Accounts Demystified: The Astonishingly Simple Guide to Accounting

Contents......Page 4
About the author......Page 8
Preface......Page 9
Acknowledgements......Page 10
Prologue......Page 11
Wingate s annual report......Page 13
1 The basics of accounting......Page 14
3 Analysing company accounts......Page 15
The basics of accounting......Page 17
The balance sheet and the fundamental principle......Page 19
Sarah’s ‘personal’ balance sheet......Page 20
The balance sheet of a company......Page 23
The balance sheet equation rearranged......Page 25
The balance sheet chart......Page 26
Procedure for creating a balance sheet......Page 29
SBL’s balance sheet......Page 30
The ‘American’ balance sheet......Page 54
Basic concepts of accounting......Page 56
The accruals basis......Page 57
The going concern assumption......Page 58
The profit & loss account......Page 59
The cash flow statement......Page 61
‘Definitive’ vs ‘descriptive’ statements......Page 62
The P&L as a list......Page 65
A more useful P&L......Page 67
The cash flow statement as a list......Page 69
Profit and cash flow......Page 70
Impact of depreciation on cash flow......Page 73
Impact of prepayments on cash flow......Page 74
The effect of a previous year’s transactions......Page 75
Nominal account......Page 79
Trial balance......Page 80
Journal entry......Page 81
The debit and credit convention......Page 82
Interpretation of accounts......Page 89
Wingate’s annual report......Page 91
Accounting rules......Page 92
The auditors’ report......Page 93
Tangible fixed assets......Page 94
Sale of fixed assets......Page 96
Stock......Page 98
Trade debtors and doubtful debts......Page 101
Trade creditors......Page 102
Value added tax (VAT)......Page 103
Cash in advance (Deferred revenue/income)......Page 105
Taxation......Page 106
Share capital......Page 107
Retained profit......Page 108
Terminology......Page 109
Continuing operations......Page 110
Dividends......Page 111
Reserves......Page 112
Earnings per share......Page 113
Cash flow statement detail......Page 114
The notes to the accounts......Page 115
Further features of company accounts......Page 117
What are investments?......Page 118
Accounting for investments......Page 119
Associates and subsidiaries......Page 120
Goodwill......Page 121
Accounting for goodwill......Page 122
Company vs consolidated balance sheets......Page 123
Funding......Page 124
Unsecured loanstock......Page 125
Zero coupon bonds......Page 126
Preference shares......Page 127
Other types of shares......Page 128
Revaluation reserves......Page 129
Note of historical cost profits and losses......Page 131
Intangible fixed assets......Page 132
Pensions......Page 133
Operating leases......Page 134
Finance leases......Page 135
Exchange gains and losses......Page 137
Trading in foreign currencies......Page 138
Fully diluted earnings per share......Page 139
Analysing company accounts......Page 143
Financial analysis – introduction......Page 145
The ultimate goal......Page 146
The long-term perspective......Page 147
Liquidity......Page 148
The simple view of a company......Page 149
The balance sheet rearranged......Page 152
Wingate’s rearranged balance sheet......Page 154
The general approach to financial analysis......Page 156
Interpretation of parameters......Page 157
Wingate’s highlights......Page 158
Return on capital employed......Page 161
Calculating ROCE......Page 162
Trend analysis of ROCE......Page 163
The components of ROCE......Page 164
Capital productivity......Page 165
Return on sales (‘ROS’ for short)......Page 166
Where do we go from here?......Page 167
Cost of goods sold, gross margin......Page 168
Overheads......Page 170
Employee productivity......Page 172
Fixed asset productivity......Page 173
Working capital productivity......Page 174
Trade debtor productivity, trade debtor days......Page 175
Stock productivity, stock days......Page 177
The funding structure ratios......Page 181
The debt to total funding ratio......Page 182
Wingate’s five-year debt to total funding ratio......Page 183
Security of debt......Page 184
Gearing......Page 186
Scenario three – mostly debt......Page 187
Risk and return......Page 188
Debt to total funding ratio......Page 189
Return on equity......Page 190
Average interest rate......Page 192
Dividend cover, payout ratio......Page 193
Current ratio......Page 195
The cash flow statement......Page 196
Book value......Page 199
Market value......Page 200
Valuation techniques......Page 201
Price earnings ratio (PER or P/E)......Page 202
Dividend yield......Page 203
Market to book ratio......Page 204
Tricks of the trade......Page 207
The directors’ report......Page 208
Creative accounting......Page 209
Turnover tricks......Page 214
Expense tricks......Page 220
Spotting creative accounting......Page 226
Why bother?......Page 228
Return on capital employed (ROCE)......Page 229
Cash flow......Page 230
Glossary......Page 231
Business review......Page 251
Directors’ responsibilities......Page 252
By order of the Board......Page 253
Respective responsibilities of directors and auditors......Page 254
Opinion......Page 255
Index......Page 265