30_992456 bindex.qxp 2/15/08 11:32 PM Page 383

Index

evaluating use of, 323, 326–327 • A • FIFO (first-in, first-out) method, 261–262 A21, 378 for gross margin, 257 ABC (activity based costing), 246, 360 for interest , 259 ACA (Association of Chartered international standards, 255 ), 360 LIFO (last-in, first-out) method, 261, ACA credentials, 39 263–266 ACCA credentials, 39 for , 259 accelerated method, in profit and loss , 256–260 270–271 for purchasing power of pound loss Accenture, 315 caused by inflation, 274–275 account, 34 for SA&G , 258–259 accountants, 11–12 for sales , 256–257 accounting for share options, 274–275 compared, 32 for stock write-downs, 258 defined, 359 for warranty and guarantee (post-sales) jargon in, 16 expenses, 258 necessity of, 13 Accounting Software Reviews, 379 overview, 13–15 Accounting Standards Board (ASB), types of, 12–13 19–20, 361 accounting department accounting technicians, 39 overview, 21 , 93 responsibilities of, 21–22 , 90 accounting equation -basis accounting defined, 359 defined, 359 described, 15 based on, 130 accounting fraud, 312 overview, 91 accounting manual, 36 accrued expenses payable, 93, 111, 112, accounting methodsCOPYRIGHTED115, MATERIAL 359 for impairment write-downs, 258 accumulated depreciation, 111–112, average method, 267 115–116, 360 for bad debts expense, 258, 272 acid-test ratio, 283, 293 for corporation tax expense, 259, 273 activity based costing (ABC), 246, 360 for expense, 257, actual cost/actual output method, 250 260–267 actual , 241 for cost of stock, 260–267 adjusted , preparing, 35–36 for depreciation expense, 258, 268–272 Adobe, 298 for earnings before interest and tax adverse opinion report, 307, 309 (EBIT), 259 advising done by accountants, 315 30_992456 bindex.qxp 2/15/08 11:32 PM Page 384

384 Understanding Business Accounting For Dummies, 2nd Edition

Alternative Investment Market (AIM) embezzlement against the business, defined, 360 311 overview, 336 evidence, examining, 306 Altman Z-score, 300, 374 financial fraud, 312 amortisation, 68 financial reporting fraud, 312 annual bonuses, 288 firms who perform, 303–305 annualised rate of interest, 79, 360 and GAAP, 313–314 annualised rate of return, 360 management fraud, 312 arm’s length bargaining, 48, 63 overview, 302–303 Arthur Andersen, 315 recording transactions, errors in, 311 ASB (Accounting Standards Board), theft against the business, 311 19–20, 359 what occurs in, 306 Asset Based Finance Association, 343 who is required to have, 304 asset impairment write-downs, 258 , 267 asset turnover ratio average ROI rates, 79–81 defined, 360 investor checklist for, 354–355 overview, 112 • B • bad debts, 258, 272, 361 fixed assets, 92 Baker Tilly, 304 increases consistent with business’s growth, 351–352 accrued expenses payable account, overview, 14, 25–26 111, 112, 115 valuing, 236 accumulated depreciation, 111–112, Association of Accounting Technicians, 115–116 29 assets, 25–26 Association of Chartered Accountants budgeted balance sheet, 195 (ACA), 360 , 115 audit report classified balance sheets, 122–124 adverse opinion audit report, 307, 309 creditor liability account, 111 clean opinion audit report, 307–308 debt, 118–121 defined, 360–361 debtors, 114 going concerns, 309 defined, 361 investor checklist for, 356–357 depreciation expense, 115 overview, 306–307 described, 14 audit trails, 42 equation for, 89–90, 109 external balance sheets, 122–124 accounting fraud, 312 fixed assets, 115–116 advising, movement toward, 315 format of, 25 confidential relationship between income tax payable account, 112 auditor and client, 313–314 internal balance sheets, 121 detecting fraud, 310–313 liabilities, 25–26 30_992456 bindex.qxp 2/15/08 11:32 PM Page 385

Index 385

net worth, 26 borrowing money, cash inflows from, 130 overview, 25–26, 109–112 bottom line, 15, 28, 86 owners’ , 25–26, 118, 120 bottom-line profit, 28 prepaid expenses, 111, 115 break-even point, 181–182, 239, 361 profit and loss account, relationship to, break-even sales volume, 181–182 104, 110 bribes, 48, 62 retained earnings, 112, 118 British Business Angels Association, 339 stock, 114 British Venture Capital Association, 338 stock asset account, 111 budgeted balance sheet, 195 UK balance sheet, 125–127 budgeted statement, 196 values in, understanding, 124–125 budgeted costs, 241 Banana Accounting for European budgeted management profit and loss Companies, 378 account, 195, 203–205 bankruptcy, 120–121 budgeting banks benefits of, 194–199 long-term loans, 339–340 budgeted management profit and loss short-term loans, 340–341 account, 203–205 BDO Stoy Hayward, 304 business managers’ use of accounting, Bentley Jennison, 304 327–328 Biz/ed, 295 business plan, as component of, 198 board of directors, 221 capital expenditures budgeting, book value of assets, 361 207–211 book value of owners’ equity in total, 361 cash flow from profit, 205–207 book value per share, 222, 283, 291, 361 defined, 362 book values, 125 example, 201–207 bookkeepers, 40 expense control, 211–212 bookkeeping flexibility in, 211–212 accounting compared, 32 forecasting improved with, 198 adjusted trial balance, preparing, 35–36 government budgeting compared, 207 closing the books, 36 long-term budgeting, 196 cycle, steps and sequence of and, 199–201 bookkeeping, 32–36 management-related reasons for, end-of-period procedures, 197–198 performing, 35 modelling-related reasons for, 195–196 original entries in journals and motivation encouraged with, 198 accounts, recording, 34 overview, 193–194 source documents, preparing and planning-related reasons for, 196–197 collecting, 33 profit strategy, developing, 203–205 steps in, 32–36 reasons for, 194–199 transactions, recording, 32 spreadsheet for, 194 borrowers, individuals as, 68–73 Buffett, Warren (chairman and CEO of Berkshire Hathaway), 158, 274 30_992456 bindex.qxp 2/15/08 11:32 PM Page 386

