Catherine Gowthorpe. Now in its third edition, this popular introductory text is aimed at non-specialist students of accounting and finance taking their first module in the subject, within courses such as business studies and management. Add tags for "Business accounting and. CATHERINE GOWTHORPE. /V CENGAGE Basics of business accounting: the three principal More practice with statements of financial position bestthing.info: Business Accounting and Finance () by Catherine Gowthorpe and a great selection of similar New, Used and Collectible Books.
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On the basis of this, an accounting standard prescribing the temporal method, FAS8, was issued in The standard proved unpopular with US multinationals because: 1 Through the second half of the s the US dollar tended to weaken, leading to reported losses on translation of foreign subsidiary accounts as we have seen above.
Alleman cites the example of how, under FAS8, in ITT experienced a virtual halving of profit in one quarter and a doubling in the next because of foreign currency losses and gains.
In , in response to vigorous lobbying, FAS52 was issued prescribing the closing rate method. This satisfied US multinationals. However, Ndubizu points out that there was a negative economic impact on developing countries.
This is because such countries tend to have weak currencies. To minimise the loss that this results in under the closing rate method multinationals tend to reduce their net investment in subsidiaries in developing countries by using local borrowing rather than injecting capital directly.
This example illustrates the issue of relentlessness. One feature of the PGC was to require capitalisation of finance lease agreements, so that when a company enters into a lease with an option to download at a bargain price at the end of the rental period this should be accounted for as though an asset had been downloadd with a secured loan.
Application of this concept is well established in the USA and increasingly applied by the Accounting Standards Board in the UK, but is in contrast to the strong legalistic tradition of Spanish accounting. When this accounting requirement was proposed it was opposed by the Spanish leasing association on the grounds that it would make leasing less attractive to companies because the increase reported assets and liabilities on the balance sheet would show a higher risk exposure Vidal ; the association successfully lobbied for classification of leased assets as intangible rather than tangible in the belief that this would solve the problem.
Following a survey of Spanish financial managers Blake et al. However, given the distaste that company financial managers show for the disclosure of leased assets as intangible rather than tangible, the equipment leasing association would seem to have exacerbated their problem as a result of successfully lobbying for such treatment. A number of economic consequences issues arose during the development of an accounting standard on leasing in the UK.
The UK and the Republic of Ireland at that time shared a common system for developing accounting standards. It is interesting to contrast the role of the accounting profession in two cases where the government introduced unconventional accounting legislation to achieve an economic objective, one in Sweden and the other in the USA.
At the end of Uddeholm AB, a major Swedish company in steel and forest products, faced crisis. Major borrowings had been undertaken with a debt covenant provision that total borrowings should not exceed 75 per cent of reported total assets.
As a result of a major loss, the company was in breach of this condition. The Swedish government came under pressure to rescue this major employer, but was barred by international agreement from giving a subsidy to a steel producer. Instead, the government extended a line of credit to Uddeholm, and passed a law effectively requiring the company to treat this line of credit receivable as an asset.
The effect was to boost total assets to the point where the company was not in breach of its debt covenant. In the years that followed, the company conducted an orderly realisation of its assets to clear the loans, and in was taken over by AGA. In the opposition in the Swedish parliament called for a report by the parliamentary auditor on this rescue, being concerned with the broad economic issues.
Margavio summarises the experience in the USA of special accounting treatment formulated in a vain attempt to protect the savings and loans institutions. During the s these institutions, long favoured by the US government for their role in providing finance to expand home ownership, were badly hit by inflation and consequent high interest rates. Their problems arose from the practice of lending for long periods at fixed interest rates, while borrowing from depositors on a short term basis at what, of necessity, had to be current market interest rates.
In the early s a series of accounting regulations from the government were enacted to give these institutions the appearance of viability.
By the end of the s it had become clear that these measures had failed to give the breathing space necessary for the institutions to recover their stability. While these regulations come from government rather than the accountancy profession accountants have been criticised for: 1 Failure to publicly identify and criticise the deficiencies of the regulations when they were enacted.
In the US case a series of unorthodox accounting regulations allowed concealment of serious underlying problems that continued to grow with consequent major costs.
The accounting profession failed to give a lead in tackling the issues, and individual audit firms have become involved in major liabilities for their own failure to act.
For example, the membership of the Institute of Chartered Accountants in England and Wales by sex over the last twenty years, set out in Table 1. However, as Roberts and Coutts point out, the age distribution of women accountants is skewed towards the younger age groups because they have only recently started to enter the profession in significant numbers.
Therefore they are over-represented at junior levels and under-represented in senior management. Explanatory theories for this imbalance include the suggestion by some authors that unequal relationships are inherent in the nature of accounting which is dominated and defined by a set of values originating from an entirely male world view e.
