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Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
CONTENTS vii
5 Presentation of financial position 6.4 The profit or loss statement 154

and the worksheet 104 6.5 Balance sheet and profit or loss
Learning objectives 104 statement 156
Introduction 105 6.6 Statement of profit or loss and other
5.1 Business activities and the worksheet 105 comprehensive income 157
Common errors in recording of transactions 107 6.7 Factors affecting the format of the
5.2 Definition and purpose of the profit or loss statement 159
balance sheet 108 Types of business 160
The purpose of the balance sheet 110 Users of accounts 160
5.3 Elements of the balance sheet 110 6.8 Earnings (or profit) management 160
Assets 110 6.9 The statement of changes in equity 161
Categories of assets 112 6.10 The worksheet 163
5.4 Liabilities 113 Study tools 169
Current liabilities 114 7 Presentation of cash flows 184
Non-current liabilities 114 Learning objectives 184
Assets and liabilities 115 Introduction 185
5.5 Owners’ equity 115 7.1 Cash and cash equivalents 185
5.6 The balance sheet equation 118 7.2 Internal control of cash 186
A simple balance sheet 118 7.3 The statement of cash flows 187
5.7 Some balance sheet ratios 122 Purpose 187
5.8 Influences on the format of the 7.4 What does a statement of cash
balance sheet 124 flows show? 187
Types of business 124 7.5 Cash flow from operating activities 189
Users of accounts 127 7.6 Cash flow from investing activities 197
Limitations of the balance sheet 127 Cash flow from financing activities 198
Format used in the book 128 Increase or decrease in cash in the period 198
Study tools 129 Interest, dividends and income tax 198
6 Presentation of financial performance Non-cash investing and financing activities 199
and the worksheet 142 Study tools 200
Learning objectives 142 8 Accounting for selected assets 212
Introduction 143 Learning objectives 212
6.1 Financial performance measurement 143 Introduction 213
6.2 Income and revenue 145 8.1 Accounts receivable 213
Increases in assets 145 Bad and doubtful debts 214
Decreases in liabilities 147 8.2 Accounting policies for bad and
Excluding contributions by owners 147 doubtful debts and implications for users 217
Revenue recognition 147 8.3 Inventory 218
Examples of revenue recognition 148 Valuing inventory 219
6.3 Expenses 150 8.4 Establishing the cost of inventories 221
Reductions in assets 150 AASB 102 Inventories 221
Increases in liabilities 150 Effects of price changes 222
Excluding distributions to owners 151 8.5 Accounting policies for inventories and
The recognition principle 151 implications for users 224
Examples of expenses 151 8.6 Property, plant and equipment, and
depreciation 225
viii CONTENTS
8.7 Methods of depreciation 225 10.4 Techniques of analysis 290

Why depreciate? 225 Comparison of financial statements over time 290
The straight-line method 229 Trend analysis 290
The reducing-balance method 230 10.5 Ratio analysis 297
Units-of-production method 232 Benchmarks 302
8.8 Accounting policies for depreciation and Profitability ratios 303
implications for users 233 Efficiency ratios 305
8.9 Intangible assets 233 Short-term solvency ratios 306
The cost of intangible assets 234 Long-term solvency ratios 309
Research and development 234 10.6 Market-based ratios 310
Patents 234 10.7 Key limitations of financial statement
Copyright 235 analysis 313
Trademarks or brand names 235 Information problems 313
Franchises 235 Comparison problems over time 313
8.10 Accounting for intangible assets 235 Comparison problems between entities 313
Study tools 237 Study tools 314
9 Accounting for selected liabilities and 11 From the worksheet to debits
sources of financing 250 and credits 334
Learning objectives 250 Learning objectives 334
Introduction 251 Introduction 335
9.1 Accounts payable, provisions 11.1 The traditional approach 335
and accruals 251 11.2 Ledgers, journals and a trial balance 339
9.2 Taxation 254 Ledgers 339
Temporary differences 254 The journal 340
9.3 Sources of finance 256 11.3 End-of-period adjustments 341
Short-term finance 256 Comparison with the worksheet approach 343
Medium-term finance 259 11.4 Final accounts 343
Long-term finance 263 11.5 Computerised accounting systems 345
9.4 Equity finance 264 Study tools 346
Sole proprietorships 264
Partnerships 264 Part 2 Strategic management accounting 356
Limited companies 265
9.5 Classification as equity or debt 266 12 Introduction to strategic management
9.6 Financing structures and financial risk 267 accounting 358
Study tools 270 Learning objectives 358
Introduction 359
10 Analysis of financial statements 278
12.1 Managerial decision making and
Learning objectives 278
accounting information 359
Introduction 279
12.2 External stakeholders and access to
10.1 Users’ information needs 279
management and other accounting
The investor group 279
information 362
Lenders 280
12.3 The organisation as a value chain 363
Employees 281
The industry value chain 365
Analysts 281
Information technology and the value chain 366
Auditors 281
12.4 Strategic management 367
Management 281
Strategy choice 368
Common information needs 281
Strategy implementation 370
10.2 Projections and predictions 283
12.5 Strategic management and
10.3 The common needs explained 285
management accounting information 373
CONTENTS ix
12.6 Factors influencing the form and types of 14.2 Cost behaviours 420
management accounting information 374 Linear cost functions 421
Organisational size as a determinant of The relevant range of activity 421
management accounting system design 374 The choice of the independent variable 423
Organisational structure as a determinant of Variable costs 424
management accounting system design 375 Fixed costs 425
Technology as a determinant of management Cost behaviour: assumptions
accounting system design 375 and limitations 425
Environmental factors as a determinant of Estimating costs 426
management accounting system design 376 14.3 The cost assignment process 429
Management accounting information Direct and indirect manufacturing costs 430
and other organisational settings 376 Costing systems and the implication for costs 431
12.7 Accounting information systems and Product and period costs 433
organisational control: a behavioural Past and future manufacturing costs 434
perspective 377 14.4 Traditional volume based costing
Study tools 379 systems and accounting for overhead 436
13 Performance measurement and Costing methods: absorption and variable
evaluation frameworks 386 costing 437
Learning objectives 386 Absorbing overheads 438
Introduction 387 Traditional volume-based costing systems 438
13.1 Organisational goals and performance Predetermined overhead absorption rates 442
measurement 387 14.5 Activity-based costing systems 444
Performance measurement 388 14.6 Presenting cost information for
13.2 What is a performance measure and what management purposes:
properties should it have? 388 manufacturing statements 451
The strategic nature of performance measures 389 Variable costing versus
13.3 Organisational structure and performance absorption costing 453
measurement systems 390 Study tools 455
Executive remuneration and business 15 Budgeting and performance
performance 392 reporting 466
13.4 The use of financial measures to assess Learning objectives 466
organisational performance 393 Introduction 467
Investment centres and financial performance 15.1 The purpose of budgets 467
measures 394 Encourage planning 467
13.5 Non-financial measures: an alternative Coordinate functions within an organisation 467
view of organisational performance 400 A form of communication 467
13.6 The BSC: a comprehensive performance Provide a basis for responsibility accounting 468
management framework 402 Provide a basis for a control mechanism 468
Evaluating organisational performance with a Authorise expenditure 468
balanced scorecard 402 Motivate employees 468
Integrated reporting and the balanced 15.2 The budget process 469
scorecard 406 The budget period 472
Study tools 409 15.3 Preparation of the master budget 472
14 Costs and cost behaviour 418 15.4 Sales and production budgets 479
Learning objectives 418 15.5 Budgeting for overhead expenditure 490
Introduction 419 Study tools 491
14.1 Management’s need for information
about costs 420
x CONTENTS
16 Cost-volume-profit analysis 502 17.8 Qualitative factors 549

