business
system
place to of
thatthe
actually
double-entry
ensure
recording
there
moneymade
is not too
comes 35,000
bookkeeping
ofmuch
financial
in from trade units
for
cashtransactions.
tied up in it.There
and incurred
recording
receivablesbusiness
is a
Controls
£100,000 in over-
after atransac-
reason-
ent glossary at the back of the book.
tions head
whichcosts?
able period has
of been
time, inin use
line for the
with centuries. In the
business’s veryterms.
credit smallest businesses,
Similarly, manual
the business
records may full
should take be kept but in most
advantage of anybusinesses,
credit terms it isoffered
likely that the accounting
by suppliers. records
It is helpful if

122
will
the
be computerized.
credit terms offered by However, theare
suppliers
sophistication of the system.
customers.
same at double-entry
least as long principles apply
as the credit regardless
terms given of
to Ponder Points
Part TwoCustomer Book Title Stage Supplier Date
Ponder Point OUP Accounting: A Smart Approach 3e Revise 2 Thomson05/04/17
Digital3:01 PM 27 Feb 2017
Regular Ponder Points encourage you to
08-Carey-Chap08.indd 131
If a business fails to manage its cash, there could be a number of serious conse-
quences. Too much management time will be diverted to deal with liquidity prob-
Management Accounting
Why do these costs
to be have to interest
be based on andestimated costs (predetermined
lems. There
costs)
to be able
are likely
attothe beginning
negotiate
increased
ofcredit
the best the year
termsand
charges,
withnot
the business
actual
suppliers, or(historic)
is unlikely
costs?
to take advantage
stop, think, and check your understanding of
The decision rule for using the payback period is that a project should be accepted
Part One
of cheaper purchasing opportunities. It is also unlikely that funds will be available
the central themes being covered within each Chapter Two
to enable new non-current assets to be purchased when needed. Most seriously of if the payback period for the project is within the limits set by the business. Where
Financial Accounting
Calculating a departmental rate to fully
all, the business may be unable to pay its suppliers and its employees, and ultim-
ately the business may fail.
chapter. Introduction to the Statement of Profit or Loss
there is more than one possible project under consideration and not all possible
cost the product projects can be undertaken, then the project or projects giving the shortest pay-
back period should be chosen.
Allocate, apportion, and reapportion indirect costs Ponder Point
Demonstration Exercises
19-Carey-Chap17.indd 311 05/04/17 3:03 PM