Cooper ; Kirkham In such circumstances women can choose to imitate men by aping their behaviour, and indeed are encouraged to do so Lehman Empirical evidence collected for this study, although limited in scope to a small number of countries, shows that the under-representation of women at senior levels in the profession dwindles to almost no representation at all in the process of standard-setting. In a brief survey conducted in we found the levels of representation by sex on seven accounting standard-setting bodies shown in Table 1.
This imbalance of representation by sex in six out of our seven cases is, of course, counter to ideals of equality, and is likely to be offensive to anyone who believes that women should be properly represented at levels where power and influence are exercised. However, in addition, there may be a significant impact on the nature and results of the standard-setting process, in that women might have a different set of ethical approaches to problems than men, and that, in current conditions, male ethical values are bound to dominate.
This view has validity only if it can be proved that women and men approach ethical issues in different ways. Two distinct areas of difficulty relating to differing sex-based ethical values suggest themselves in the context of accounting standard-setting. The agenda for standard-setting boards is set by a male-dominated accounting profession, influenced by other male-dominated communities e.
The second area of difficulty relates to ethical judgement and decisionmaking processes.
We argue earlier in this chapter that ethical perspectives have relevance to debate on accounting issues. Once recognised, an accounting issue could be dealt with by drawing upon a variety of ethical standpoints. The standard-setting boards are missing out a set of alternative ethical perspectives on problems because of the non-inclusion of women in debate.
To summarise, we feel that the imbalance of representation of the sexes in the higher echelons of the accounting profession and in the membership of the standard-setting bodies results in an imbalance in the ethical perspectives which inform the standard-setting process.
This item is not reservable because:
The subjects for debate and the nature of that debate may be impoverished because of the absence of any significant contribution from women. A review of the literature on the application of an ethical perspective to this question indicates a case against this.
Specific examples of economic impact issues indicate the relevance of the ethical perspective. Alleman, R. Armstrong, M. Benston, G.
Ethical Issues in Accounting (Professional Ethics)
Blake, J. Briloff, A. Brown, J. Evans ed. Brown, P. Cooper, C. Dawson, L. Flower, J. Nobes and R. Gerboth, D.
Business Accounting & Finance
Haring, J. Holthausen, R. Horngren, C. Ijiri, Y. Ingram, R. Kirkham, L. Lehman, C. Lorenson, L. Margavio, G. Meyer, F. Ndubizu, G.
Newman, D. Puro, M.
Rappaport, A. Renshall, M. Rockness, H. Ruland, R. Selto, F. Solomons, D.
Stamp, E. Taylor, P. Vidal, C.
Hornbrook ed. World Leasing Yearbook , London: Euromoney, —5. Whittred, G. Zeff, S. Ian Griffiths, writing from the perspective of a business journalist, observes: Every company in the country is fiddling its profits. Every set of published accounts is based on books which have been gently cooked or completely roasted. The figures which are fed twice a year to the investing public have all been changed in order to protect the guilty.
It is the biggest con trick since the Trojan horse…. In fact this deception is all in perfectly good taste. It is totally legitimate. It is creative accounting. Two features are common to all four writers: 1 They perceive the incidence of creative accounting to be common.
The various methods of creative accounting can be considered to fall in four categories: 1 Sometimes the accounting rules allow a company to choose between different accounting methods. A company can therefore choose the accounting policy that gives their preferred image.
Grover b reports on the example of the film industry, where a decision has to be made on how to allocate film production costs. Initially, these are capitalised, and then should be amortised against related earnings. In other cases an outside expert is normally employed to make estimates; for instance, an actuary would normally be employed to assess the prospective pension liability. In this case the creative accountant can manipulate the valuation both by the way in which the valuer is briefed and by choosing a valuer known to take a pessimistic or an optimistic view, as the accountant prefers.
This is achieved by entering into two or more related transactions with an obliging third party, normally a bank. For example, supposing an arrangement is made to sell an asset to a bank then lease that asset back for the rest of its useful life.
The managers of the business are free to choose in which year they sell the investment and so increase the profit in the accounts. Accounting regulators who wish to curb creative accounting have to tackle each of these approaches in a different way: 1 Scope for choice of accounting methods can be reduced by reducing the number of permitted accounting methods or by specifying circumstances in which each method should be used.
One is to draft rules that minimise the use of judgement. Auditors also have a part to play in identifying dishonest estimates.
Thus linked transactions would be accounted for as one whole. However, the scope to use this can be limited by requiring regular revaluations of items in the accounts so that gains or losses on value changes are identified in the accounts each year as they occur, rather than only appearing in total in the year that a disposal occurs.