386 Understanding Business Accounting For Dummies, 2nd Edition

burden rate capital expenditures budgeting defined, 362 cash flow, discounting, 209–210 overview, 248 internal rate of return, calculating, business angels 210–211 defined, 362 overview, 207–208 overview, 338–339 payback, calculating, 208–209 business income taxation capital stock, 362 deductible expenses, 61–62 careers in accounting equity capital disguised as debt, 64 chartered (CA), 29 non-deductible expenses, 62–63 chief accountant, 29–30 overstating profit, 60, 61 exams for, 29 overview, 56, 58 Financial Controller, 29–30 rates for, 58–59 overview, 28 recording profit, methods for, 59–61 cash, 115 understating profit, 60, 61 cash balance, 116 Business Link, 299, 343 cash basis accounting, 57 Business Management System for Book cash , 220 Publishers, 378 cash flow from profit business managers’ use of accounting budgeting, 205–207 accounting methods, evaluating use of, computing, 133–134, 323–324 323, 326–327 debtors increase, 134–135 budgeting, 327–328 defined, 362 cash flow, determining, 324–326 depreciation expense, 136–139 cash flow from profit, determining, operating liabilities increase, 139 323–324 overview, 130, 132–133 financial controls, developing better, prepaid expenses increase, 136 330–331 stock increase, 135 financial leverage, optimising, 328–330 cash flow per share, 295 financial statements, explaining your, 332–333 analysing, 147–148 profit decisions, making better, 319–321 budgeted cash flow statement, 196 sales volume affecting profit, 321–322 defined, 363 taxable income, ownership structure depreciation, location for, 143 determining, 331 described, 15 business plan, budgeting as component direct method, 143 of, 198 financing activities, 145–146 Business Rates, 52–53 format of, 27 business/financial calculators, 69–70, 72 history of, 140 indirect method, 143 investing activities, 144–145 • C • overview, 27–28, 140–142 CA (), 29 profit and loss account relationship capital accounting, 22 to, 104 capital expenditures, 61, 144, 362 property, plant, and equipment, 144 30_992456 bindex.qxp 2/15/08 11:32 PM Page 387

Index 387

cash flow(s) companies borrowing money, cash inflows contact information, 159 from, 130 limited liability, 218 changes in account balances, 131–132 overview, 218 debt, cash outflows for paying off, 130 profit in, 224 defined, 362 publicly-owned companies, 218 determining, 324–326 stock shares, 218–222 discounting, 209–210 taxable income, 230–231 expenses, cash outflows for, 129 taxable-entity companies, 230 from financing activities, 130, 141 Companies Act 2004, 21 free cash flow, 146–147 Companies Act 2006, 20 from investing activities, 130, 141 Companies Acts, 363 investments, cash outflows for, 130 Companies House, 298, 299 liquidating old investments, cash compensatory effects, 164 inflows from, 130 compound interest from operating activities, 28, 129, defined, 363 130, 141 overview, 73–75 sales, cash inflows from, 129 types of, 129–131 defined, 363 cash payments, 21–22 overview, 154 Cashier 2000, 378 condensed financial statements, 166 C.A.T. (Cat Software), 378 confidential relationship between auditor and client, 313–314 defined, 363 connections in financial reports, overview, 38 reviewing vital, 150–153 chartered accountant (CA), 29 conservatism, 363 Chartered Institute of Management continuing education, 40 Accountants, 29 continuous development of GAAP, 280 Chartered Institute of Public Finance and contribution margin, 179–181, Accountancy, 29 186–187, 363 CheckMark Software Inc, 378 contribution margin per unit, 285 chief accountant, 29–30 control benchmarks, 113 CIMA credentials, 39 convertible preference shares, 221 classes of stock shares, 220–221 cooking the books, 48, 163, 363 classified balance sheets co-operative, 228 current (short-term) assets, 123 corporate venturing, 363 current (short-term) liabilities, 124 corporation tax, 259, 273, 364 overview, 122–123 cost of capital, 178, 364 clean opinion audit report, 307–308 cost of goods sold expense Clear Financial Solutions, 344 accounting methods, 257, 260–267 closing the books, 36 overview, 95–96, 100, 114, 172 common shares, 220–221 stock connection with, 152 cost of stock, 260–267 30_992456 bindex.qxp 2/15/08 11:32 PM Page 388