Learning objectives 502 Customers 550
Introduction 503 Employees 550
16.1 CVP analysis 503 Competitors 550
Break-even: the general principles Legal constraints 550
of CVP analysis 504 Suppliers 550
The underlying assumptions of CVP analysis 504 Study tools 551
16.2 The contribution margin method 505 18 Capital investment decisions 564
The contribution margin ratio 506 Learning objectives 564
16.3 The margin of safety 507 Introduction 565
16.4 Break-even analysis: models and charts 508 18.1 The strategic importance of capital
The total revenue formula 508 investment decisions 565
The total cost formula 509 18.2 Capital investments and life-cycle issues 567
The total profit formula 509 18.3 The capital investment decision-making
The total contribution formula 509 process 569
What happens at the BEP? 509 18.4 Capital investment: an accrual-
The break-even chart 511 based decision tool 570
16.5 Limitations of CVP analysis 518 Accounting rate of return (ARR) 570
Study tools 519 18.5 Capital investment: Cash-based
17 Accounting for decision making: with decision tools 576
and without resource constraints 530 Payback period 576
Learning objectives 530 Discounted cash-flow techniques 579
Introduction 531 Net present value (NPV) 580
Decisions where there are no resource Internal rate of return (IRR) 586
constraints 531 Comparison of NPV and IRR 589
Decisions where there are resource constraints 531 18.6 Qualitative factors and capital
Mutually exclusive decisions 531 investment decisions 590
17.1 Costs and benefits relevant to decision 18.7 Post-implementation audit 591
making 532 Study tools 593
Future and sunk (past) costs 532 Appendices
Differential (incremental) costs 533 1 Extracts from Woolworths Ltd 2018
Avoidable and unavoidable costs 533 Annual Report 601
Opportunity costs 535 2 Present and future value factor tables 621
Replacement costs 536 Table 1: Future value of $1 621
Comparison with traditional costing methods 537 Table 2: Present value of $1 623
17.2 Costs and benefits relevant to specific Table 3: Future value of $1 per period 625
decisions 539 Table 4: Present value of $1 per period 627
The meaning of relevance 539
Glossary 629
17.3 Fixed and variable costs and the
contribution approach 540 References 641
The range of products 540 Index 643
17.4 Closing an unprofitable section: the
contribution margin approach 541
17.5 Decision making with constraints 543
17.6 The contribution approach with
one scarce resource 543
17.7 Make or buy decisions 546
Where there is spare capacity 547
Where there is no spare capacity 548
xi
Preface
Contemporary Accounting, 10th edition, provides an introduction to accounting for students at universities and other higher
education institutions. With the nature and extent of topic coverage, the text meets the needs of students completing a
first course in accounting. Thus, the text is well suited to fulfilling the requirements of a one-semester unit in accounting for
students enrolled in undergraduate accounting and non-accounting majors or MBA or equivalent post graduate qualifications.
The book provides an excellent overview of the accounting function in business for non-accounting majors, and the approach
taken to financial accounting provides a solid foundation on which accounting majors can better understand the bookkeeping
function. Extensive online materials have been prepared to accompany the 10th edition and are available for instructors and
students who want more material on double-entry bookkeeping to support the concepts covered in the book. Where relevant,
the implications of different accounting policy choices for managers and other external decision makers are discussed.
The objective of this textbook is to convey an understanding of accounting without introducing unnecessary technical
terminology and procedures. Building on basic concepts, it provides a clear understanding of financial statements, their uses
and limitations. Accounting terms and concepts are defined in accordance with official pronouncements. As Australia has
adopted International Financial Reporting Standards (IFRS) for use by all reporting entities in the private and public sectors,
the conceptual basis of Contemporary Accounting relies on the IFRS and relevant pronouncements on the framework issued by
the International Accounting Standards Board (IASB). Where required, these concepts and regulatory requirements are used
to analyse various issues in accounting.
Where appropriate, extracts from annual reports are provided to illustrate contemporary accounting practices. Also
included are extracts from the 2018 Woolworths Limited Annual Report. This report appears in Appendix 1 and students are
invited to refer to it frequently throughout the text.
Worksheets, based upon the balance sheet equation, are used to introduce accounting techniques and principles such as
duality. The in-chapter worked examples and end-of-chapter questions provide students with an understanding of concepts
such as assets, liabilities, equity, income, revenues and expenses, and allow them to see how financial statements are prepared.
This approach avoids the problems often experienced by students in trying to understand debits and credits.
The text covers financial accounting in Chapters 1 to 11, and these chapters focus on the development of accounting
information relevant to the decision-making needs of external users. Chapters 12 to 18 examine the decision-making needs
of internal users (i.e. managers) and provide an introduction to core management accounting topics. In each chapter, learning
objectives and key concepts are identified and highlighted. Review exercises are included and solutions are provided at the
end of each chapter. Additional review questions and problems are provided at the end of each chapter. The problems are
presented in order of difficulty. The more difficult problems are primarily intended for use in MBA courses. The ethics case
studies are intended for all students and are well suited to in-class group discussions. We recommend that students refer to
the comprehensive glossary as they work through the book.
Contemporary Accounting has been presented in a manner that students find easy to read. The response to the first nine
editions of this book has been very positive. However, there are major changes in the 10th edition of the book. These changes
have been made in response to comments from past and current users of the book, and also in response to changes that have
occurred in education, the business world and the accounting profession.
xii PREFACE
A new approach
As is usual, a thorough review of the text has been undertaken which incorporates feedback received and important
changes arising from the Revised Conceptual Framework published by the IASB in 2018. While the main elements of the
text remain, including the conceptual approach and the use of the worksheet, a number of changes have been made and are
summarised below.
The main changes to each chapter are outlined as follows:
»» Chapter 1 has been amended whereby the sections on sustainability reporting have been updated and relocated to Chapter 3.
»» Chapter 2 has been renamed to Business structures and financial reporting. There are significant changes in Chapter 2 to reflect
the new definitions of assets, liabilities, income and expenses arising from the Revised Conceptual Framework published by
the IASB in 2018. It also reflects the new definition of a reporting entity. There have been changes to simplify the format
with the use of more tables to replace long sections of text.
»» Chapter 3 has been renamed to Sustainability reporting, ethics and corporate governance. The material on sustainability from
Chapter 1 has been updated and relocated to this chapter. The section on ethics has been reduced and focuses more on
ethics in accounting.
»» Chapter 4 has been renamed to Different measurement methods. Economic value has been altered to value-in-use.
»» Chapter 5 has been amended to include the new definitions of assets and liabilities. The organisation of material has also
been amended to provide a better flow of the content.
»» Chapter 6 has a new section on the relationship between the balance sheet and the profit or loss statement. It also
incorporates the impact of the new definitions of income and expenses, plus the new accounting standard AASB15 Revenue
from contracts with customers.
»» Chapter 7 is similar to the 9th edition with the addition of updates where relevant.
»» Chapter 8 has been updated with current examples and the section on the theoretical formula in the reducing balance
depreciation method has been removed.
»» Chapter 9 has been renamed to Accounting for selected liabilities and sources of financing. The section on leases has been revised
to reflect the new accounting standard AASB 16 Leases. Some additional information on debt ratios has been added.
»» Chapter 10 has been renamed Analysis of financial statements. It has also been restructured in parts to simplify the format
with the use of more tables to replace long sections of text.
»» Chapter 11 has been renamed From the worksheet to debits and credits and remains similar to the chapter in the 9th edition.
»» Chapter 12 continues to build on the theme of management accounting systems being designed to provide information
to best meet the strategic decision-making needs of management. Recognising that the contemporary challenge for many
managers is to create the greatest value from their organisation’s activities, the chapter covers this topic by employing the
value chain model of business activities in combination with Michael Porter’s generic competitive strategies and five forces
analysis of competitive position.
»» Chapter 13 continues to examine the material on performance measurement, and this material provides a strategic analysis
of performance measurement, including the use of different financial and non-financial performance measures and the use
of the balanced scorecard as a comprehensive performance management framework. The use of the balanced scorecard as
a means for incorporating the non-financial measures incorporated in an organisation’s integrated report is discussed. The
material on Economic Value Added (EVA) has been removed and will be available as an extended online resource.
»» Chapter 14 provides a comprehensive examination of costs, including the nature and behaviour of costs, direct and indirect
costs, product and period costs, and the allocation of overhead costs using traditional volume and activity-based cost
allocation models. The importance of effective cost reduction strategies to enhancing the financial sustainability of an
organisation, particularly in the resources sector, is identified and serves to reinforce the idea that different costs are used
for different decision-making purposes.
PREFACE xiii
»» Chapter 15 examines the nature and purpose of budgets with a detailed practical illustration of the development of a
master budget and the nature and purpose of projected financial statements.
»» Chapter 16 examines cost-volume-profit analysis, placing greater emphasis on the significance of operating leverage to
decisions about pricing, volume and cost structures as they affect organisational profitability.
»» Chapter 17 examines short-term decision making with and without resource constraints, as well as key management
accounting concepts such as sunk, opportunity and relevant costs.
»» Chapter 18 examines long-term decision making (i.e. capital investment projects). Previously incorporated materials on
financial maths, dealing with uncertainty, sensitivity analysis and post-implementation audits have been removed and are
available as separate online resources.
Additional resources included in the textbook are as follows:
»» Appendix 1 provides an extract from the Annual Report of Woolworths Limited for the year ending 30 June 2018.
Reference is made to the Woolworths financial report throughout the financial accounting section of the 10th edition,
enabling readers to examine the financial report of a real company. Most of the financial accounting chapters include
end-of-chapter questions relating to the report. These questions are intended to encourage student interest in reading
published financial reports and becoming familiar with the contents.
»» Updated recent newspaper articles are used to illustrate the various topics discussed in many chapters. These articles
provide a real-world context for the subject matter discussed, as well as stimulating student interest in accounting as a field
of professional practice.
»» At the end of each chapter we have introduced a new Take it further activity, which affords students the opportunity to
apply critical analysis to highly relevant accounting issues and problems. As critical thinking is an important employability
skill cited in employer surveys across many different careers, providing students with the further opportunity to develop
this significant transferable skill is desirable.
xiv
Guide to the text

As you read this text you will find a number of features in every
chapter to enhance your study of Contemporary Accounting and help
you understand how the theory is applied in the real world.
PART OPENING FEATURES CHAPTER OPENING FEATURES

Meet real professionals in this area in the Identify the key concepts that the chapter will cover
Practitioner Perspectives at the start of each part, with the Learning objectives at the start of each
and gain an insight into how accounting theory relates chapter.
to and informs their day-to-day practice. 3 4
Chapter 1 IntroductIon to accountIng 9

Practitioner Perspective Chapter 1
Lawrie Tremaine
InternalIntroduction
users to accounting
Lawrie Tremaine is a finance executive with over 30 years’ experience in
financial and commercial leadership. Lawrie is currently the CFO at Origin The major internal user of accounting information is the management of an entity. For a small entity this
Energy and was previously the CFO at Woodside Petroleum for six years. is likely to be the owner, or a small number of individuals in the case of a partnership. However, many
Lawrie also worked at Alcoa for 17 years, culminating in five years in Tokyo and businesses are much larger and are owned by numerous individuals or groups of individuals, as is the case
Beijing as Vice President Finance, Alcoa Asia Pacific.
with large entities such as Woolworths, National Australia Bank or Woodside Limited.
A large part of being a Chief the confidence to invest and to cases, the efficiency of decision Often the major investors themselves are owned by others, as is the case with the major financial
Financial Officer for a publicly minimise the cost of the invested making is dependent on the institutions. In such a situation, it is extremely unlikely that the actual owners would or could take an
listed company is informing capital to the company. quality of the underlying active part in the day-to-day running of the entity. Consider the chaos if all the people who bought shares
capital markets, employees and Similarly for national economies financial information. in Woolworths tried to take an active part in the day-to-day running of that business. Instead, these owners
other stakeholders about the to grow, they too need to attract Part 1 of this text will provide
or shareholdersLearning objectives
delegate the authority for the day-to-day running to a group of directors and managers.
financial position and prospects of capital. Capital flows are fluid and you with a broad understanding of
ChapteR 3 SuStainability reporting, ethicS and corporate governance These 79 directors and end
At the managers
of thisare involvedyou
chapter, in the routine
should bedecision-making
able to:
the company. global. Capital will preferentially Financial Statements. You will gain
Rido/Shutterstock.com
Financial information contained move to the capital markets which an appreciation of their purpose activities of theLO
entity
1.1 andexplain
their information
what is meant needs
by are
theequivalent to that
term ‘accounting’
in the Financial Statements, along are fair, well-regulated and function and the knowledge to interpret of the small business owner. These needs are normally met by unpublished
LO 1.2 explain the difference between management accounting, financial
with the Operating
Researchers haveand alsoFinancial well,studying
been actively demonstratedmany by liquid
questions and utilisecorporate
capitalconcerning financial statements.
governance. In reports of various kinds, accounting
usually basedand on tax
information provided through
Review and the results presentation flows. Once again, the availability addition, you will learn about the accounting
A number of studies have attempted tooftest whether companies with goodissues corporate governance perform both the financial accounting system and the management accounting
are critical to keeping capital reliable financial and operating of estimation, assumptions LO 1.3 identify the main users of accounting information, and the main
better in terms
markets, of profitability
both debt and equity, and share market performance.
information is vital to the Many studies and show a positive
judgements relationship
underpinning system. The exact nature of the reports varies from entity to entity. A
purposes for which the information is used
between the ownership of shares by theoperation
fully informed. CEO and of firm
globalperformance
and national and some showstatements
financial mixed results.
and how Studies
this department store may require information about the profitability of
have A company
also shownneedsthat to
it attract
is easier for thecapital to control and influence theisboard’s
CEOmarkets. vital to decisions.
the valid analysis of
For example, LO 1.4
each of its departments, identify
whereasthe limitations
a factory of accounting
producing a small information
number
capitalCPA
in 2017 to grow and create
Australia was value.
embroiled For these reasons,
By in controversy which eventually sawa the
public business.
CEO sacked and the entire LO 1.5is likely
of different products to require
discuss information
the factors about thethe
that influence profitability
choice of accounting systems for
definition, this means the company companies must ensure that Contemporary Accounting: a
Board resign. It was alleged that the CEO wielded too much influence over the board. of each product. different types of organisations
must invest in opportunities published Financial Statements Strategic Approach for Users is
An audit
which committee
provide returns in is excess
a subcommittee of the
and other board offully
disclosures directors
inform and written
is anotherfromimportant
the viewpointcorporate
of a The form ofLO each
1.6 report will also vary
demonstrate according to its
an understanding purpose.
of the If and environmental
regulatory
governance
of the costmechanism.
of capital. TheThe costaudit committee mayprospective
current and be chargedinvestors
with varioususerdutiesandincluding:
not a preparer. It avoids the purpose of the report is to assist management,
considerations it needs
that can influence to showdecisions
accounting
» of
overseeing the appointment
capital is determined by the of and ofrelationship withmatters
all the material the external
which auditordebits and credits and focuses on the past transactions and performance, probably measured against some
LO 1.7 explain what is meant by the term ‘economic consequences’ and relate
» availability
overseeingofthe capital and the of and may
appointment impact their
relationship withinvestment.
the internal auditor the language of accountants predetermined standard. For planning purposes, though, a forecast of what
this to the choice of accounting policies
» relative
reviewing risk of the company
compliance with regulations This means ensuring reporting
and accounting standards and how to use and analyse
is likely to happen in the future is more important. These different forms of reports and ways of grouping
FEATURES WITHIN CHAPTERS