Summary of Key Points If capital expenditure is incorrectly recorded as revenue expenditure, what
To arrive at a more accurate method of charging out indirect manufacturing costs Demonstration Exercise 15.4
Regular
to Every
●products, exercises,
business
a needs cash in be
rate must order focusing
to function. for
calculated It is cash
eachon
that thesuppliers
enables running
manufacturing and
department in the
195
effect will this have on the profit for the year?
employees to be paid and for the business to grow in the future. Forecast cashbetween
outflows and
andinflows from the bottles project are
rev-shown in
case Cash and profit are not the same. To be successful, a business must manage both. test
study, offer you the opportunity
business or organization. Rather than calculating one rate for the whole business,
●
we need to calculate one for each manufacturing department, reflecting the char-
to The distinction
Tableexpenditure
enue 15.5.
capital revenue expenditure is important as only
will have a direct impact on the net profit figure. In many in-
your●
understanding
acteristics of that department. For ofexample,
the concepts
a blanket rate willyou
The statement of cash flows is the third main financial statement; it shows how
much cash was generated from operations, along with other sources of cash, and
have
ignore the differ- stances the distinction is clear but one of the more difficult areas is considering how
Table 15.5
ences between the frame-making and the racquet-stringing departments as the to treat expenditure on repairs, maintenance, and on the improvement of assets.
just learned. Answers
how that cash was spent.
to these are either
former is a machine-operation department and the latter is a labour-intensive one. The cost of maintaining or repairing
The bottles an asset should be treated
project—forecast cash asflows
revenue expendi-
demonstrated within the chapter, or given
To calculate departmental rates, costs need to be collected by manufacturing
departments in three stages, as shown in Figure 11.1.
ture and the cost of improving an asset should be treated as capital expenditure.
Time £’000
at the
Stage end1: Anyof the
costs thatbook to enable
can be clearly identifiedyouwith ato check
specific department At start Cost of moulding machines, less grant 1,300
can be allocated. For example, the hire of the printing machine can be allocated After one year Cash inflow from bottle sales 360
your
directlyprogress.
to the team kit department.
Ponder Point
After two years Cash inflow from bottle sales 550
Can you think of any examples where it might be difficult to distinguish be-
For added convenience, templates of the
Stage 2: Any costs that are general to all departments can be apportioned or
272
07-Carey-Chap07.indd 122 05/04/17 3:00 PM
After three years Cash inflow from bottle sales 710
shared. This can be done by taking each type of expense and finding an appro- tween an improvement to an asset and repair of an asset?
tables youofneed
priate method spreading tothecomplete are available
costs across departments. For example,onthe rent After four years Cash inflow from bottle sales 340
31
can be shared between the team kit, frame-making, and racquet-stringing depart- After four years Scrap value of machines 100
the
mentsOnline
according Resource
to how much space Centre
in the factoryforeachyou to down-
uses.
Danni and Sam have agreed a target payback period of three years.
load and print off.
Stage 3: If there are service departments that provide support to other depart-
ments, their costs need to be reapportioned over the manufacturing departments. Calculate the payback
Summary ofperiod
Keyfor the bottles project, and advise Danni and Sam
Points
For example, the maintenance costs could be shared between the team kit, frame- on whether they should consider proceeding further with this project.
Summary of Key Points
making, and racquet-stringing departments according to the number of hours
maintenance staff spend in each department.
● Cash and profits are not the same.
Transactions are accounted for in the period in which they occur.
●
Ponder Point
Linked to the learning objectives, each chap- ● The double-entry system is the recording of the two entries for each and every
Can you think of any advantages of using the payback period as an invest-
ter concludes with a summary of the most transaction.
ment
● appraisal
Accounts technique?
can be categorized into six types:
important concepts you need to take away. - income
Limitations
- expenditure of the payback period
12-Carey-Chap11.indd 195 - assets05/04/17 3:29 PM

There are significant limitations to using the payback period as an investment ap-
- liabilities
praisal technique:
- capital
1.- The
drawings.
payback period takes no account of the cash flows that are expected to
● Financial
occur statements are prepared
after the payback for ahas
point specified
beenperiod
reached.of time, usually one year.
●2.TheThe payback
profit or loss forperiod ignores
the business the actual
is calculated timing of
by comparing the cash
revenue flows.
income with For exam-
revenue
ple, the two projects in Table 15.6 would have or
expenditure. This is shown in the statement of profit loss.
the same payback period of
 OUP Accounting: A Smart Approach 3e Revise 2 Thomson Digital 29 Mar 2017

Part One Chapter Seven


Financial Accounting The Statement of Cash Flows

● In the statement of cash flows, the cash flows are identified under one of three
How to use this book
possible headings: cash flows from operations, cash flows from investing activities,
and cash flows from financing activities.
● Careful management of the working capital of a business is a key factor in ensuring
that the business has adequate cash available to it.

Smart Questions: Smart Questions: a wider perspective

a wider perspective 1. How is it possible for a profitable business to experience cash-flow problems?

Carefully devised questions at the end of 2. Why is working capital management key to managing cash in a business?
3. If a business generates significant cash flows from operations, is it always advisable
each chapter allow you to reflect more widely to raise extra long-term funding (by issuing shares and/or loans) if the business

on the topic covered, and enhance your crit­ Customer 4. wants to expand?
Book Title Stage
If a business found that there was a surplus on revaluing a property, what effect
Supplier Date
OUP Accounting: A Smart Approach 3e Revise 1 Thomson Digital 27 Feb 2017
ical thinking skills through considering the would this have on its cash position?
5. Statements of cash flow are prepared after the end of an accounting period. What
assumptions made, or explore the practical technique could a business use to plan future cash movements and balances?
123
implications of using the accounting tech-
niques you have just encountered. Wider Questions Reading
True or false?
Wider Reading Drury,
For eachC.of(2008) Management
the following and Costdetermine
statements, Cengage
Accounting,whether it isLearning.
management accounting and looks at management accounting terms and
Part I introduces
true or false:

Customer Book Title Stage Supplier Date A A company’s statement of cash flows should enable a user to understand why
OUP A consolidated list of annotated suggestions
Accounting: A Smart Approach 3e Revise 1 Thomson Digital
concepts.
27 Feb 2017 profits and cash generated are not the same.