388 Understanding Business Accounting For Dummies, 2nd Edition

cost-benefit analysis, 364 customer entertainment expenses, 62 costs. See also manufacturing costs customers, transactions with, 22 activity-based costing (ABC) method, 246 actual costs, 241 • D • assets, valuing, 236 DBA Software, 378 break-even point, 239 DDB (double-declining balance) budgeted costs, 241 depreciation method, 270, 272 CEO view of, 253 debits direct costs, 238 defined, 364 fixed costs, 238 overview, 45–46 gross margin, measuring, 236 debt importance of, 236–237 advantages of, 119 indirect costs, 238 cash outflows for paying off, 130 irrelevant costs, 237, 240 disadvantages of, 119–120 optimal choices, making, 237 forcing bankruptcy, 120–121 overview, 235–236 overview, 118–119 period costs, 242 sources of capital, 23 product costs, 241 debtors relevant costs, 237, 240 balance sheet, 114 sales price, setting, 236 defined, 365 standard costs, 241 sales revenue and, 114 sunk costs, 240 deductible expenses variable costs, 238 business income taxation, 61–62 coupon rate, 78 , 61 cover letter, 158 revenue expenditure, 62 deductions, 67 defined, 364 deferred income, 365 described, 19 deferred maintenance, 165 Creative Solutions, 378 defined-benefit pension plans, 76 credentials, professional, 39 defined-contribution pension plans, 76 credit Deloitte & Touche, 304 sales made on, 90–91 Department for Business Enterprise and status of company, finding, 299–300 Regulatory Reform, 280, 340 credit card slip, 33 depreciation expense Credit Gate, 300 accelerated depreciation method, Credit Guru, 300 270–271 Credit Reporting, 300 accounting methods, 258, 268–272 creditor liability account, 111 balance sheet, 115 creditors, 364 cash flow from profit, 136–139 credit-rating companies, 299–300 cash flow statement location for, 143 credits, 45–46, 364 defined, 365 current assets, 123, 364 double-declining balance (DDB) current liabilities, 124, 364 depreciation method, 270, 272 current ratio, 124, 283, 292–293, 364 30_992456 bindex.qxp 2/15/08 11:32 PM Page 389

Index 389

HM Revenue and Customs Code, distribution of sales revenue, 213–215 269–270 distribution to owners of net income, 178 overview, 268–270 yield, 283, 290, 365 profit, 92–93 Dosh, 378 straight-line depreciation method, double-declining balance (DDB) 270–271 depreciation method, 270, 272 diluted , 287–288, 365 double-entry accounting dilution effect, 223 credits, 45–46 direct costs, 238 debits, 45–46 direct labour, 242 defined, 365 direct method, 143 liabilities, 44–45 disclosures management of bookkeeping and company contact information, 159 accounting systems, 41 cover letter, 158 overview, 44–45 described, 19 owners’ equity, 44–45 financial reports, 155–159 recording transactions, 45–46 footnotes, 156–157 double-entry bookkeeping, 15 graphics, 158 Dun & Bradstreet, 300 highlights table, 158 historical summaries, 158 independent auditor’s report, 159 • E • list of, 158–159 earnings before interest and tax (EBIT) management discussion and analysis accounting methods, 259 (MD&A), 158 defined, 365 management’s responsibility management profit and loss account, statement, 159 177–179 overview, 155 profit and loss account, 100, 120 profiles, 158 earnings per share (EPS) promotional material, 158 defined, 361 quarterly summaries of dividends, 159 overview, 287–288 quarterly summaries of profit profit growth, EPS growth matching, performance, 159 348–349 quarterly summaries of share earn-out, 365 prices, 159 effective interest rate, 366 segment information, 158 embezzlement against the business, 311 supplementary financial schedules and employees, transactions with, 22 tables, 156 employer payroll taxes transmittal letter, 158 National Insurance, 50–51 types of, 156 overview, 50 discontinuities PAYE (Pay as You Earn) tax, 51–52 continuities, becoming, 103 end-of-period procedures as opportunity to record other overview, 41–42 losses, 104 performing, 35 overview, 102–104 30_992456 bindex.qxp 2/15/08 11:32 PM Page 390