or business opportunity. The is consistent with all regulatory financial statements. LO 1.8
» perceived
reviewingrisk internal control
is in turn procedures
impacted requirements but also going beyond With this being the 10th edition,
information are normally identify
referred tocareer
underopportunities
the heading offor‘management
accountants. accounting’.
» overseeing
by a numberthe company’s
of factors, risk management
including practices
this standard as required to meet the text remains up to date and As stated earlier, management accounting is the focus of the second part of this book. At this stage it is
» the
reviewing
quality ofthethecompany’s
investmentfinancial statements
the objective.and recommending themrelevant, to the incorporating
board for approval. The
the Revised worth briefly summarising the different categories of management accounting reports. To do this we need
thesis,
board leverage,
has to sign the off
reputation As a CFO I am
on the financial statements andalso the user
certify that ConceptualaFramework
of they represent true and fairissued
view of to make some generalisations about the needs of managers and to categorise those needs. In practice, of
Identify core ideas and important points with the
and quality of management and
the company.
country risk, among many others.
the Financial Statements of other
companies. I rely on their financial
by the IASB in 2018 and new
accounting standards. I commend Test your progress through each chapter by answering
course, there is a certain amount of overlap between the categories but we need not concern ourselves with
It is one matter to require the formation of an audit committee and another to specify its role and powers. this at present. The broad categories that we have referred to in terms of the needs of managers can be
Key concept boxes, which provide concise definitions of the Stop and think questions as you read. Solutions are
The availability of reliable, complete information as we consider them as this text to you as providing
Theand
above roles areprepared
consistently extensive and are suppliers,
financial not necessarily
tradingcarried out by all, orvaluable,
counterparties, even some, auditinsight
up-to-date committees.
in the found in Table 1.1.
Anand
important
operating issue for all audit
information is committees is whether
joint venture partnerstheoraudit
even committee use,should have itsand
interpretation own funding
analysis of Rather than getting deeply involved at this stage, let us first look at the other broad area we identified –
accounting concepts.
so vital to provide
it is not reliantinvestors with
upon management. acquisition targets.
If it is reliant upon In each of these for
management financial
funding statements.
it may not be able to provided at the end of the chapter.
the needs of users outside the entity: the external users. We shall be returning to the needs of internal users
effectively conduct its duties. in more detail in Chapter 12.
Key concept 3.5: Audit committee Stop and think 1

An audit committee is a subcommittee of the board of directors and part of the corporate governance of What are the needs of internal users? Can you identify any other needs of internal users? If so, can you
a company. Its roles vary according to the company but, in general, the role of the audit committee is to suggest how these would be met?
ensure that the financial statements have been reliably prepared and verified.
The major thrust for the creation of audit committees is to add credibility to the financial reporting process.
The critical issue relates to how independent the audit committee is, as this influences its effectiveness. Ian
Ramsay (2001) prepared a report for the federal government of Australia following the problems with HIH,
One.Tel and others. In his report, Ramsay made the following comments about audit committees.
» An effective audit committee must not only exist and be independent, it must actually meet and be active.
» Audit committee members must be independent.
» Each member should be financially literate or should, within a reasonable period of time after
appointment, become financially literate.
3.5 Enforcement of corporate governance LO 3.5

Identify the approaches
The response of government to company failures has been somewhat different in the USA and Australia. The to enforcing corporate
governance requirements
USA adopted what is described as a ‘black letter law’ approach through the passing of the Sarbanes-Oxley Act
in australia and the USa.
in 2002. This is an extensive legislative response to corporate failures and has many requirements including:
» the establishment of a Public Company Accounting Oversight Board with responsibility for overseeing
the work of audit firms
» significant new rules relating to auditor independence
Key concept 4.1: Wealth
Wealth is a static measure and represents a stock at a particular point in time. This stock can change
over time. So, the wealth measured at the start of a period will not necessarily be equal to the wealth
measured at the end of the period. The difference between the two is the profit or loss for that period
of time. GUIDE TO THE TEXT xv
Key concept 4.2: Profit
38 part 1 financial accounting
Profit represents the difference between the wealth at the start of the period and at the end of
the period. Unlike wealth, which is essentially a static measure, profit is a measure of flow which
summarises activity over a period. 262 part 1 finAnciAl Accounting
Statement of profit or loss and other
FEATURES
To summarise, we WITHIN
time T , as:
CHAPTERS
have shown that we can express the profit for the first period, from time T to 0 comprehensive income
1 In response to the problem of the non-disclosure of leases, the accounting profession issued accounting
profit for period1 = wealth1 − wealth0
The first difference is in the title of the statement: the fact that Jack is a proprietary limited company must
standards that required the reporting of leases that met certain criteria. In Australia, AASB 1008 Accounting
be stated, and the new title does this. In addition, the statement contains comparative figures for the
Analyse in-depth Case studies that present issues in
for Leases was the initial standard and, with the adoption of IFRSs, this was replaced with AASB 117 Leases.
See step-by-step examples of how to approach
Similarly, we can express the profit for the second period, the period between time T1 and time T2, as: previous year, as well as references to a number of notes. These notes contain greater detail than can be
In 2016 this standard was replaced by AASB 16 Leases. AASB 16 requires a lessee to record a lease as an
profit for period2 = wealth2 − wealth1 shown Accounting
on the face of the statement, and so are an integral part of the analysis of the accounts of a company.
important concepts in the Worked examples. 262 part 1 finAnciAl
We have also established that the profit or loss is derived by measuring the wealth of an individual, or context, encouraging you to integrate and apply the
asset and a liability at the present value of the lease payments for the period the lease is non-cancellable.
This will be discussed in more detail in Chapter 10. We can see that down to ‘Gross profit’ the format is
familiar. However,
studywe 9.1then find that expenses are classified into broad categories. These categories are
an entity, at two points in time. Now let us look in more detail at what we are trying to measure and how
we can measure it.
Case
concepts discussed in the chapter to the workplace.
laid down in AASB 101 Presentation of Financial Statements. The other difference is that the statement is
In response to the problem of the non-disclosure of leases, the accounting profession issued accounting
Each one has a clearly marked Commentary section that
We start by examining the case of an individual because this is simpler and more in line with your own called a statement of profit or loss and other comprehensive income. CompanyWe A discuss statements of financialB
Company
standards that required the reporting of leases that met certain criteria. In Australia, AASB 1008 Accounting
performance in detail in Chapter 6.
experience. The underlying arguments and principles are just the same for an entity but the degree of for Leases was the initial standard and, with the adoption of IFRSs, this$was replaced with AASB 117 Leases. $
complexity increases. Let us suppose that we asked an individual to measure his or her wealth; that is, the It is from
Assets
In 2016
the point at
discusses the case.
which the profit is shown that the real differences arise. The most striking
this standard was replaced by AASB 16 Leases. AASB 16 requires a lessee to record a lease as an
these is that taxation is included in the statement of profit or loss and other comprehensive income. This is
of
sum of possessions less debts. asset and a liability
becauseCurrent assets isatrecognised
the company
the present value of the lease payments for
as a separate entity for legal and
the
100tax
000period the lease is non-cancellable.
purposes and its profits are100 000
liable
Non-current
to company assets the sole trader and the partnership1are
tax. In contrast, 900not
000separate legal or taxable1entities:
400 000
Worked example 4.1: Alexia Case study 9.1
their profits are not taxed as such, but only as they form part of the
Total assets income
2 000 000 of the owner. 1 500 000
Alexia came up with the following list of assets and told us that she owed nothing.
Liabilities Company A Company B
Balance sheet
At the start of the year: T0 At the end of the year: T1 Current liabilities $
500 000 $
500 000
We now look at the balance sheet of a proprietary limited liability company and the differences that arise.
A new Toyota Corolla A one-year-old Toyota Corolla Assets
Non-current liabilities 500 000 –
Scout Kozakiewicz
The format uses the current/non-current classification. AASB 101 allows companies to choose an
One new dress The same dress Total
Currentliabilities
assets 1 000
100 000 500
100 000
alternative format in which assets and liabilities are listed in order of liquidity. Most banks list assets and
Five shirts The same five shirts Net
liabilities inassets
Non-current
order ofassets
liquidity and do not use the current/non-current 1 000
900 000 000 000
classification. We discuss1 balance
400
Four pairs of jeans Five pairs of jeans Shareholders’
sheets Total assets
in detail equity5.
in Chapter 2 000 000 1 500 000
reserves
One surfboard One surfboard (Chapter 2) Amounts As you can
up see,
Liabilities
Paid the top part of the balance sheet is similar to those
capital 500 we
000have encountered before,500 except
000
$400 cash $500 cash set aside out of profits for theRetained
inclusionliabilities
Current of dividends and taxation and the fact that a lot of500
profits the 000
detail is included in the notes500
to the
000
and other surpluses statements. For example, Note 6 would contain details of non-current assets bought and sold during the
which are not designed Non-current liabilities 1 000
500 000 1 000 000 –
While the lists above might accurately reflect the assets Alexia controls and what sheto owes, we cannot
meet any liability,
year, as well as the depreciation to date, and that charged during the year.
easily see whether she is better or worse off at the end of the year than she was at the start. With thecommitment
contingency, The Total
lowerliabilities
part of the balance sheet is somewhat different in1that 000 the
000 owners’ equity is referred 500to000
as
benefit of our own knowledge of the world, we could perhaps say that she must be worseoroff because in value of
diminution share Commentary
Net assets
capital. This might consist of different types, each carrying 1 000 000 voting rights, and so1on.
different 000This
000
assets known
everything is one year older. This, however, assumes that the value of her possessions decreases withtotime.
exist at
wouldThe only be difference
apparent
Shareholders’
only ifbetween
equitywe lookedtheatbalance
the detail contained
sheets in the notes.
of Company A and Similarly,
Companythere may000
B is $500 be different
in
the date of the balance
In many cases that is a reasonable assumption, but clearly there are cases where the value increases. For types non-current
of reserves, assets
such asand
a $500 000 inreserve
revaluation non-current
for liabilities.
revalued Company
assets such asAland
has and
just buildings.
borrowed $500
Jack 000a
has
sheet. Reserves do not Paid up capital 500 000 500 000
example, would our attitudes towards the value of her possessions change if the car wasequal a 1956 FJ
cash.
Holden? from the
revaluation bankand
reserve over a period
more of are
details 10 years. It has
provided inpurchased
the statementa machine thatin
of changes has an estimated life of 10
equity.
Leaving that question aside for a moment, you may have noticed that as soon as we started to discuss the Retained
years with profits
zero residual value. B has just signed a lease agreement 500 000to acquire the use of an identical 500 000
measurement of wealth we also started talking of the more abstract concept of value. machine to that purchased by A. The lease agreement is for 10 years
1 000 000 and cannot be cancelled 1 000by 000
>
2.2 Financial statements
LO 2.2 either party unless B fails to make a lease payment. Given these facts, should the balance sheets 601
Identify the main of A and B be any different? In Company A’s balance sheet, total liabilities to shareholders’ equity
Commentary
characteristics of the
for a public company
is 100 per cent. However, for Company B this ratio is only 50 per cent. This suggests that the lease
financial statements of
a public company and Appendix 1
arranged
non-current
The statements
by Company
The only difference
assets and
presented
B is less
between
for $500
the
Jack 000
risky
Pty Ltd
than sheets
balance that arranged
in non-current
of Company
above are forliabilities.
by Company
a privateCompany
companyAand
A. Is this B
A and Company
hasarejust
a fair conclusion?
is $500
borrowed
simpler
000 in
than$500
those 000for
the role and meaning of
from
a public the bank
company. over a period
Woolworths is aofpublic
10 years. It has and
company purchased a machine
its financial that has
statements an estimated
illustrate the usual life of 10
format
consolidated financial
The asset
with recorded in thevalue.
lessee’s accounts is then lease
amortised or depreciated to the statement of profit or
Extracts from Woolworths Ltd 2018 Annual Report
years zero residual B has just signed
statements. of each statement. Refer to the Woolworths financial areport agreement
in Appendixto1.acquire
Note that the use of an identical
statements are
machine
loss and other to that purchased by
comprehensive A. The
income lease
over theagreement
lease period.is for
The10lease
years and cannot
liability be cancelled
is reported by
as a non-current
headed ‘consolidated’.
either
liability party
see theunless
Toexcept the B fails
full portion
annual to make
report, athe
lease
pleaseinvisit
payable next payment.
12 months Given
whichthese
http://www.woolworthslimited.com.aufacts, should
is reported the
andasfollow thebalance
a currentlinks sheets
to the
liability. Investor Centre
Each lease
Extracts from the Woolworths Ltd 2018 Annual Most major
and then
of A and
companies,
B be to any
Reports. such as Woolworths, operate in a parent–subsidiary (or controlled entity)
different? In Company A’s balance sheet, total liabilities to shareholders’ equity
W
payment incorporates principal and interest components; the interest component is treated as an expense.
relationship forcent.
is 10060per a variety
However, of for
reasons.
CompanyIn fact,
B thissuch
ratio companies often
is only 50 per cent.control
This suggests many that companies.
the leaseFor
The liability is systematically reduced in each period by the principal component of each lease payment.
Report are included in the Appendix, and the example, Woolworths
arranged
Therefore, each
by Company has over
lease payment
Auditor’s
70 risky
B is less wholly
is similar
Independence
owned
than subsidiaries,
that arranged includingA.Cellarmasters
by Company Is this a fair conclusion?
to the loan repayment that Company A would be required to make
Declaration
and Safeway.
margin icon indicates places in the text where reference in Case study 9.1.
The asset recorded in the lessee’s accounts is then amortised or depreciated to the statement of profit or
Deloitte Touche Tohmatsu
is made to these extracts. These will help you become