BDunn,
CashJ.flows
(2010)from
Financial Reporting
operating and Analysis,
activities Wiley. Chapter
are a measure 8 provides
of the cash an interesting
generated from the
for wider reading signposts where you can overview of accounting
main activities for non-current tangible assets.
of the company.

find further information to broaden yourChapter Twelve Hall. CElliott,

The depreciation
B. and Elliott,charge
reconciling
Chapteritem
forFinancial
J. (2012) the yearAccounting
in the statement
8 provides details on the
is a non-cash
of cash
andexpense and
Reporting, willed.,
15th always be a
FT Prentice
flows.and content of financial statements
structure
Budgeting
understanding of topics in accounting, D prepared by companies
The nominal complying
value of shares issuedwith
would international
always be accounting
shown as cashstandards. Chapter
inflow from
26 providesactivities.
financing a more detailed explanation of the preparation and presentation of more
including references to
Smart Questions: a wider perspective
academic articles and E
complex statements of cash flow.
A company that has poor liquidity is one that has adequate cash and other liquid

professional journals.
1. How can the accuracy of a budget be improved?
assets A.
Ferreira, available to allow
and Otley, it to pay
D. (2009) 'Theany liabilities
design as they
and use fall due. management
of performance
systems: an extended framework for analysis', Management Accounting Research,
F In order to improve the liquidity in a business, it is helpful to reduce the time taken
2. How can budgets motivate and demotivate managers? 20: 263–282.
to pay tradeThis articleand
payables provides
hencedetailed
reduce recommendations
the amount owed for performance
to them.
3. Which types of businesses might put more emphasis on planning rather than measurement system requirements.
control in their use of budgets? Hughes, S. and Gjerde, K. (2003) 'Do different costing systems make a difference?', 349
4. What conflicts might occur as a result of the different objectives of budgeting? Management Accounting Quarterly, Fall, 5(1): 22–30. This article provides the results
of a survey of how activity-based costing has made an impact on US manufacturing
companies.
Questions

True or false?
International Accounting Standard 1, Presentation of Financial Statements. Summary
07-Carey-Chap07.indd 123
available from www.iasplus.com/ This provides a useful summary of the key
requirements of the international accounting standard on the presentation of
05/04/17 3:00 PM
xix
For each of the following statements, determine whether it is true or false: company financial statements.
A A budget is an example of a management accounting technique used to plan and International Accounting Standard 7, Statements of Cash Flow. Summary available
control the finances of a company.
B The budgeted statements of profit or loss, financial position, and cash flow are
227 Practice Questions
from www.iasplus.com/ This provides a useful summary of the key requirements of
the international accounting standard on statements of cash flow.
functional budgets.
C The budgeting process usually starts with the limiting factor such as sales volume or
Detailed
Jackson, D. andquestions atBudgeting,
Strovic, D. (2004) Better the end ofInstitute
Chartered each chapter,
of Management
Accountants (CIMA), available from www.cimaglobal.com. This article provides a
production capacity.
ranging from
review of recent true
debates oroffalse
on the role budgeting.exercises to more
D To calculate the required production volume, the closing finished goods inventory
needs to be deducted from the sales volume, assuming there is no opening advanced accounting
Kaplan, R. and Norton, tasks,
D. (2007) 'Using the present
balanced scorecard you with
as a strategic
management system', Harvard Business Review, 85(7/8): 150–161. This is the latest in a
inventory.
E A favourable material price variance is likely to be caused by buying higher quality theseries
opportunity to ofcheck
of articles from the authors your
the balanced ability to use
scorecard.
materials.
the techniques covered, and to interpret your
Practice questions findings. Answers are provided at the back
1. Renata
Renata has set up a jam-making business. As the fruit-picking season approaches, she
of the textbook to enable you to check your
needs to calculate her raw material requirements for the year ahead. Given her sales
estimates in Table 12.13:
Customer
OUP
progress before moving on to the next topic.
Book Title
Accounting: A Smart Approach 3e
Stage
Revise 1
Supplier
Thomson Digital
Date
27 Feb 2017