390 Understanding Business Accounting For Dummies, 2nd Edition

enforcing accounting rules financial distress signs, 352–354 overview, 19–20 financial effects Sarbanes-Oxley Act, 20–21 measuring, 87–90, 96–99 equity, 64 not reporting, 173 Ernst & Young, 304 financial fraud, 312 Euromoney, 341–342 financial leverage European Business Angels Network, 339 defined, 366 European Venture Capital Association, optimising, 328–330 338 overview, 120 events, 23 financial leverage gain, 294 evidence in audits, examining, 306 financial reporting fraud, 312 exams for careers in accounting, 29 financial reports. See also investor exercise price, 219 checklist for reading a financial expense control, 211–212 report expenses audits on, 296–298 cash outflows for, 129 cost of goods sold expense and stock overview, 87 connection, reviewing, 152 Experian, 300 credit status of company, finding, external balance sheets, 122–124 299–300 external financial statements, 366 defined, 366 external profit and loss account disclosures, 155–159 example, 172–173 finding, 298–300 financial effects, not reporting, 173 footnotes in, 296 GAAP, preparation according to, 173 overview, 104–105 overview, 101 prerelease steps for, 149–150 extraordinary gains and losses for privately-owned businesses, defined, 366 159–161, 280–282, 299 investor checklist for, 347 profit-smoothing, 163–165 for publicly-owned businesses, 160–161, 280–282, 298 • F • reading, 166–167 factoring, 342–343 requirements for, 281 FIFO (first-in, first-out) method sales, administration, and general defined, 366 (SA&G) expenses, 152–153 overview, 261–262 sales revenue and debtors connection, stock cost value and, 264–265 reviewing, 152 Finance and Leasing Association, 341 statement of changes in owners’ equity, Standards Board 153–155 (FASB), 366 statement of changes in shareholders’ financial calculators, 69–70, 72 equity, 153 Financial Controller, 29–30 tricks used in, 161–165 financial controls, developing better, vital connections, reviewing, 150–153 330–331 window dressing in, 161–162 30_992456 bindex.qxp 2/15/08 11:32 PM Page 391

Index 391

ratios footnotes acid-test ratio, 283, 293 defined, 367 book value per share, 283, 291 in financial reports, 296 current ratio, 283, 292–293 on investigations by government, 296 dividend yield, 283, 290 on litigation, 296 earnings per share (EPS), 283, 286–288 overview, 156–157 gross margin ratio, 282, 285–286 on pending legal actions, 296 price/earnings (P/E) ratio, 283, 289–290 on segment information for the profit ratio, 282, 286 business, 296 return on assets (ROA) ratio, 283, on share options, 296 294–295 types of, 156 return on equity (ROE) ratio, 283, forecasting improved with 291–292 budgeting, 198 Web sites with calculation tools for, 295 Form P6 (PAYE tax), 52 financial statements. See also balance Form P11 (PAYE tax), 51 sheet; cash flow statement; profit Form P35 (PAYE tax), 52 and loss account Form P45 (PAYE tax), 51 defined, 366 Form P46 (PAYE tax), 51 explaining your, 332–333 Form P60 (PAYE tax), 51 overview, 24–25, 104–105 fraud Financial Times Mortgage Affordability accounting fraud, 312 Calculator, 70 bribes, 48 financing activities, 130, 141, cooking the books, 48 145–146, 366 detecting, 310–313 fines, 62 embezzlement against the firm, 224 business, 311 firms who perform audits, 303–305 financial fraud, 312 first-in, first-out method. See FIFO financial reporting fraud, 312 (first-in, first-out) method looking for, 310–311 fixed assets management fraud, 310–312 balance sheet, 115–116 money laundering, 47 defined, 367 overview, 47–48 overview, 92, 144–145 recording transactions, errors in, 311 fixed expenses (costs) sales skimming, 47 defined, 367 theft against the business, 311 overview, 238 free cash flow fixed manufacturing costs, 247–248 defined, 367 fixed operating expenses, 175–177 overview, 146–147 fixed overhead, 243 full cost, 235 flexibility in budgeting, 211–212 funds, sources for. See sources for funds flexibility in standards in accounting and funds flow statement, 140 financial reporting, 18–19 30_992456 bindex.qxp 2/15/08 11:32 PM Page 392

392 Understanding Business Accounting For Dummies, 2nd Edition

home mortgages, 69–73 • G • hostile merger, 368 GAAP (generally accepted accounting hurdle rate, 368 principles) hyperinflation, 368 audits and, 313–314 continuous development of, 280 • I • defined, 367 in external profit and loss account, 173 ICAEW (Institute of Chartered importance of, 17–18 Accountants in England and Wales), overview, 16–17 29 private businesses complying with, ICAI (Institute of Chartered Accountants 280–281 in Ireland), 29 gearing, 367 ICAS (Institute of Chartered Accountants general , 38, 367 of Scotland), 29 general partners, 225 IFRS (International Financial Reporting Gilt, 78–79 Standards), 19–20 going concerns, 309, 367 imputed cost, 368 , 367 incentives as source for funds, 343 government agencies, transactions income, 66 with, 23 income smoothing, 163 government budgeting, 207 income statement. See profit and loss Grant Thornton, 304 account grants as source for funds, 343 income tax amount, 67 graphics, 158 income tax expense, 100, 117 gross earnings, 21 income tax model (basic) gross income, 86 deductions, 67 gross margin income, 66 defined, 367 income tax amount, 67 measuring, 236 overview, 65–68 overview, 100, 180–181, 257 personal allowances, 66 gross margin ratio, 181, 282, 285–286 tax rates, 67 gross profit, 100, 180–181 taxable income, 67 gross wages, 21 income tax payable, 93, 112, 368 incubator, 368 independent auditor’s report, 159 • H • indirect costs, 235, 238 Harvard Business School, 295 indirect method, 143 hedge fund, 368 InFactor, 343 hedging, 368 initial public offering (IPO), 160, 368 highlights table, 158 insider trading, 368 hire purchase companies, 341–342 Instant Accounting (Sage), 377 historical summaries, 158 Institute of Chartered Accountants in HM Revenue & Customs, 18, 42 England and Wales (ICAEW), 29 HM Revenue and Customs Code, 269–270 Institute of Chartered Accountants in home, working from, 53–54 Ireland (ICAI), 29 30_992456 bindex.qxp 2/15/08 11:32 PM Page 393