A.C.N. 74 490 121 060
loss and other comprehensive income over the lease period. The lease liability Grosvenor Placeis reported as a non-current
225 George Street
liability except the portion payable in the next 12 months which is reported as Grosvenor
Sydney NSW 2000
PO Box N250 a currentPlace liability. Each lease
familiar with and appreciate the functioning of a real
Sydney NSW 1217 Australia
payment incorporates principal and interest components; the interest component
The Board of Directors
Woolworths Group Limited
DX 10307SSE is treated as an expense.
Tel: +61 (0) 2 9322 7000
The liability is1Bella

systematically
Woolworths Way
reduced in each period by the principal component
Fax: +61 (0) 2 9322 7001
of each lease payment.
company’s financial report.
Vista www.deloitte.com.au
Therefore, each lease payment is similar to the loan repayment that Company A would be required to make
NSW 2153
in Case study209.1. August 2018
Dear Board Members

Woolworths Group Limited
In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence
to the directors of Woolworths Group Limited.
As lead audit partner for the audit of the financial statements of Woolworths Group Limited for the financial year ended 24 June 2018,
I declare that to the best of my knowledge and belief, there have been no contraventions of:
(i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
128 pArt 1 applicable
(ii) any financial accoUntinG
code of professional conduct in relation to the audit.
Yours sincerely
There are also issues relating to the ways in which a business is perceived and the ways in which
management wishes the business to be perceived. Research has shown that managers, especially the
The Ethics and corporate social responsibility Ethics/CSR DELOITTE TOUCHE TOHMATSU
managers of smaller entities, believe bankers are interested in the amount of assets available as security
for a loan or overdraft. There is therefore a temptation to try to enhance the value of assets, perhaps by
icons in the margin highlight ethical issues and
Sometimes managers revaluing land and buildings, before applying for a loan. Similarly, in a number of cases where a business
might feel the temptation
to try to enhance assets is in trouble, assets have been revalued in order to bolster the image of the business and to promote the
discussion of CSR throughout the text. on a balance sheet when
applying for a loan. There
impression of a sound asset base.
In Australia there are severe penalties for directors of public companies or other entities who attempt
can be severeA penalties
V Griffiths
for this. Partner fraudulently to inflate assets or decrease liabilities. In Chapter 1, we discussed contacts, agency costs and
Chartered Accountants
incentives for managers to select certain accounting policies but this does not include fraudulent behaviour.
In Chapter 3, we discussed the concept of ethics and the costs of unethical and fraudulent behaviour.
Stop and think 4

What are the main limitations of a balance sheet? Does this mean a balance sheet is of no use?
Liability limited by a scheme approved under Professional Standards Legislation.
Member of Deloitte Touche Tohmatsu Limited
Format used in the book

In this chapter we have defined the nature, purpose and content of balance sheets and highlighted some of
the problems with such statements. We have also introduced the wider context in which accounting reports
can be viewed. Before proceeding, it is important to make sure you understand the definitions involved and
can apply them to real problems. As you have seen, a balance sheet can take many forms and in a book of
this nature there is no need to cover all of them. For simplicity, therefore, we use one format throughout
the book − the one shown for Simple Ltd in Worked example 5.3.
The needs of an entity determine the format of the balance sheet. We have chosen a format appropriate
to an introductory text. Before following a different format, ensure that you understand the reasons behind
it and consider whether the information is presented as clearly as it is in the Simple Ltd balance sheet. This
W format is the one previously required under the Corporations Act 2001 and many companies in Australia are
still using it. Turn to Appendix 1 and study the balance sheet of Woolworths Limited and note its format.
The balance sheet is headed with the name of the entity and the date to which the statement relates. As
explained previously, a balance sheet relates to one point in time and that date needs to be clearly stated
in the heading.
Finally, we emphasise again that a balance sheet’s format may differ according to the requirements of the
users or the owners (as illustrated in the previous section by examples for an individual and a partnership).
Other formats are also possible. For example, it is unlikely that a corner store would be part of a public
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated,
company. A more in whole orformat
appropriate in part. WCN
in this case may02-200-202
be to list the current assets less the current liabilities.
If current assets are more than current liabilities, this would indicate that the business should be able to
meet its short-term commitments when they become due.
xvi GUIDE TO THE TEXT
END-OF-CHAPTER FEATURES
At the end of each chapter you will find several tools to help you to review, practise and extend your knowledge of the
key learning objectives. Chapter 1 IntroductIon to accountIng 23
Study tools
Summary
Review your understanding of the key LO 1.1
Explain what is meant by the term ‘accounting’
These definitions and recognition criteria are discussed
in Chapter 2.
24 part 1 FInancIaL accountIng
chapter topics with the Summary. In this chapter we have tried to give an idea of what
accounting is and how it pervades both the internal workings LO 1.5
of organisations and the external commercial environment. It Discuss the factors that influence the choice of
can accounting systems for different
work intypes
large,of organisations
LObe1.8
seen at one level as a functional area of business and administration. Accountants medium and
at an external level as an important determinant of business The
smallfactors that influence
organisations the choice
preparing of an
financial accounting system
statements
Identify career opportunities for accountants include the size
survival through its effect on groups such as shareholders, and all types of of the organisation,
information the type
for internal of business
decision making by
Accountants work in many areas and in many types of activity being undertakenalso
andwork
whether it is simple orentities,
complex,
lenders and employees. managers. Accountants in not-for-profit
organisations. Accountants work in public accounting the structure of all
thelevels
organisation and whether the organisation
which include of government and other areas such
firms providing various services including audit and
LO 1.2 isasfor-profit or not-for-profit.
health, education and social services.
assurance, taxation, an advisory service, and insolvency and A failing business will still fail even though it has an
Explain the difference between management
accounting, financial accounting and tax accounting excellent accounting system; on the other hand, potentially
review questions
Management accounting is prepared for internal users and is
largely unregulated. Financial accounting results in financial
successful businesses have been allowed to go bankrupt
because the accounting system did not give any warning
1 For what
statements purposes
prepared is accounting
for external information
users in accordanceused:
with signs or gave them notice too late to allow management to
GAAP.– Taxbyaccounting
the individual
involves the preparation of tax returns take action to rectify the situation.
where– theby the entity
objective is toorreport
organisation?
the activities of the organisation
2 compliance
in Exampleswith werethe
given of certain
tax rules limitations
so that of accounting
the organisation LO 1.6 Can you give examples of your own?
pays information.
3 minimum
the What areamount
some ofofthetaxcareers for accountants?
to the government. Demonstrate an understanding of the regulatory
4 Why would employees require financial information about anand environmental considerations that can influence
employer?
5LO When
1.3 would customers require financial information about aaccounting provider of adecisions
product or service?
Test your knowledge and consolidate your 6 Do you
Identify
the
7 main
the think
maincompanies
Whatpurposes
would provide
users of accounting
is the impactforofwhich
financial information
information,
the information
technology on accounting?
and
is used
The Corporations
if they Act influences
were not required theCorporations
to by the financial reporting
Act?
of companies and other entities required to register with
learning through the Review questions, There

