Contents
About the author x
Preface xi
Acknowledgements xii
Prologue xiii
Introduction xv
Part 1: The basics of accounting
1 The balance sheet and the fundamental
principle 3
Assets, liabilities and balance sheets 4
Sarah’s ‘personal’ balance sheet 4
The balance sheet of a company 7
The balance sheet chart 10
Summary 12
2 Creating a balance sheet 13
Procedure for creating a balance sheet 13
SBL’s balance sheet 14
The different forms of balance sheet 38
Basic concepts of accounting 40
Summary 42
3 The profit & loss account and cash flow
statement 43
The profit & loss account 43
The cash flow statement 45
‘Definitive’ vs ‘descriptive’ statements 46
Summary 48
vi
4 Creating the profit & loss account and
cash flow statement 49
Creating the profit & loss account 49
Creating the cash flow statement 53
Summary 61
5 Book-keeping jargon 63
Basic terminology 63
The debit and credit convention 66
Part 2: Interpretation of accounts
6 Wingate’s annual report 75
Accounting rules 76
The reports 77
Assets 79
Liabilities 87
Shareholders’ equity 92
Terminology 93
The P&L and cash flow statement 95
The notes to the accounts 100
Summary 101
7 Further features of company accounts 103
Investments 104
Associates and subsidiaries 106
Accounting for associates 107
Accounting for subsidiaries 109
Funding 110
Debt 111
Equity 113
Revaluation reserves 115
Statement of recognised gains and losses 117
Note of historical cost profits and losses 117
c o n t e n t s
vii
Intangible fixed assets 118
Pensions 119
Leases 120
Corporation tax 125
Exchange gains and losses 125
Fully diluted earnings per share 127
Summary 129
Part 3: Analysing company accounts
8 Financial analysis – introduction 133
The ultimate goal 134
The two components of a company 137
The general approach to financial analysis 144
Wingate’s highlights 146
Summary 148
9 Analysis of the enterprise 149
Return on capital employed (ROCE) 149
The components of ROCE 152
Where do we go from here? 155
Expense ratios 156
Capital ratios 161
Summary 167
10 Analysis of the funding structure 169
The funding structure ratios 169
Lenders’ perspective 172
Gearing 174
Shareholders’ perspective 177
Liquidity 183
Summary 186
c o n t e n t s
viii
11 Valuation of companies 187
Book value vs market value 187
Valuation techniques 189
Summary 193
12 Tricks of the trade 195
Self-serving presentation 196
Creative accounting 197
Why bother? 216
Summary 218
Glossary 219
Appendix 239
Index 254
c o n t e n t s
ix

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