Index 393

Institute of Chartered Accountants of liability payment obligations, 352–354 Scotland (ICAS), 29 profit increase generating cash flow integrity, 40 increase, 349–351 interest expense profit ratios, 346 accounting methods, 259 return on capital investment, 355–356 profit and loss account, 100, 117 sales growth, 346 interest rates, 68–73 solvency analysis, 352–354 internal (accounting) controls, 35, 305 unusual assets and liabilities, 354 defined, 368 investors, individuals as, 76–81 described, 13 invoice discounting as source for funds, management of bookkeeping and 342–343 accounting systems, 40 IPO (initial public offering), 160, 368 internal balance sheets, 121 IRR (internal rate of return), 210–211 internal profit report. See management irrelevant costs, 237, 240 profit and loss account internal rate of return (IRR), 210–211 international accounting standards, 255 • J • International Accounting Standards jargon in accounting, 16 Committee, 255 journal, 34 International Financial Reporting juggling the books, 163 Standards (IFRS), 19–20 junior market , 96 defined, 369 invested capital, 216 overview, 336–337 investigations by government, footnotes on, 296 • K • investing activities cash flow statement, 144–145 keeping two sets of books, 270 cash flows from, 130, 141 Keynote, 299 defined, 369 kickbacks, 62 Investing For Dummies (Levene), 76, 221, KPMG, 304 300 investments • L • cash outflows for, 130 overview, 76 leasing companies as source for funds, investor checklist for reading a financial 341–342 report Levene, Tony (Investing For Dummies), asset and liabilities increases 76, 221, 300 consistent with business’s growth, leveraged buyout, 369 351–352 liabilities asset turnover ratio, 354–355 double-entry accounting, 44–45 auditor’s report, 356–357 increases consistent with business’s EPS growth matching profit growth, growth, 351–352 348–349 investor checklist for, 352–354 extraordinary gains or losses, 347 overview, 25–26 financial distress signs, 352–354 life insurance premiums, 63 30_992456 bindex.qxp 2/15/08 11:32 PM Page 394

394 Understanding Business Accounting For Dummies, 2nd Edition

LIFO (last-in, first-out) method end-of-period procedures, 41–42 advantages of, 263 internal controls, 40 defined, 369 overview, 36 disadvantages of, 264 personnel, 39–40 overview, 261, 263 reports, designing, 43–44 profit manipulation with, 265–266 source document forms and stock cost value and, 264–265 procedures, standardizing, 38–39 LIFO liquidation gain unusual events and developments, defined, 369 watching for, 43 overview, 265–266 management profit and loss account limited companies (Ltd) analysing, 183–186 defined, 369 budgeted management profit and loss overview, 218, 229 account, 195 limited partnerships, 225 calculating profit, 179–183 liquidating old investments, cash inflows CEO view of, 253 from, 130 contribution margin minus fixed listed company, 369 expenses, 179–181 litigation, footnotes on, 296 earnings before interest and tax (EBIT), loans 177–179 long-term loans, 339–340 fixed operating expenses, 175–177 short-term loans, 340–341 lower sales volume impacting profit, lobbying costs, 62 184–185 London Stock Exchange, 280–281, 298 model for, 173–174 long-term budgeting, 196 operating leverage affecting profit, long-term loans, 339–340 185–186 loss leaders, 202 overview, 173–174 lower of cost or market, 18 profit improvement, 187–188 revenue-driven expenses, 174 sales price, effect of decreasing, • M • 186–190 major stock markets as source for funds, sales volume, improving, 189–190 335–336 variable operating expenses, 174–176 management accounting management-related reasons for and budgeting, 199–201 budgeting, 197–198 defined, 369 management’s responsibility statement, management buy-out, 369 159 management discussion and analysis managers, 222–223 (MD&A), 158 manufacturers, 244–245 management fraud, 310–312 manufacturing costs management of bookkeeping and allocating, 244–245 accounting systems direct labour, 242 audit trails, 42 fixed manufacturing costs, 247–248 categorising financial information, fixed overhead, 243 36–38 overview, 242–244 double-entry accounting, 41 and production capacity, 247–249 30_992456 bindex.qxp 2/15/08 11:32 PM Page 395