8 Whatare many
is theusers of accounting
difference betweeninformation
management
they include internal users (managers) and external users
ASIC. Developments in technology and outsourcing certain
andand financial accounting?
procedural bookkeeping tasks have also had a major impact
Take if further activity and Problems Take it further

(shareholders, lenders, suppliers, customers, employees,
government and the general public). We have shown that there
upon the function of accounting.
LO 1.7
for discussion and analysis. is Much has been
no perfect writtenreport
accounting aboutthat
thewill
impact
meetofthe
technology on accounting
needs of all and the potential loss of jobs as a result of automation.
The and
users, 2015 publication
that the needs the Australia’s
of users vary. ForFuture Workforce?,
example, published
in the case by the
Explain Committee
what is meantforby
Economic
the term Development
‘economic of
Australia, is one example. Conduct internet research
of a small business the owner may wish to show a low profit to to see if you can locate
consequences’otherand
more recent
relate examples.
this to the choice of
accounting policies
reduce the potential tax bill, but may need to show a high profit
problems for discussion and analysis
in order to persuade a banker to lend the business money. The economic consequences of accounting policies
can influence a manager’s choice of accounting policies.
Chapter 2 Business structures and financial reporting 67
1LO Refer
1.4 to the 2018 Woolworths financial statements in Appendix Accounting
1. numbers are used in various contracts and this, it
a the
Identify
b
What
Does
is the nameofofaccounting
limitations
Woolworths
the auditinginformation
include shares
firm?
as part of the policies
remuneration forbased on their impact on the numbers in the
employees?
W
is argued, creates incentives for managers to choose accounting
We have shown that accounting will be useful only if it is
used ccorrectly
Required Do these
and shares affect the are
if its limitations determination net profit forcontracts.
understood.ofFinancial Woolworths? Managerial compensation and debt contracts create
2 In your own words, describe what you
accounting is based on past information and only includesthink accounting meansincentives
and for
what managers
accountants to do
favour
in a profit-increasing accounting
small and very large
Calculate
those Bob’sthat
business.
elements share
meetof the
the profits overand
definition next three years if hispolicies.
therecognition Political
optimistic costs
estimate is create incentives for managers of large
correct.
3 aDiscuss
criteria forCalculate Bob’s share
whatliabilities,
assets, information of the
you
income, profitswould
believe
expenses over
andthe
be next three
useful
equity. organisations
to theyears if his most
following toprobable
groups favour profit-decreasing
of reportestimate accounting policies.
users: is correct.
ba Calculate
employeesBob’s share of the profits over the next three years if his pessimistic estimate is correct.
cb If the probabilities are 20 per cent that
investors
the
c regulatorsoptimistic estimate will be correct, 60 per cent that the most probable estimate will be correct, and 20 per
d cent that the
suppliers pessimistic
of goods estimate will be correct, should Bob sell for $80 000?
and services
de Discuss
customers. the other factors Bob should consider when deciding whether or not to sell.
4 If you work for an accounting firm, whose perspective should you take – the firm’s, the client’s, the user’s or your own?
ethics
5 You own and case
run a smallstudy
supermarket. What accounting information do you need, and how often?
6 You are the manager of a small local band which are offered $1000 for a three-hour performance. What financial
Tom(accounting)
has been employed
issues doat New Incentives
you have Ltd for
to consider six months,
before after
accepting or recently
rejectinggraduating
the offer? from university with a degree in
Apply what you have learned to real-world accounting. It is his first job after trying to find employment for six months. Tom’s boss has asked him for a favour in preparing
the profit or loss and statement of comprehensive income for the year. She wants Tom to include in income cash received for
ethical dilemmas In the Ethics case study services to be provided next year. She also wants him to record as an asset cash paid for advertisements that were screened on
television two weeks before the end of the accounting period. Tom is aware that management is to be paid bonuses based on
at the end of every chapter. the net profit for the period.
Discuss
a How the transactions should be reported according to your understanding of the IASB Conceptual Framework 2018
b What Tom should do.
Cool Value Cinemas

Go to the online case and answer the questions related to Chapter 2
Suggested answers to stop and think exercises
1 A company allows funds to be raised from members of the public. Therefore, it provides greater access to funds than a
partnership. However, companies are subject to more rules and regulations and these rules are increasing in the wake of
the collapse of companies like HIH, Enron and WorldCom. Shareholders in a limited company are only liable for the
amount paid on their shares, whereas partners may be jointly and severally liable for all partners’ debts. A company is a
separate legal entity, whereas a partnership is not.
2 This is a difficult and controversial question. In the USA the Sarbanes-Oxley Act 2002 places restrictions on the type
of services, other than auditing, that an audit firm can provide to an audit client. The approach in Australia involves
some restrictions and more disclosure about the fees an auditor derives from the provision of other services to an
audit client. The real issue is auditor independence, and some argue that an auditor can provide other services and
still be independent due to professionalism. Others disagree and, partially as a result of what happened with Enron,
argue for restrictions on the amount and type of other services an auditor can provide to audit clients.
xvii
Guide to the online resources

FOR THE INSTRUCTOR
Cengage is pleased to provide you with a selection of resources that

will help you prepare your lectures and assessments. These teaching
tools are accessible via cengage.com.au/instructors for Australia
or cengage.co.nz/instructors for New Zealand.
MINDTAP
Premium online teaching and learning tools are available on the MindTap platform - the personalised eLearning
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smartphone or tablet. Students can read on the go, complete practice quizzes or participate in interactive real-time
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MindTap for Contemporary Accounting: A Strategic Approach for Users is full of innovative resources to support
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• Contemporary Accounting: A Strategic Approach for Users 10th edition eBook
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• “What do you think?” polling questions
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• Concept Check and Revision Quizzes
• Additional case studies and appendices
• And more
MindTap is a premium purchasable eLearning tool. Contact your Cengage
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SOLUTIONS MANUAL
The Solutions manual provides detailed solutions to the review questions and problems in the text.
TEST BANK
This bank of questions has been developed in conjunction with the text for creating quizzes, tests and exams for your
students. Deliver these through your LMS and in your classroom.
xviii GUIDE TO THE ONLINE RESOURCES
POWERPOINT™ PRESENTATIONS
Use the chapter-by-chapter PowerPoint slides to enhance your lecture presentations and handouts by reinforcing the
key principles of your subject.
ARTWORK FROM THE TEXT

Add the digital files of graphs, tables, pictures and flow charts into your course management system, use them in
student handouts, or copy them into your lecture presentations.
FOR THE STUDENT
MINDTAP FOR CONTEMPORARY ACCOUNTING: A STRATEGIC APPROACH FOR

USERS, 10TH EDITION
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xix
About the authors

Phil Hancock is a Professor of Accounting and the Associate Dean of Teaching and Learning for the Faculty of Arts, Business,
Law and Education at the University of Western Australia. Phil has extensive experience in the regulation of corporate
financial reporting, management and international accounting in both the educational and private sectors. Phil was Chair
of the Accounting Learning Outcomes Working Party, which was responsible for drafting the threshold learning standards
for graduates of bachelor and master degrees in accounting in 2010 and revised in 2016. Phil is a Fellow of CPA Australia
and the Chartered Accountants Australia and New Zealand and the Accounting and Finance Association of Australia and
New Zealand (AFAANZ). In 2013 Phil was awarded the Outstanding Contribution to Accounting and Finance Education by
AFAANZ. He is a previous President of the Western Australian Divisional Council for CPA Australia. As an academic, Phil has
held senior positions at the University of Western Australia, Edith Cowan University and Murdoch University, where he was
an Associate Professor in Accounting.
Peter Robinson has taught at all West Australian universities, spending more than 20 years with each of Curtin University
and the University of Western Australia (UWA). Peter has also held teaching appointments with the University of Melbourne,
the University of New South Wales (UNSW), the University of Texas at Austin and the University of South Africa. Peter
has taught the breadth of the accounting curriculum at undergraduate and post graduate level with strategic management
accounting and public sector financial management being his more recent areas of teaching specialisation. Peter is Academic
Co-ordinator for Work Integrated Learning (WIL) for the Faculty of Arts, Business, Law and Education at the University of
Western Australia. Peter is a Fellow of CPA Australia and a member of the Accounting and Finance Association of Australia
and New Zealand (AFAANZ). Peter has also been an active contributor to the development and delivery of study materials
used by candidates seeking admission to the former Institute of Chartered Accountants in Australia and CPA Australia; to
the professional development of managers and senior executives in the for-profit, not-for-profit and public sectors, both
in Australia and internationally; and has regularly consulted with clients in these sectors upon a wide range of financial
and performance management topics. Apart from Peter’s undergraduate and post graduate studies in accounting with
Curtin, UWA and UNSW, he has a Master of Education (UWA). Over the past five years, Peter has contributed, as reviewer,
presenter of professional development material to high school teachers, and as chief examiner in 2011, 2012 and 2017 and
as independent examiner in 2018 to the development and delivery of Western Australia’s Certificate of Education Accounting
and Finance course of studies for Year 12 senior secondary school students.
Mike Bazley (1931–2013) was the inspiration behind the first edition of this book, which now enters its 10th edition. The
success of this text is a tribute to Mike’s perseverance, as many of the publishers he initially approached were not particularly
interested in his idea of adapting the UK text Accounting in Business Context. However, Thomas Nelson, now Cengage
Learning, finally agreed and in 1991 the first edition was published. Sadly Mike Bazley passed away in February 2013. Mike
was an excellent teacher and highly regarded by the students he taught, an outstanding work colleague, a valued friend and a
true gentleman to all that he met. He is deeply missed by his family and many friends and former colleagues.
Mike Bazley was born in the United Kingdom where, having undertaken national service, he joined a medium-sized
company and worked his way to joint managing director. In 1969, Mike migrated to Australia and began his period of
employment at the University of Western Australia, which eventually led him to taking up a lectureship in 1977 in UWA’s
then Department of Accounting and Finance. He subsequently took up a position with Murdoch University where he was
Dean of Studies and Chair of the School of Commerce and Senior Lecturer. In addition to his academic work, he also consulted
for the West Australian state government, conducted public seminars and contributed to various academic and professional
publications. Mike was a Fellow of CPA Australia. Having retired in 1995, Mike still continued to take great interest in the
development of this text.
xx
Acknowledgements
We acknowledge our debt to Aidan Berry and Robin Jarvis, the authors of Accounting in Business Context published in the UK.
This book was originally based on the British text, although the two books are now significantly different. Responsibility for
the opinions expressed and for any errors in this book is entirely our own.
Phil Hancock
Faculty of Arts, Business Law and Education
The University of Western Australia
Peter Robinson
Faculty of Arts, Business Law and Education
The University of Western Australia
Mike Bazley
Cengage Learning would also like to thank the following reviewers for their incisive and helpful feedback:
»» Asit Bhattacharyya (University of Newcastle)
»» Md. Borhan Uddin Bhuiyan (Massey University) Sudipta Bose (University of Newcastle)
»» Robyn Davidson (University of Adelaide)
»» Peter Graham (University of Canberra)
»» Nicole Ibbett (Western Sydney University)
»» Ian Maclean (University of Canberra)
»» Heinrich Oosthuizen (University of Tasmania)
»» Dr Graham Ray (Southern Cross University)
»» Erwei (David) Xiang (Edith Cowan University)
Financial Accounting
Part
1
1 Introduction to accounting
2 Business structures and financial reporting
3 Sustainability reporting, ethics and corporate