a) Calculate the production budget using the opening inventory assumptions in Table
12.13 and assuming that closing inventory should be 8% of sales units.
Further practice questions are also provided
21-Carey-Chap00-Wider-Reading.indd 349 05/04/17 3:04 PM

on the Online Resource Centre.

Part Two
Management Accounting

Case Studies
Case Study: Management Accounting
Test your understanding of financial ac- Orchid Products
13-Carey-Chap12.indd 227 05/04/17 3:31 PM

counting or management accounting by Orchid is a personal products company manufacturing shampoo, conditioner, and liq-

attempting the case studies provided to uid soap. As it faces tough competition in a static market with no price inflation, the
managing director and his team are considering how best to improve its financial per-

consolidate all the material you’ve learned in formance. They are considering a number of options. A review of the product profit-
ability suggests that they should not be selling liquid soap, but the sales director is

the previous chapters. concerned that the management accounting information is misleading. He would
prefer to increase sales volume by reducing the selling prices or by running a major
advertising campaign. The operations director wishes to use the spare capacity on the
manufacturing line by producing a shampoo for a supermarket chain under the super-
market’s own label, while the marketing director would like to launch a new shower gel
product.

306 Table MA.1

Current product data

Volume Selling Direct Distribution Bottles Bottles
(000 price costs cost per per per
bottles) per per bottle machine labour
bottle bottle £ hour hour
£ £
Shampoo 2,000 1.50 0.6 0.20 2,600 14,000
Conditioner 1,500 1.75 0.5 0.20 3,100 6,700
Liquid soap 500 1.25 0.4 0.30 2,010 1,500
Note: Assume direct costs and distribution are 100% variable. The majority of direct costs
are materials with a small proportion of direct labour.
 How to use the Online
Resource Centre
www.oxfordtextbooks.co.uk/orc/carey3e/
The Online Resource Centre (ORC) comprises
resources for both lecturers and students,
including:

Student Resources
Free and open-access material available:

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Additional questions and solutions, including
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Solutions to the financial and

management accounting case
studies
Solutions to the case studies in the book are
available, allowing these to be used as assess-
ments or extended seminar tasks. xxi
Test bank
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Part One
Financial Accounting
1 The Cash Budget
2 Introduction to the Statement of Profit or Loss
3 Balancing the Basics
4 Accounting for Depreciation and Bad Debts
5 Company Finance
6 Company Accounts
7 The Statement of Cash Flows
8 Interpreting Financial Statements
9 Capital Structure and Investment Ratios
   Case Study: Financial Accounting
Another random document with
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Wolf swivelled his chair around and stared out of the window onto the
hospital lawn. "We thought that the deep therapy method was
something perfect. Something that would make a patient tell the
absolute truth as he saw it. But our patient is making hash out of it."
He lifted his coffee cup and tasted the black liquid tentatively.
"Follow it through. The first story he gave us was conscious. He said
he couldn't remember exactly what happened to him. Okay. This
could be a fabrication. The next story he gave under therapy
conditions. He said that he killed Glover in a fit of rage because of an
argument. Okay again. We could have accepted that at face value,
and he would have gotten away with it, except that we got curious
about a couple of things. We wondered how the paranoid tinge got
into his thoughts, and we wondered exactly what it was that he and
Glover were on the verge of discovering. So we tried again. Now we
find that he deliberately plotted to kill Glover, and the paranoid
symptoms are now so intense that he gives us a completely phony
story about making millions of dollars out of the discovery, when
everybody knows that you can't patent anything for personal profit
when you invent it in a government laboratory."
Alma Heller lifted her hand, making a one with her forefinger. "So, our
friend Jim Britten is doing two things—both of which we did not
believe him capable of doing. First, he is lying and inventing stories
under deep therapy. Second, he is withholding information. For notice
that he is still avoiding specific mention of the result which his
experiment was aiming at."
Her voice became flat, precise, and probing.
"Now, could our young physicist, Jim Britten, do this thing? No. Not
unless he is an unsuspected superman type. Or—unless he has had
special training and conditioning for resistance against deep therapy.
How does a young physics student obtain such training? And
where?"
She looked across the desk at Morris Wolf, who chewed savagely on
his pipe bit.
"If I had any sense," he growled, "I'd call up the AEC and throw Jim
Britten right back in their faces. If they give me a problem to solve
they should at least tell me how hot they think it is. And my viscera
are beginning to tell me that this is going to be a very, very warm
baby. Maybe I should holler for help. I have a wife and two kids at
home. I don't want to get hurt."
"Who you kidding?" Alma wanted to know. "You wouldn't let a juicy
problem like this escape you just when you have it clutched about the
middle. Besides, our two undercover friends from the FBI will be
keeping their eyes on things. Let them earn their pay."
"Okay." Wolf came to a decision. "We'll give it one more try, and then
we'll call for help. First thing tomorrow morning. In the meantime,
there are two things I want. First I want Britten to have a complete
physical examination. The works. Inside and outside. Blood tests,
electro-encephalograph, tissue specimens, complete x-rays—
everything they can think of. Then I'll spend tonight keeping company
with Britten while the technicians pull down some overtime pay
analyzing the examination results."
"You have an idea?"
He nodded. "At least one idea. But it needs feeding."