It is interesting to observe that, in their recent draft conceptual framework, the ASB have stated a wish to move towards increased use of revaluations rather than historic cost in the accounts.
We have seen above that creative accounting is seen as a particular feature of the Anglo-Saxon approach to accounting, with its scope for flexibility and judgement, rather than the continental European model, with its tradition of detailed prescription.
However, as we show in Table 2. The more prescriptive and inflexible approach of the continental European model makes it easier to reduce the scope for abuse of choice of accounting policy and manipulation of accounting estimates.
The less legal orientation of the Anglo-Saxon model is more conducive to the use of substance over form and revaluation. Reasons for the directors of listed companies to seek to manipulate the accounts are as follows. Companies generally prefer to report a steady trend of growth in profit rather than to show volatile profits with a series of dramatic rises and falls. This is achieved by making unnecessarily high provisions for liabilities and against asset values in good years so that these provisions can be reduced, thereby improving reported profits, in bad years.
It also avoids raising expectations so high in good years that the company is unable to deliver what is required subsequently. This type of creative accounting is not special to the UK. Blake et al. Fox reports on how accounting policies at Microsoft are designed, within the normal accounting rules, to match reported earnings to profit forecasts. This perfectly respectable, and highly conservative, accounting policy means that future earnings are easy to predict.
This helps the company to raise capital from new share issues, offer their own shares in takeover bids, and resist takeover by other companies.
It should be noted that, in an efficient market, analysts will not be fooled by cosmetic accounting charges. Indeed, the alert analyst will see income-boosting accounting changes as a possible indicator of weakness. Dharan and Lev report on a study showing poor share price performance in the years following income-increasing accounting changes.
Another set of reasons for creative accounting, which applies to all companies, arises because companies are subject to various forms of contractual rights, obligations and constraints based on the amounts reported in the accounts.
Examples of such contractual issues are as follows. Example 1 It is common for loan agreements to include a restriction on the total amount that a company is entitled to borrow computed as a multiple of the total share capital and reserves. An accounting rule change can plunge a company into difficulties with loan agreements. Therrien Example 2 Some companies, such as public utilities like electricity and telephone companies, are subject to the authority of a government regulator who prescribes the maximum amounts they can charge.
If such companies report high profits then the regulator is likely to respond by curbing prices. These companies, therefore, have an interest in choosing accounting methods that tend to reduce their reported profits.
Where the link is to the share price then clearly the directors will be motivated to present accounts that will impress the stock market. Where a bonus is based on reported profit the scheme often stipulates that the bonus is a percentage of profit above a minimum level, and is paid up to a maximum level.
Thus: 1 If the profit figure is between the two levels then directors will choose accounting methods that lift profit towards the maximum.
The timing of the announcement of gains and losses can have a major impact on bonuses. Example 4 Where a part or division of a business is subject to a profitsharing arrangement then this may affect the preferred accounting methods. The problem was solved by an agreement for the company to pay a fixed amount of money each year instead of a profit share. Example 5 Taxation may also be a factor in creative accounting in those circumstances where taxable income is measured by relation to the accounting figures.
Example 6 When a new manager takes over responsibility for a unit there is a motivation to make provisions that ensure that any losses appear as the responsibility of the previous manager.
Dahl reports on a survey of US bank managers that found provisions for loan losses tended to be higher in the year of change in manager. Revsine discusses the benefits to managers in being able to manipulate income between years so as to maximise their bonus entitlements, as discussed above. Instead future FASB work should be applied to the public sector, including institutions such as the savings and loans where publicly funded guarantees underpin their activity.
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Your rating has been recorded. Write a review Rate this item: Preview this item Preview this item. Business accounting and finance Author: Catherine Gowthorpe Publisher: Now in its third edition, this popular introductory text is aimed at non-specialist students of accounting and finance taking their first module in the subject, within courses such as business studies and management.
The new edition has been extensively revised to bring all the financial reporting aspects up-to-date and consistent with international financial reporting practice.
Business Accounting and Finance is ideally suitable for introductory accounting and finance modules taught on undergraduate business studies courses, around the world. It is also appropriate for use on MBA courses. Read more Find a copy online Links to this item MyiLibrary public. Allow this favorite library to be seen by others Keep this favorite library private.
Find a copy in the library Finding libraries that hold this itemPlease create a new list with a new name; move some items to a new or existing list; or delete some items. Seller Inventory GOR Even in healthcare, ethical dilemmas are not confined to medical practitioners. It is also appropriate for use on MBA courses. The theme of education is developed by Carroll in Chapter 9 in which he examines the issues surrounding the nurturing of ethical development in the individual and suggests a model for integrating ethics into the accounting curriculum.
The statement of financial position3. User lists with this item 1 business 1 items by simonapillay updated Dawson, L.
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