governance
4 Different measurement methods
5 Presentation of financial position and the

worksheet
6 Presentation of financial performance and the

worksheet
7 Presentation of cash flows
8 Accounting for selected assets
9 Accounting for selected liabilities and sources

of financing
10 Analysis of financial statements
11 From the worksheet to debits and credits
3
Practitioner Perspective
Lawrie Tremaine
Lawrie Tremaine is a finance executive with over 30 years’ experience in
financial and commercial leadership. Lawrie is currently the CFO at Origin
Energy and was previously the CFO at Woodside Petroleum for six years.
Lawrie also worked at Alcoa for 17 years, culminating in five years in Tokyo and
Beijing as Vice President Finance, Alcoa Asia Pacific.
A large part of being a Chief the confidence to invest and to cases, the efficiency of decision
Financial Officer for a publicly minimise the cost of the invested making is dependent on the
listed company is informing capital to the company. quality of the underlying
capital markets, employees and Similarly for national economies financial information.
other stakeholders about the to grow, they too need to attract Part 1 of this text will provide
financial position and prospects of capital. Capital flows are fluid and you with a broad understanding of
the company. global. Capital will preferentially Financial Statements. You will gain
Financial information contained move to the capital markets which an appreciation of their purpose
in the Financial Statements, along are fair, well-regulated and function and the knowledge to interpret
with the Operating and Financial well, demonstrated by liquid capital and utilise financial statements. In
Review and the results presentation flows. Once again, the availability addition, you will learn about the
are critical to keeping capital of reliable financial and operating issues of estimation, assumptions
markets, both debt and equity, information is vital to the and judgements underpinning
fully informed. operation of global and national financial statements and how this
A company needs to attract capital markets. is vital to the valid analysis of
capital to grow and create value. By For these reasons, public a business.
definition, this means the company companies must ensure that Contemporary Accounting: a
must invest in opportunities published Financial Statements Strategic Approach for Users is
which provide returns in excess and other disclosures fully inform written from the viewpoint of a
of the cost of capital. The cost current and prospective investors user and not a preparer. It avoids
of capital is determined by the of all the material matters which debits and credits and focuses on
availability of capital and the may impact their investment. the language of accountants
relative risk of the company This means ensuring reporting and how to use and analyse
or business opportunity. The is consistent with all regulatory financial statements.
perceived risk is in turn impacted requirements but also going beyond With this being the 10th edition,
by a number of factors, including this standard as required to meet the text remains up to date and
the quality of the investment the objective. relevant, incorporating the Revised
thesis, leverage, the reputation As a CFO I am also the user of Conceptual Framework issued
and quality of management and the Financial Statements of other by the IASB in 2018 and new
country risk, among many others. companies. I rely on their financial accounting standards. I commend
The availability of reliable, complete information as we consider them as this text to you as providing
and consistently prepared financial suppliers, trading counterparties, valuable, up-to-date insight in the
and operating information is joint venture partners or even use, interpretation and analysis of
vital to provide investors with acquisition targets. In each of these financial statements.
4
Chapter 1
Introduction to accounting
Learning objectives
At the end of this chapter, you should be able to:
LO 1.1 explain what is meant by the term ‘accounting’
LO 1.2 explain the difference between management accounting, financial
accounting and tax accounting
LO 1.3 identify the main users of accounting information, and the main
purposes for which the information is used
LO 1.4 identify the limitations of accounting information
LO 1.5 discuss the factors that influence the choice of accounting systems for
different types of organisations
LO 1.6 demonstrate an understanding of the regulatory and environmental
considerations that can influence accounting decisions
LO 1.7 explain what is meant by the term ‘economic consequences’ and relate
this to the choice of accounting policies
LO 1.8 identify career opportunities for accountants.
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As a class, these people are sadly put upon. They are criticised not only
for their own shortcomings, but for those of all their irresponsible fellow
citizens. If anything goes wrong they are sure to hear about it, for they
listen to sermons, and read the newspapers, and attend meetings. No
reformer can be truly eloquent who does not point his finger at his hearer,
and say, “Thou art the man!” Now, unfortunately, the real delinquents are
usually absent, and the right-minded, conscientious hearer of the word,
who is doing all he can for social regeneration, even to the verge of
nervous prostration, has to act as substitute. He has been so often
assured that he is the guilty man that, by and by, he comes to believe it.
He walks to church with his family only to be told that it is his fault, and
the fault of those like him, that other people have gone off in their
automobiles. Perhaps, if he had walked differently, he might have made
church-going more attractive to them. The evils of intemperance are laid
at his door. It is not worth while to blame the drunkard or the saloon-
keeper; they are not within ear-shot. As to pauperism and vice, every one
knows that they arise from social conditions; and pray who is responsible
for these conditions unless it be the meek man who sits in the pew,—at
least, he is the only one who can readily be made to assume the
responsibility.
There is something wholesome in all this if it be not overdone. I, myself,
like to have my fling at the man who is trying to do his duty, and to twit him
occasionally for not doing more. It keeps him from self-righteousness. But
sometimes it is carried too far, and the poor man staggers under a load of
vicarious guilt.
I especially hate to see the man who is trying to do his duty given over to
the censures of those who do not try. There is something very harsh in the
judgment of the ne’er-do-well upon his well-to-do brother. His attitude is
the extreme of phariseeism, as he contrasts his own generous and care-
free nature with the pickayunish prudence which he scorns. To be sure,
his brother in the end pays his debts for him, but he does it with a narrow
scrutiny which robs the act of its natural charm. His acts of helpfulness
are marred by a tendency to didacticism. All these things are laid up
against him.
But allowance should be made for the difference in condition. Ne’er-do-
wellness is an expansive state. There are no natural limits to it. It
develops broad views, and its peculiar virtues have a free field. It is
different with well-to-doness, which is a precarious condition with a very
narrow margin of safety. The ne’er-do-well can afford to be generous,
seeing that his generosity costs him nothing. He is free from all belittling
calculations necessary to those who are compelled to adjust means to
ends,—he is indifferent to ends and he has no means.
When the morally responsible person finds himself too much put upon, I
would grant him a generous indulgence. After all, I would tell him, the
prudential virtues are not so bad. It is a good deal of an achievement to
make both ends meet. I am not disposed to be too hard on those who
accomplish this, even though I may think a little fullness in their moral
garments might be more becoming.
I should also make provision for the pardon of those good people who are
harshly judged because their virtues are unseasonable. But their case
involves delicate considerations that can best be treated in another
chapter.
UNSEASONABLE VIRTUES
T HERE are certain philosophers who have fallen into the habit of
speaking slightingly of Time and Space. Time, they say, is only a poor
concept of ours corresponding to no ultimate reality, and Space is little
better. They are merely mental receptacles into which we put our
sensations. We are assured that could we get at the right point of view we
should see that real existence is timeless. Of course we cannot get at the
right point of view, but that does not matter.
It is easy to understand how philosophers can talk in that way, for
familiarity with great subjects breeds contempt; but we of the laity cannot
dismiss either Time or Space so cavalierly. Having once acquired the
time-habit, it is difficult to see how we could live without it. We are
accustomed to use the minutes and hours as stepping-stones, and we
pick our way from one to another. If it were not for them, we should find
ourselves at once beyond our depth. It is the succession of events which
makes them interesting. There is a delightful transitoriness about
everything, and yet the sense that there is more where it all comes from.
To the unsophisticated mind Eternity is not the negation of Time; it is
having all the time one wants. And why may not the unsophisticated mind
be as nearly right in such matters as any other?
In a timeless existence there would be no distinction between now and
then, before and after. Yesterdays and to-days would be merged in one
featureless Forever. When we met one another it would be impertinent to
ask, “How do you do?” The chilling answer would be: “I do not do; I am.”
There would be nothing more to say to one who had reduced his being to
such bare metaphysical first principles.
I much prefer living in Time, where there are circumstances and incidents
to give variety to existence. There is a dramatic instinct in all of us that
must be satisfied. We watch with keen interest for what is coming next.
We would rather have long waits than to have no shifting of the scenes,
and all the actors on the stage at once, doing nothing.
An open-minded editor prints the following question from an anxious
reader in regard to a serial story appearing in his paper: “Does it make
any difference in reading the serial whether I begin with Saturday’s
chapter and read backward toward Monday, or should the tale be read as
the chapters appear?”
The editor assures his subscriber that the story is of such uniform
excellence that it would read well in either direction. In practical affairs our
dramatic instinct will not allow us this latitude. We insist upon certain
sequences. There is an expectancy that one thing will lead up to another.
We do not take kindly to an anti-climax or to an anachronism. The Hebrew
sage declares, “He hath made everything beautiful in his time.” That is in
the right time, but alas for the beautiful thing that falls upon the wrong
time! It is bewitched beyond all recognition by the old necromancer who
has power to make “ancient good uncouth.”
It is just here that charity requires that we should discriminate. There is a
situation that demands the services of a kind-hearted indulgencer. Ethics
has to do with two kinds of offenses: one is against the eternal and
unchanging standards of right and wrong, and the other against the
perpetually varying conditions of the passing day. We are continually
confusing the two. We visit upon the ancient uncouth good which comes
honestly stumbling on its belated journey toward the perfect, all the
condemnation that properly belongs to willful evil. It is lucky if it gets off so
easily as that, for we are likely to add the pains and penalties which
belong to hypocritical pretense. As for a premature kind of goodness
coming before there is time properly to classify it, that must expect
martyrdom. Something of the old feeling about strangers still survives in
us. We think it safer to treat the stranger as an enemy. If he survives our
attacks we may make friends with him.
Those good people who, in their devotion to their own ideals, have
ignored all considerations of timeliness, have usually passed through sore
tribulations. They have been the victims of cruel misunderstandings.
Such, for example, was Saint Cerbonius. Cerbonius is one of the October
saints. October is a good month for saints. The ecclesiastical calendar
gives us a sense of spiritual mellowness and fruitfulness. The virtues
celebrated are without the acidity which belongs to some other seasons:
witness Saint Francis of Assisi, Saint Teresa, Saint Luke, the beloved
physician, Saint John Capistran, of whom it is written, “he had a singular
talent for reconciling inveterate enemies and inducing them to love one
another.” Cerbonius has a modest place in this autumnal brotherhood;
indeed, in some Lives of the Saints, he is not even mentioned, and yet he
had the true October spirit. Nevertheless, his good was evil spoken of,