That evening Morris Wolf walked down the hospital corridor past the
door of Britten's room. He entered the next door and found himself in
a tiny chamber already occupied by Bill Grady. This was no surprise,
for he knew that Grady and Jones kept Britten under constant
surveillance. He motioned for Grady to keep his seat, and made
himself comfortable in another chair, which he placed so that he could
watch Britten through the one-way window set in the wall. Through
this window he could see every move which Britten made, and
through a loudspeaker he could hear every sound.
It was not clear in Wolf's mind precisely what he expected to find by
watching Britten, but he knew that if he was to unravel his puzzle, he
must know everything about the boy, including the way he walked
and talked and combed his hair.
For a time Britten sat and read, then paced the floor restlessly, as if
waiting for something. Finally he picked his guitar up from the bed
and sat down on his chair, tuning the instrument. When he began to
sing, it was quietly, as though to himself. Wolf had heard him sing
before, generally folk songs from the Southern and Midwestern
states.
Now there intruded into Wolf's mind a thought which had previously
been on the edge of consciousness, and simultaneously his hand
reached out to touch the start button on his tape recorder. The
manner in which a person sings should reveal a great deal about his
early life—about the kind of language he grew up with, down to the
very vocal structure which has developed in his body since childhood.
As a result there are many types of voices: French voices, Tennessee
voices, Italian voices, Texas voices, each with its own flavor caused
by the way in which the vocal muscles have been trained by the
native language, and also by the way in which people are
accustomed to singing in those places.
When Wolf went home that night he carried a tape of Britten's song
with him. It was convenient that he did not have to go far for an expert
opinion to corroborate what he had already decided as an amateur.
He entered his house, the pleasant place with the warm colors, the
rows of books, the grand piano, and of course his wife.
"Sorry I had to stay late, dear, but there's something important going
on. Something really important. And you can be a big help to me right
now."
"Me?" asked Lynne. "You're going back to musical therapy?"
"Not exactly," he said, dryly. "More like musical detection. I'm going to
play a tape recording of a song or two, and I want your professional
opinion as to what part of the world the singer came from."
He walked over to the recorder and began threading the tape. "Now
pay no attention to the song itself," he instructed. "I'm interested only
in the voice quality."
The tape spool unrolled slowly, and Britten's voice filled the room.
"Not bad for an amateur," Lynne commented, listening closely. For
several minutes she remained silent, until finally the tape was
completed.
"Well," she said, finally, "I don't think it's an American. A bit too rich. It
doesn't have the French quality, nor the Italian. More chesty, kind of
ripe and fruity. Central European. Hungarian, Russian, or something
of that order."
Wolf kissed her solemnly. "You win first prize, girl. That's the answer I
wanted, and that's the answer that fits."