Index 395

raw materials, 242 changes in operating liabilities, variable manufacturing costs, 247–248 summary of, 97–98 variable overhead, 242 cost of goods sold, 95–96 margin of safety credit, making sales on, 90–91 defined, 370 decisions, making better, 319–321 overview, 183 defined, 370 margin per unit, 320–321 depreciation expense, 92–93 marginal tax rate, 67–68 described, 17–18 market cap distribution to owners, 178 defined, 370 financial effects of profit-making overview, 289 activities, measuring, 87–90, 96–99 market value appreciation, 78 improving, 187–188 market values, 125 increase generating cash flow increase, marketable securities, 354 349–351 markup, 181 lowered by variable expenses, 180 massaging the numbers, 19 manipulation with LIFO method, Mazars, 304 265–266 MD&A (management discussion and methods for recording, 59–61 analysis), 158 overview, 85–87 Microsoft Small Business Centre, 343 prepaid expenses, 94–95 model for management profit and loss profit and loss account, 117–118 account, 173–174 steps in, 90–96 modelling-related reasons for budgeting, unpaid expenses, 93–94 195–196 net operating assets, 370 Money 2007 (Microsoft), 375–376 net present value (NPV), 209–210 money laundering, 47 net realisable value (NRV), 258, 267–268, Money Tree Report, 337 370 Moore Stephens, 304 net worth, 26, 370 motivation encouraged with budgeting, non-deductible expenses 198 bribes, 62 MYOB, 376 business income taxation, 62–63 customer entertainment expenses, 62 fines, 62 • N • kickbacks, 62 National Insurance, 50–51 life insurance premiums, 63 National Venture Capital Association, 338 lobbying costs, 62 net earnings, 86 overview, 62 net income (profit) penalties, 62 accounting methods, 259 related parties, transactions with, 63 balance sheet equation, preparing the, start-up costs, 63 89–90 travel and convention attendance basic equation for, 85–87 expenses, 63 changes in non-cash assets, summary working from home, 63 of, 97–98 Non-Domestic Rates, 52–53 30_992456 bindex.qxp 2/15/08 11:32 PM Page 396

396 Understanding Business Accounting For Dummies, 2nd Edition

non-income taxes owners’ equity employer payroll taxes, 50–52 balance sheet, 118, 120 overview, 49–50 defined, 371 notes to financial statements, 370 double-entry accounting, 44–45 NPV (net present value), 209–210 overview, 14, 25–26, 216 NRV (net realisable value), 258, ownership structure 267–268, 370 companies, 218–224 co-operative, 228 limited companies (Ltd), 229 • O • overview, 215–217 operating activities partnerships, 224–227 cash flows from, 129, 141 public limited companies (plc), 229 defined, 370 sole proprietorships, 228 operating assets, 370 sole tradership, 228 operating cycle, 123, 370 taxable income, 230–233 operating earnings. See earnings before interest and tax (EBIT) operating leverage • P • affecting profit, 185–186 package of accounts. See financial defined, 371 reports overview, 321–322 participating preference shares, 221 operating liabilities partnerships accounts payable, 93 defined, 371 accrued expenses payable, 93 disadvantages of, 226–227 cash flow from profit and, 139 general partners, 225 defined, 371 limited partnerships, 225 income tax payable, 93 overview, 224–225 overview, 89, 93–94 profit allocation, 227 operating profit. See earnings before setting up, 226 interest and tax (EBIT) taxable income, 232 opportunity cost, 371 types of, 225 optimal choices, making, 237 patronage dividends, 228 ordinary shares payback, calculating, 208–209 defined, 371 PAYE Tables, 51 overview, 220–221 PAYE (Pay as You Earn) tax original entries in journals and accounts, Form P6, 52 recording, 34 Form P11, 51 overdrafts, 33, 340–341 Form P35, 52 overhead costs, 371 Form P45, 51 overproduction and product costs, Form P46, 51 249–253 Form P60, 51 overstating profit, 60, 61 overview, 51–52 owners, 215–216 pay-out ratio, 147 30_992456 bindex.qxp 2/15/08 11:32 PM Page 397

Index 397

payroll, 21 preferred stock, 371 P/E (price/earnings) ratio, 283, prepaid expenses 289–290, 372 balance sheet, 115 Peachtree Accounting, 379 defined, 372 penalties, 62 increase in, 136 pending legal actions, footnotes on, 296 profit, 94–95 pension fund, 344 prerelease steps for financial reports, pension plans 149–150 defined-benefit pension plans, 76 price/earnings (P/E) ratio, 283, defined-contribution pension plans, 76 289–290, 372 Self-Invested Personal Pension Plan PricewaterhouseCoopers, 304 (SIPP), 344 private businesses Pensions Regulator, 344 complying with GAAP, 280–281 period costs, 242 financial reports for, 159–161 personal allowances, 66 finding reports for, 299 personal computer spreadsheet private equity programs, 72 defined, 372 Personal Finance For Dummies sources for funds, 337–338 (Tyson), 73 product costs personal finances actual cost/actual output method, 250 basic income tax model, 65–68 burden rate, 248 borrowers, individuals as, 68–73 calculating, 245–247 defined-benefit pension plans, 76 defined, 372 defined-contribution pension plans, 76 for manufacturer, 244–245 home mortgages, 69–73 overproduction and, 249–253 interest rates, 68–73 overview, 180 investors, individuals as, 76–81 production capacity, 247–249 retirement planning, 81–82 profiles, 158 return on investment (ROI), 76–81 profit savers, individuals as, 73–75 accounting methods, 259 personnel, 39–40 balance sheet equation, preparing the, PKF, 304 89–90 P&L (profit and loss) statement, 372 basic equation for, 85–87 planning-related reasons for budgeting, changes in non-cash assets, summary 196–197 of, 97–98 plcs (public limited companies), 229 changes in operating liabilities, post-sales expenses, 258 summary of, 97–98 pounce ratio, 293 cost of goods sold, 95–96 pound, accounting methods affecting credit, making sales on, 90–91 purchasing power of, 274–275 decisions, making better, 319–321 preference shares defined, 372 defined, 371 depreciation expense, 92–93 overview, 220–221 described, 17–18 30_992456 bindex.qxp 2/15/08 11:32 PM Page 398