and he came near to excommunication, and all because of his divergence
from popular custom in the matter of time.
It seems that he lived towards the end of the sixth century, and that he
was bishop of Piombino. Very soon a great scandal arose, for it was
declared that the bishop was neglecting his duties. At the accustomed
hour the citizens came to the cathedral for their devotions, only to find the
chancel devoid of clergy. Cerbonius and his priests were at that moment
comfortably seated at breakfast. Each succeeding morning witnessed the
same scene. The bishop was evidently an infidel scoffing at the rites of
religion. Appeal was made to Rome, and legates were appointed who
confirmed the astounding rumors. At last Cerbonius went to Rome to
plead his cause; but only by a special miracle was his character cleared.
The miracle induced the authorities to look into the matter more carefully,
and it was found that Cerbonius, instead of neglecting his duties, had
been carried away by holy zeal. While the people of Piombino were still in
their beds, Cerbonius and his clergy would be celebrating mass. As for
breakfast, that was quite late in the day.
It is easy to be wise after the event, and now that the matter has been
cleared up it is evident that all the religion was not on one side. Taking a
large view of the subject, we see that in the course of the twenty-four
hours the bishop spent as much time in the church as the most
scrupulous parishioner could ask. But it was just this large view that they
were unwilling to take. With them it was now or never. They judged his
character by the cross-section which they took at one particular hour.
I suppose that, had I lived in Piombino, I should have been a moderate
anti-Cerbonian. Cerbonius was in error, but not in mortal sin. He was
guilty of a heresy that disturbed the peace of the church,—that of early
rising. So long as early rising is held only as a creed for substance of
doctrine and set forth as a counsel of perfection, it may be tolerated, but
when the creed becomes a deed it awakens fanatical opposition. This
breeds schism. A person cannot be popular who gets the reputation of
being a human alarm clock. The primitive instinct in regard to an alarm
clock is to stop it. If Cerbonius had possessed the tact necessary to a
man in his position, he would not only have done his duty, but he would
have done it at the time most convenient to the greatest number. His
virtue was unseasonable; but between a man of unseasonable virtue and
an abandoned character who has no virtue at all, there is a great
difference. It is just this difference which the majority of people will not
see. They make no distinction between one who deliberately offends
against the eternal verities and one who accidentally tramples upon a
temporary verity that he didn’t know was there.
Most of our quarrels do not concern absolute right and wrong; they arise
from disputes about the time of day. Two persons may have the same
qualities and convictions and yet never agree. An ironical fate sets them
at cross purposes and they never meet without irritating contradictions. It
is all because their moods do not synchronize. One is always a little too
slow, the other a little too fast. When one is in fine fettle the other is just
beginning to get tired. They are equally serious, but never on the same
occasion, and so each accuses the other of heartless frivolity. They have
an equal appreciation of a pleasantry, but they never see it at the same
instant. One gives it an uproarious welcome when the other is speeding
the parting guest.
Two quick-tempered people may live together very comfortably so long as
they lose their tempers simultaneously; they are then ready to make up at
the same time. They get on like an automobile, by a series of small
explosions accurately timed. But when a quick-tempered person is
unequally yoked with one who is slow to wrath, the case is difficult. The
slowness causes continual apprehension. The fuse burns so deliberately
that it seems to have gone out and then the explosion comes. In such
cases there can be no adequate explanation. The offender would
apologize if he could remember what the offense was, and he doesn’t
dare to ask.
Said one theologian to another: “The difference between us is that your
God is my Devil.” This involved more than the mere matter of
nomenclature. It upset the spiritual time-table and caused disastrous
collisions. When one good man set forth valiantly to fight the Devil, the
other would charge him with disturbing his worship.
The fact that one man’s work is another man’s play is equally fruitful in
misunderstandings. The proverbial irritability of the literary and artistic
tribes arises in part from this cause. They feel that they are never taken
seriously. When we go to a good play we find it so easy to be amused that
we do not realize what hard work it is for those whose business it is to be
amusing. The better the work, the more effortless it seems to us. On a
summer afternoon we take up a novel in a mood which to the
conscientious novelist seems sacrilege. He has thrown all the
earnestness of his nature into it, and he wants his message to be
received in the same spirit. We have earnestness of nature too, but we
have expended it in other directions. Having finished our work, we take
our rest by reading his. It is a pleasant way to pass the time. This enrages
the novelist, and he writes essays to rebuke us. He calls us Philistines
and other hard names, and says that we are incapable of appreciating
literary art.
But what is our offense? We have used his work for our own purpose,
which was to rest our minds. We got out of it what at the time we needed.
Does he not act in very much the same way? Did we not see him at the
town-meeting when a very serious question concerning the management
of the town poor-house was to be settled? It was a time when every good
citizen should have shown his interest by speaking an earnest word.
Unmindful of all this, he sat through the meeting with the air of an amused
outsider. He paid little attention to the weighty arguments of the
selectmen, but noted down all their slips in grammar. He confessed
unblushingly that he attended the meeting simply to get a little local color.
What is to become of the country when a tax-payer will take the duties of
citizenship so lightly?
These recriminations go on endlessly. Because we do not see certain
qualities in action, we deny their existence. The owl has a reputation for
sedentary habits and unpractical wisdom, simply because he keeps
different business hours from those to which we are accustomed. Could
we look in on him during the rush time, we would find him a hustling
fellow. He has no time to waste on unremunerative meditation. This is his
busy night. How ridiculous is the sleepiness of the greater part of the
animal world! There is the lark nodding for hours on his perch. They say
he never really wakes up—at least, nobody has seen him awake.
* * * * * *
There is a pedagogical theory according to which each individual in his
early life repeats quite accurately the history of mankind up to date. He
passes through all the successive stages in the history of the race, with a
few extra flourishes now and then to indicate the surprises which the
future may have in store for us. The history of civilization becomes, for the
initiated, the rehearsal of the intensely interesting drama of the nursery
and the schoolroom. It lacks the delicacy of the finished performance, but
it presents the argument clearly enough and suggests the necessary
stage business. The young lady who attempts to guide a group of
reluctant young cave-dwellers from one period in human culture to
another is not surprised at any of their tantrums. Her only anxiety is lest
some form of barbarism appropriate to their condition may have been
skipped. Her chief function is like that of the chorus in the Greek tragedy,
to explain to the audience each dramatic situation as it unfolds.
I should not like to take the responsibility of running such an excellent
theory into the ground, yet it does seem to me that it might be carried
further. Granted that childhood is innocent savagery and that adolescence
is gloriously barbaric, what is the matter with mature life? Does it not have
any remnants of primitiveness? Does not Tennyson write of “the gray
barbarian”?
The transitions from primitive savagery to civilization which took the race
centuries to accomplish are repeated by the individual, not once but many
times. After we get the knack of it, we can run over the alphabet of human
progress backwards as well as forwards.
Exit Troglodyte. Enter Philosopher discoursing on disinterested virtue.
Reënter Troglodyte. Such dramatic transformations may be expected by
merely changing the subject of the conversation.
I remember sitting, one Sunday afternoon, on a vine-covered piazza
reading to a thoughtful and irascible friend. The book was Martineau’s
“Endeavors after the Christian Life.” In the middle of the second discourse
my friend’s dog rushed into the street to attack the dog of a passer-by. It
was one of those sudden and unpredictable antipathies to which the
members of the canine race are subject. My friend, instead of preserving
a dignified neutrality, rushed into the fray in the spirit of offensive
partisanship, and instantly became involved in an altercation with the
gentleman on the sidewalk. Canes were brandished, fierce threats were
exchanged, and only by the greatest efforts were the Homeric heroes
separated. Returning to his chair, my friend handed me the book, saying,
“Now let us go on with our religion.” The religion went on as placidly as
aforetime. There was no sense of confusion. The wrath of Achilles did not
disturb the calm spirituality of Martineau. Each held the centre of the
stage for his own moment, and there was no troublesome attempt to
harmonize them. Why should there be? Martineau was not talking about
dogs.
I know no greater luxury than that of thinking well of my fellow-men. It is a
luxury which a person in narrow circumstances, who is compelled to live
within the limits of strict veracity, sometimes feels to be beyond his
means. Yet I think it no harm to indulge in a little extravagance in this
direction. The best device for seeing all sorts and conditions of men to
advantage is to arrange them in their proper chronological order.
For years it was the custom to speak disparagingly of the “poor whites” of
our Southern mountains. Shut off from the main currents of modern life,
they seemed unpardonably unprogressive. They were treated as mere
degenerates. At last, however, a keener and kindlier observer hit upon a
happy phrase. These isolated mountaineers, he said, have retained the
characteristic habits of a former generation. They are our “contemporary
ancestors.” Instantly everything was put in a more favorable light; for we
all are disposed to see the good points in our ancestors. After all, the
whole offense with which these mountain people are charged is that they
are behind the times. In our bona-fide contemporaries this is a grave fault,
but in our ancestors it is pardonable. We do not expect them to live up to
our standards, and so we give them credit for living up to their own.
In this case we agree to consider fifty miles of mountain roads, if they be
sufficiently bad, as the equivalent of rather more than a hundred years of
time. Behind the barrier the twentieth century does not yet exist. Many
things may still be winked at for which the later generation may be sternly
called to repentance. Then, too, the end of the eighteenth century has
some good points of its own. These contemporary ancestors of ours are
of good old English stock, and we begin to look upon them with a good
deal of family pride.
But when we once accept poor roads as the equivalent of the passage of
time, putting people at the other end into another generation, there is no
knowing what we may come to in our charitable interpretations. For there
are other equally effective non-conductors of thought. By the simple
device of not knowing how to read, a man cuts off some thousands of
culture years and saves himself from no end of intellectual distractions.
He becomes the contemporary of “earth’s vigorous, primitive sons.” If to
his illiteracy he adds native talent and imagination, there is a chance for
him to make for himself some of those fine old discoveries which we lose
because we got the answer from some blabbing book before we had
come to the point of asking the question. Of course the danger is that if he
has native talent and imagination he will learn to read, and it must be
confessed that for this reason we do not get such a high order of illiterates
as formerly.
I once made the acquaintance of an ancient Philosopher. His talents were
for cosmogony, and his equipment would have been deemed ample in the
days when cosmogony was the fashion. He had meditated much on the
genesis of things and had read nothing, so that his speculations were
uncontaminated by the investigations of others. He was just the man to
construct a perfectly simple and logical theory of the universe, and he did