CHAPTER III
In the morning, the act of going to the hospital produced within him a
sensation as of marching to the front line of battle.
Whitehead, the laboratory chief, was prowling about his office when
he arrived.
"Morning," Wolf greeted him. "Got something for me?"
"I have a strangeness," Whitehead said. "A very great strangeness."
"We all do," Wolf replied. "What's yours?"
"This Britten of yours. How old is he?"
"By appearance, and according to the records, about twenty-one."
"Uh-huh. And by cellular structure and metabolism he is at least
forty!"
"So."
Wolf sank down in his chair and cocked an eye at Alma Heller, who
came into the room at that moment.
"Did you hear that, Alma? In more ways than one our boy isn't what
he seems to be. By last night I was certain that he is not a native of
Louisville, Kentucky. Now we are told that he is twice as old as we
thought he was."
Alma stared for a moment.
"We do seem to get in deeper and deeper. Have any ideas?"
Wolf ran his hand worriedly through his hair. "One. But I'm afraid of it.
At any rate, we're in too far to back out. This morning we're going to
dig for more information, and we're not going to stop until we have
Britten squeezed dry."
He reached onto his desk for his tobacco can and began filling a pipe,
meanwhile organizing his thoughts.
"Somehow or other," he resumed, "Britten has received conditioning
to resist giving information under deep therapy."
"And not only that," Alma interposed, "but he has the ability to retain
consciousness under deep therapy and fabricate a story to replace
the true facts."
"Correct. So, since the ordinary deep therapy method is useless, we
have to get tough. We have to eliminate his present set of
conditioned reactions and replace them by a new set. In other words,
we must reset the controls so that he responds to a new set of
orders."
Alma pursed her lips for a soundless whistle. "Fisher's method! Do
you know how much of that a nervous system can take?"
Wolf shrugged. "Who knows? This is very new stuff. I've played
around with a little of it, but ... who knows? At any rate, we're going to
assume that Britten has a fairly tough mind in order to get as far as
he has. We'll assume this not only for his own sake, but for ours,
because we are going to shake him loose from his present set of
memories, and we want enough of his original memories left for us to
assemble. Now suppose we begin."
Whitehead excused himself. There was work waiting in his laboratory,
he said, and watched wistfully as the two disappeared into the
therapy room.
Alma began switching on the apparatus, while Wolf called for Jim
Britten to be brought in.
"Still going digging in my mind?" Britten wisecracked as he walked in,
flanked by the ubiquitous Grady and Jones.
"With a steam shovel," Wolf replied, and motioned that Britten be
strapped onto the table.
This time Wolf wasted no explanations. Without pausing he slipped
Britten a preliminary shot and began fitting electrodes onto his head
and arms.
"We're going back a long time, now," he said, quietly. "Remember
back to the days before you started college. How old are you?"
Britten began dreaming off. "Sixteen years old. It was a hot summer.
Kentucky in summer. Hot. Hot as a solar cycle ... hot as a bicycle
down the road ... a tricycle down the toad ... doctor you look like a big
pimply warty green-eyed toad...."
Morris Wolf waited until the drug-induced schizophrenic symptoms
were well under way, then motioned for Alma Heller to send a
sequence of high-frequency pulses through Britten's nervous system,
breaking down synapses and destroying memory patterns. This, in
combination with the drug, was intended to clear the mind of
memories involving the period of time to which Britten's attention had
been directed. In this period, Wolf guessed, the conditioning had
taken place. If not, then he must try another period.
Britten's body stiffened under the onslaught and perspiration rolled
out on his brow. His mouth twisted and his eyebrows writhed. Morris
Wolf himself felt perspiration starting out on his face, while in the back
of the room the two "attendants" stared in amazement.
After enough time of this, Wolf switched the controls so that a
rhythmic pattern of pulses went through Britten's system in such a
manner as to aid the triggering of synapses and the formation of
memory patterns. The slate having been wiped clean, new writing
had to be placed on it.
"Now," he said, tensely, leaning over the patient and speaking close
to his ears. "Cooperation means obey. Cooperation means obey.
Cooperation means you do what I say. Cooperation means you do
what I tell you to do, say what I tell you to say, remember what I tell
you to remember. Cooperation is the key word."
The words went from Wolf's mouth to Britten's ears in the form of
sound waves, were converted into neuro-electrical impulses, and
under the influence of the rhythmically repeating pulses, from the
machine, circulated around and around through Britten's system,
tracing a deeply etched path.
Finally Wolf ceased the talking, and Alma handed him the needle with
the antidote to the first drug.
"Now we see how successful we are," he said.
He gave the shot and several minutes went by while they waited for it
to take effect. They remained silent, as though to say a word would
break the spell.
Then: "Cooperation," Wolf said.
Britten lay still.
"Open your eyes."
Britten's eyelids struggled open, but the eyes stared blankly.
Wolf thought: what question is most basic?
Then he asked: "What is your name?"
The mouth writhed, and then whispered, "Pyotr Fermineyev."