398 Understanding Business Accounting For Dummies, 2nd Edition

profit (continued) property, plant, and equipment distribution to owners, 178 expense, 144 financial effects of profit-making property taxes activities, measuring, 87–90, 96–99 Business Rates, 52–53 improving, 187–188 home, working from, 53–54 increase generating cash flow increase, Non-Domestic Rates, 52–53 349–351 overview, 52–53 lowered by variable expenses, 180 Proshare, 295 manipulation with LIFO method, proxy statement, 167, 282, 372 265–266 PSEPS Venture Capital and Private Equity methods for recording, 59–61 Directory, 337 overview, 85–87 public companies, finding reports prepaid expenses, 94–95 for, 298 profit and loss account, 117–118 Accounting Reforms steps in, 90–96 and Investor Protection Act - 2002, unpaid expenses, 93–94 20, 314 profit allocation, 227 public limited companies (plcs), 229 profit and loss account. See also external publicly-owned businesses, 160–161, 218, profit and loss account 280–282 accounting methods in, 256–260 purchase invoice, 33 accrual , 130 purchase orders, 22 balance sheet, relationship to, 104 purchasing power of pound affected by cash flow statement, relationship accounting methods, 274–275 to, 104 cost of goods sold expense, 100 discontinuties in, 102–104 • Q • earnings before interest and tax (EBIT), quarterly summaries 100, 120 of dividends, 159 example, 101 of profit performance, 159 format of, 26 of share prices, 159 income tax expense, 100, 117 quick ratio, 372 interest expense, 100, 117 QuickBooks 2008 (Intuit), 377 links between balance sheet and, 110 QuickUSE Accounting, 379 net income, 117–118 overview, 15, 26, 99 • R • sales, administrative, and general expenses, 100 rates for business income taxation, sales revenue, 114 58–59 unusual gains and losses, reporting, ratios used to analyse financial reports 102–104 acid-test ratio, 283, 293 profit ratios, 215, 282, 286, 346, 372 book value per share, 283, 291 profit smoothing, 163–165, 372 current ratio, 283, 292–293 profit strategy, developing, 203–205 dividend yield, 283, 290 promotional material, 158 earnings per share (EPS), 283, 286–288 30_992456 bindex.qxp 2/15/08 11:32 PM Page 399

Index 399

gross margin ratio, 282, 285–286 R.T.I., 379 price/earnings (P/E) ratio, 283, 289–290 the rule of 72, 74, 75 profit ratio, 282, 286 return on assets (ROA) ratio, 283, 294–295 • S • return on equity (ROE) ratio, 283, Sage Pro Inventory Control module, 268 291–292 salary schedules, 33 Web sites with calculation tools for, 295 sales, administration, and general raw materials, 242 (SA&G) expenses reading financial reports, 166–167 and accrued expenses payable recording transactions connection, reviewing, 152–153 double-entry accounting, 45–46 and creditors connection, reviewing, errors in, 311 152 Red Wing, 379 overview, 100, 258–259 reducing balance, 372 and prepaid expenses connection, register, 218 reviewing, 152 related parties, 48, 63 sales, cash inflows from, 129 relevant costs, 237, 240 sales demand risk, 268 replacement cost risk, 268 sales growth, 346 replacement ratio, 81–82 sales mix, 202 reports, designing, 43–44 sales price requirements for financial reports, 281 effect of decreasing, 186–190 reserves, 216, 373 profit, decrease in sales price affecting, retained earnings 186–187 balance sheet, 118 setting, 236 defined, 373 sales revenue overview, 88–89, 216 accounting methods, 256–257 retirement planning, 81–82 and debtors, 114, 152 return on assets (ROA), 283, 294–295, distribution of, 213–215 373 overview, 85–86 return on capital investment, 355–356 profit and loss account, 114 return on equity (ROE), 178, 215, 283, sales revenue-driven expenses, 373 291–292, 373 sales skimming, 47, 191 return on investment (ROI) sales volume annualised ROI rates, 79 affecting profit, 321–322 average ROI rates, 79–81 improving, 189–190 defined, 373 sales volume-driven expenses, 373 example of, 78 salvage value, 145 overview, 76–77 Sarbanes-Oxley Act, 20–21, 48, 314 personal finances, 76–81 savers, individuals as, 73–75 revenue expenditure, 62 savings, 73 revenue-driven expenses, 174 SBC Systems, 379 road show, 373 SCORE, 101 30_992456 bindex.qxp 2/15/08 11:32 PM Page 400