There was a small roaring in Morris Wolf's ears, and beside him he
heard the intake of Alma Heller's breath. The FBI agents, Grady and
Jones, had moved up until they were leaning over Wolf's shoulder.
Then: "Where were you born?"
Again the whisper from the blank face: "In Leningrad."
Then: "Who sent you to America?"
"The Society for the Restoration of the Revolution."
"What is the nature of this organization?"
"It is an underground group pledged to return the Soviet Union to its
status as the leader of the world revolution and to overthrow the
present appeasers of the capitalist governments."
Wolf glowed with triumph. "Get that, Alma?" he gloated, and he
turned around half way and winked at the two men behind him.
Alma Heller shook a strand of hair back from her eyes. "The fanatical
revolutionaries—now they're trying to overthrow their own
government because the Soviet is too friendly to the Western
governments!"
"This is no comic underground group," Wolf said. "There are some
big people in it who know how to do things that we're just barely
starting to learn about."
He paused, and considered his next questions. The time had come to
dig in.
He phrased his query: "What was your task on the satellite?"
Britten's face writhed. Perspiration rolled down his cheeks in a steady
stream. Obviously some of the original conditioning remained,
causing interference with Wolf's orders.
Alma Heller's knuckles showed white and her clenched hands
trembled. The FBI agents inched forward, their bodies stiff with
impatience.
Between hard breaths the words came: "... was on the satellite to
watch ... new developments in nuclear power ... complete conversion
... matter to energy...."
Understanding grew in Wolf's mind with a brilliant glare. Glover had
been on the verge of taming the ultimate source of energy—the total
and complete conversion of matter—a source of power over 130
times more potent than the hydrogen-helium reaction. No wonder the
project had been put under wraps!
"So you killed Glover to prevent him from continuing his work. What
did you intend to gain by that? Somebody else will take it over. How
are you going to develop this power source yourself?"
Britten groaned audibly. His back arched and his arms strained
against the table straps.
Through clenched teeth: "Ruppert ... next man in line for Glover's job
... one of us."
Wolf's eyes opened wide, and he whirled to the telephone.
"I'm calling Washington—" he began, then stopped in horror.
Behind him, Britten's voice said, in a strangely firm tone: "Now is the
time."