400 Understanding Business Accounting For Dummies, 2nd Edition

Securities and Exchange Commission Software Options, 379 (SEC), 280, 281, 298, 373 sole proprietorships seed capital, 373 overview, 228 segment information taxable income, 232 footnotes on, 296 sole trader, 228, 373 overview, 158 Solutions Matrix, 211 Self-Invested Personal Pension Plan solvency analysis, 352–354 (SIPP), 344 source documents selling stock shares, 222 forms and procedures, standardizing, share capital, 216 38–39 share options preparing and collecting, 33 accounting methods, 274–275 sources for funds footnotes on, 296 banks: long-term money, 339–340 short-term loans, 340–341 banks: short-term loans, 340–341 short-term solvency, 292 business angels, 338–339 Small Business Notes, 343 factoring, 342–343 Small Self-Administered Scheme (SSAS), grants, 343 344 hire purchase companies, 341–342 Smith & Williamson, 304 incentives, 343 software invoice discounting, 342–343 A21, 378 junior stock markets, 336–337 Banana Accounting for European leasing companies, 341–342 Companies, 378 major stock markets, 335–336 Business Management System for Book overdrafts, 340–341 Publishers, 378 pension fund, 344 Cashier 2000, 378 private equity, 337–338 C.A.T. (Cat Software), 378 venture capitalists, 337–338 CheckMark Software Inc, 378 SSAS (Small Self-Administered choosing, 379 Scheme), 344 Creative Solutions, 378 standard costs, 241 DBA Software, 378 standards in accounting and financial Dosh, 378 reporting Instant Accounting (Sage), 377 Accounting Standards Board, 19–20 Money 2007 (Microsoft), 373–374 flexibility in, 18–19 MYOB, 376 GAAP (generally accepted accounting overview, 375 principles), 16–18 Peachtree Accounting, 379 HM Revenue & Customs’ income tax QuickBooks 2008 (Intuit), 377 accounting rules, 18 QuickUSE Accounting, 379 International Financial Reporting Red Wing, 379 Standards (IFRS), 19–20 R.T.I., 379 overview, 16 SBC Systems, 377 start-up costs, 63 Software Options, 377 statement of changes in owners’ TAS Books (Tas Software), 376 (shareholders’) equity, 153–155, 374 30_992456 bindex.qxp 2/15/08 11:32 PM Page 401

Index 401

statement of earnings. See profit and loss account • T • statement of operating results. See profit TAS Books (Tas Software), 376 and loss account tax rates, 67 stock taxable income balance sheet, 114 basic income tax model, 67 cost of goods sold expense and, 114 companies, 230–231 defined, 374 ownership structure determining, described, 17, 22 230–233, 331 increase and cash flow from profit, 135 partnerships, 232 stock asset account, 95, 111 sole proprietorships, 232 stock certificates, 218 taxable-entity companies, 230 stock cost value, 264–265 taxes Stock Exchange, 281–282 business income taxation, 56–64 stock exchange, getting listed on a, 336 employer payroll taxes, 50–52 Stock Exchanges World Wide Links, 336 non-income taxes, 49–50 stock shares property taxes, 52–54 board of directors, 221 Value Added Tax (VAT), 54–55 book value per share, 222 Tenon Group, 304 classes of, 220–221 theft against the business, 311 common shares, 220–221 time cards, 33 companies, 218–222 Tolley’s Tax Guides (Butterworths), 66, convertible preference shares, 221 270 dilution effect, 223 total contribution margin, 285 exercise price, 219 trading on equity, 120 managers, 222–223 transactions ordinary shares, 220–221 with customers, 22 overview, 218–220 with debt sources of capital, 23 participating preference shares, 221 with employees, 22 preference shares, 220–221 with equity sources of capital, 23 register, 218 with government agencies, 23 selling, 222 overview, 22–23 share options, 219 recording, 32 shareholders, 218, 222–223 with suppliers, 22 stock certificates, 218 with vendors, 22 strike price, 219 transmittal letter, 158 stock write-downs, 258 travel and convention attendance straight-line depreciation, 270–271, 374 expenses, 63 strike price, 219 tricks used in financial reports, 161–165 summary financial statement, 14 true and fair, 376 sunk costs, 240 two sets of books, keeping, 270 supplementary financial schedules and Tyson, Eric (Personal Finance For tables, 156 Dummies), 73 suppliers, transactions with, 22 30_992456 bindex.qxp 2/15/08 11:32 PM Page 402

402 Understanding Business Accounting For Dummies, 2nd Edition

variable overhead, 242 • U • vendors, 22 UK balance sheet, 125–127 venture capital, 374 UK Small Firms Loan Guarantee venture capitalists as source for funds, Scheme, 340 337–338 understating profit, 60, 61 university degree in accounting, 39 • W • unpaid expenses, 93–94 unusual assets and liabilities, 354 warranty and guarantee (post-sales) unusual events and developments, expenses, 258 watching for, 43 Westerby Trustee Service, 344 unusual gains and losses, reporting, window dressing, 161–162, 332, 374 102–104 working capital, 374 working from home, 63 • V • write-off, 258 Value Added Tax (VAT) • Y • cash basis accounting for, 57 overview, 54–55 Yahoo, 298 value investing, 291 Vantis, 304 • Z • variable expenses (costs) defined, 374 zero-sum game, 214 overview, 238 Z-Score profit lowered by, 180 defined, 374 variable manufacturing costs, 247–248 overview, 300 variable operating expenses, 174–176