Wolf whirled again. He saw Britten, still strapped to the table, his eyes
unglazed, and his facial expression commanding.
The FBI men had stiffened, and were standing in place, motionless.
"Cover them, and untie me," Britten rapped out, in a voice that was
greatly different from the youthful, uncertain tone he had previously
used.
Grady pulled his gun, backed Wolf and Alma Heller against the wall,
while Jones loosened Britten's straps.
"So you're one of them, too, Grady," Wolf growled. "And you, Jones.
May you burn in hell."
"Don't malign them," said Britten, sitting up and rubbing his arms.
"They are good, loyal G-men. But they sat outside my door too long,
and now they do what I tell them to do."
Wolf narrowed his eyes and stared at Britten. "Just what are you?" he
demanded.
Britten met his gaze, bleakly, and ignored the question.
"We have a rendezvous to make. The two of you will escort me to a
helicopter that Grady will order. I need not repeat that we are
prepared to blast our way out of this place. You'll save lives all around
by being as inconspicuous as possible."
He indicated that Wolf and Alma Heller would go ahead, while the two
agents took up the rear. Out in the main corridor they merged into the
confused traffic of the busy hospital, two doctors and two attendants
conducting a patient out.
Grady took the controls of the helicopter that waited for them out on
the parking lot. As they climbed to a high traffic lane, Jones took care
of tying the hands of the two doctors behind their seats.
Britten sat beside the pilot, staring through the windshield. "Head due
west one hundred miles," he said. "Then I'll give you further
directions."
Wolf looked down through the port next to him and felt his heart
constrict as he saw the houses below grow smaller and smaller. One
of those houses was his; there was a small figure beside it that could
have been his little boy. That was the thought that set his heart
beating violently and the adrenalin pumping swiftly through his veins.
For himself he didn't care so much, but his son needed a father to
come home.
He looked at Alma sitting beside him, her face pale and frightened.
He wondered how much time there was before the rendezvous. For
this was all the time he had. Beyond that were too many unknown
factors to consider.
He leaned over sideways.
"Alma," he said, in a voice not loud enough to carry forward over the
roar of the motor. "Tell me exactly what happened when Britten said,
'Now is the time.' My back was turned then. Just what did he look
like?"
Alma swallowed. She composed her face and turned her thoughts
inward, remembering.
"There was a sudden change," she said. "One moment he was in the
trance state, the next moment he was fully aware of his surroundings
and in charge of the situation. As though he received a signal at that
instant."
A signal, Wolf thought. From where? The implication was shocking.
Look at what we have, he continued to himself. Britten comes to me,
under conditioning, ready to act out his part to the hilt. We question
him under deep hypnotherapy and he comes forth with a plausible
story. We might have stopped right there, but we got curious and
began to ask more questions. He brings out another story. Why?
Obviously, red herrings to confuse the issue. To stall for time. We
apply more pressure, blank out his original conditioning so that he
gives us straight answers to questions, and we are getting along fine.
Then, suddenly he snaps out of it and into his original, pre-Britten
character, all forty years of him. Therefore there must have been
another, deeper level to the control over his mind which we did not
even touch. A level activated by a new signal which we did not even
detect, a signal which came at a crucial time.
"Now is the time" meant that the stalling was over, that the
preparations for Britten's escape were completed.
There were still questions to be answered, many blank spaces to be
filled in, but at the present instant there was only one question that
mattered. The treatment which Wolf had given Britten—had it been at
all effective?
Was it still effective?
There was one way to find out.

Morris Wolf leaned forward and called in a loud voice: "Pyotr

Fermineyev!"
The man's head snapped around.
"Cooperation is the key word!" Wolf shouted.
Confusion passed over Britten's face as conflict once more knotted
his nervous system.
Wolf threw his second punch immediately. "Tell Jones to cut me
loose," he demanded.
"Cut him loose," Britten echoed, in bewilderment.
After an interminable interval, Jones laid down his gun, found his
knife, opened it, and slashed the cords from Wolf's arms. Wolf's
muscles were already tensed. He snatched Jones' gun, lurched
forward, and even as Britten's mouth opened to countermand his
order, he slugged Britten with the butt of the pistol, hitting him
viciously and hard until he lay unconscious on the floor.
Then he said to Grady, "You'd better get us back to the hospital,"
keeping the gun in his hand.
But Grady and Jones made no trouble. With Britten out of the picture
they obeyed the one obviously in command. Poor boys, Wolf thought.
Now they were in need of therapy.
As the hospital hove into view, he said to Alma Heller, "We have just
seen the real beginning of psychological warfare. Where it took us a
whole roomful of equipment to condition Britten's responses to a
trigger word, he was able to do it to Jones and Brady single-handed.
His method is something we'd like to know. But more than that,
Britten himself was conditioned to respond to a signal unknown to us
and undetected by us. My God, it could only have been telepathic!"
Alma Heller's eyes closed for a moment.
"I think," she said, "that psychiatrists are going to reach the same
position that physicists did during World War II."
Morris Wolf looked dourly out of the window, watching the hospital
balloon up under the helicopter.
"That's the most unpleasant thing anybody has said all day," he
replied.
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