it. His universe was not like that of which our sciences give us imperfect
glimpses, but it was very satisfactory to him. He was very fair in dealing
with facts; he explained all that could be explained by his system. As the
only criterion of a fact which he recognized was that it agreed with his
system, there was none left over to trouble him. His manner of thought
was so foreign to that of our time that his intellectual ability was not widely
appreciated; yet had his birth not been so long delayed, he might have
been the founder of a school and have had books written about him. For
so far as I could learn, his views of the four elements of earth, air, fire, and
water, were very much like those of the early Greek physicists. Had I
taken him as a fellow American, I should have dismissed him as not up to
date; but considering him in the light of an ancient sage, I found much in
him to admire.
Once upon the coast of Maine I came upon a huge wooden cylinder.
Within it was a smaller one, and in the centre, seated upon a swinging
platform, was the owner of the curious contrivance. He was a mild-eyed,
pleasant-spoken man, whom it was a pleasure to meet. He explained that
this was “The Amphibious Vehicle,” and that it would move equally well on
land or sea.
“You know,” said he, “what the prophet Ezekiel said about the ‘wheel in
the middle of a wheel’?”
“Yes,” I answered.
“Well, this is it.”
There was something convincing in this matter-of-fact statement. The
“wheel within a wheel” had been to me little more than a figure of speech,
but here it was made out of good pine lumber, with a plank in the middle
for the living creature to sit on. It was as if I had fallen through a trap door
into another age. Here was a literal-minded contemporary of Ezekiel,
who, having heard of the wheel within a wheel, had proceeded at once to
make one. I ascended into the precarious seat, and we conversed upon
the spiritual and temporal possibilities of the vehicle. I found that on the
scriptural argument he was clearly ahead of me, being able to quote
chapter and verse with precision, while my references were rather vague.
In the field of mechanics he was also my superior. I could not have made
the vehicle, having not yet emerged beyond the stone age. As we talked I
forgot that we were at the mouth of the Penobscot. We were on the “river
of Chebar,” and there was no knowing what might happen.
* * * * * *
The belated philosophers and inventors, who think the thoughts of the
ancient worthies after them, live peaceful lives. What matters it that they
are separated by a millennium or two from the society in which they were
fitted to shine? They are self-sufficing, and there are few who care to
contradict them. It is not so with one who is morally belated. There is
something pathetic in the condition of one who cherishes the ambition of
being a good man, but who has not informed himself of the present “state
of the art.”
Now and then an ethical revolution takes place. New ideals are
proclaimed, and in their light all things are judged. The public conscience
becomes sensitive in regard to courses of conduct which heretofore had
been unchallenged. Every such advance involves a waste in established
reputations. There are always excellent men who are not aware of what
has been going on. They keep on conforming scrupulously to the old
standards, being good in the familiar ways that were commended in their
youth. After a time they find themselves in an alien world, and in that
world they are no longer counted among the best people. The tides of
moral enthusiasm are all against them. The good man feels his solid
ground of goodness slipping away from under him. Time has played false
with his moral conventionalities. He is like a polar bear on a fast-
diminishing iceberg, growling at the Gulf Stream.
When a great evil has been recognized by the world, there is a revision of
all our judgments. A new principle of classification is introduced, by which
we differentiate the goats from the sheep. It is hard after that to revive the
old admirations. The temperance agitation of the last century has not
abolished drunkenness, but it has made the conception of a pious,
respectable drunkard seem grotesque. It has also reduced the business
of liquor-selling to a decidedly lower place in the esteem of the
community. When we read to-day of the horrors of the slave trade, we
reconstruct in our imagination the character of the slave trader,—and a
brutal wretch he is. But in his day the Guinea captain held his own with
the best. He was a good husband and father, a kind neighbor, a generous
benefactor. President Ezra Stiles of Yale College, in his “Literary Diary,”
describes such a beautiful character. It was when Dr. Stiles was yet a
parish minister in Newport that one of his parishioners died, of whom he
wrote: “God had blessed him with a good Estate and he and his Family
have been eminent for Hospitality to all and Charity to the poor and
afflicted. At his death he recommended Religion to his Children and told
them that the world was nothing. The only external blemish on his
Character was that he was a little addicted to the marvelous in stories of
what he had seen in his Voyages and Travels. But in his Dealings he was
punctual, upright, and honest, and (except as to the Flie in the Oynment,
the disposition to tell marvelous Stories of Dangers, Travels, &c.), in all
other Things he was of a sober and good moral character, respected and
beloved of all, so as to be almost without enemies. He was forward in all
the concerns of the Church and Congregation, consulting its Benefit and
peaceably falling in with the general sense without exciting quarrels,
parties, &c., and even when he differed from his Brethren he so differed
from them that they loved him amidst the differences. He was a
peaceable man and promoted Peace.”
It was in 1773 that this good man died in the odor of sanctity. It is quite
incidentally that we learn that “he was for many years a Guinea captain,
and had no doubt of the slave trade.” His pastor suggests that he might
have chosen another business than that of “buying and selling the human
species.” Still, in 1773, this did not constitute an offense serious enough
to be termed a fly in the ointment. In 1785, Dr. Stiles speaks of the slave
trade as “a most iniquitous trade in the souls of men.” Much may happen
in a dozen years in changing one’s ideas of moral values. In another
generation the civilized world was agreed that the slave trade was piracy.
After that there were no fine Christian characters among the slave
traders.
There is evidence that at the present time there is an awakening of the
social conscience that threatens as great a revolution as that which came
with the abolition of the slave trade. Business methods which have been
looked upon as consistent with high moral character are being
condemned as “the sum of all villainies.” The condemnation is not yet
universal, and there are still those who are not conscious that anything
has happened. The Christian monopolist, ruthlessly crushing out his
competitors and using every trick known to the trade, has no more doubts
as to the rightfulness of his proceedings than had the good Newport
captain in regard to the slave trade.
It is a good time to have his obituary written. His contemporaries
appreciate his excellent private virtues, and have been long accustomed
to look leniently on his public wrong-doing. The new generation, having
agreed to call his methods robbery, may find the obituary eulogies
amusing.
AN HOUR WITH OUR PREJUDICES
W E may compare the human mind to a city. It has its streets, its
places of business and amusement, its citizens of every degree.
When one person is introduced to another it is as if the warder drew back
the bolts, and the gates were thrown open. If he comes well
recommended he is given the freedom of the city. In the exercise of this
freedom, however, the stranger should show due caution.
There is usually a new quarter. Here the streets are well lighted and
policed, the crowds are cosmopolitan, and the tourist who wanders about
looking at the shop windows is sure of a civil reply to his questions. There
is no danger of highway robbers, though of course one may be taken in
by confidence men. But if he be of an inquiring mind and a lover of the
picturesque, he is not satisfied with this. After all, the new quarters are
very much alike, and one tires after a while of shop windows. The visitor
longs to explore the old town, with its winding ways, with its overhanging
houses, and its mild suggestions of decay.
But in the mental city the lover of the picturesque must remember that he
carries his life in his hands. It is not safe to say to a casual acquaintance,
“Now I have a fair idea of that part of your mind which is like that of any
other decently educated person. I have seen all the spick and span show
places, and admired all the modern improvements. Where are your ruins?
I should like to poke around a while in the more dilapidated section of
your intellect.”
Ah, but that is the Forbidden City. It is inhabited, not by orderly citizens,
under the rule of Right Reason, but by a lawless crowd known as the
Prejudices. They are of all sorts and conditions. Some are of aristocratic
lineage. They come from a long line of hereditary chiefs, who, as their
henchmen have deserted them, have recreated into their crumbling
strongholds. Some are bold, roistering blades who will not stand a
question; dangerous fellows, these, to meet in the dark! The majority,
perhaps, are harmless folk, against whom the worst that can be said is
that they have a knack of living without visible means of support.
A knowledge of human nature, as distinguished from a knowledge of
moral philosophy, is a perception of the important part played by
instinctive likes and dislikes, by perverse antipathies, by odd ends of
thought, by conclusions which have got hopelessly detached from their
premises—if they ever had any. The formal philosopher, judging others by
himself, works on the assumption that man is naturally a reasoning
animal, whereas experience teaches that the craving for the reasonable is
an acquired taste.
Of course we all have reasons for our opinions,—plenty of them! But in
the majority of cases they stand not as antecedents, but as consequents.
There is a reversal of the rational order like that involved in Dr. Hale’s
pleasant conceit of the young people who adopted a grandmother. In
spite of what intellectual persons say, I do not see how we can get along
without prejudices. A prejudice is defined as “an opinion or decision
formed without due examination of the facts or arguments which are
necessary to a just and impartial determination.” Now, it takes a good deal
of time to make a due examination of facts and arguments, even in regard
to a small matter. In the meantime our minds would be sadly unfurnished.
If we are to make a fair show in the world, we must get our mental
furniture when we set up housekeeping, and pay for it on the installment
plan.
Instead of taking a pharisaic attitude toward our neighbor’s prejudices, it
is better to cultivate a wise tolerance, knowing that human intercourse is
dependent on the art of making allowances. This is consistent with perfect
honesty. There is always something to admire if the critic is sufficiently
discriminating. When you are shown a bit of picturesque dilapidation, it is
quite possible to enjoy it. Said the Hebrew sage, “I went by the field of the
slothful, and by the vineyard of the man void of understanding; and, lo, it
was all grown over with thorns, and nettles had covered the face thereof,
and the stone wall thereof was broken down. Then I saw, and considered
it well: I looked upon it, and received instruction.”
His point of view was that of a moralist. Had he also been a bit of an
artist, the sight of the old wall with its tangle of flowering briers would have
had still further interest.
When one’s intellectually slothful neighbor points with pride to portions of
his untilled fields, we must not be too hard upon him. We also have
patches of our own that are more picturesque than useful. Even if we
ourselves are diligent husbandmen, making ceaseless war on weeds and
vermin, there are times of relenting. Have you never felt a tenderness
when the ploughshare of criticism turned up a prejudice of your own? You
had no heart to harm the
Wee sleekit, cow’rin’, tim’rous beastie.
It could not give a good account of itself. It had been so long snugly
ensconced that it blinked helplessly in the garish light. Its
wee-bit housie, too, in ruin!

Its silly wa’s the win’s are strewin’!
And naething now to big a new ane.
You would have been very angry if any one had trampled upon it.
This is the peculiarity about a prejudice. It is very appealing to the person
who holds it. A man is seldom offended by an attack on his reasoned
judgments. They are supported by evidence and can shift for themselves.
Not so with a prejudice. It belongs not to the universal order; it is his very
own. All the chivalry of his nature is enlisted in its behalf. He is, perhaps,
its only defense against the facts of an unfriendly world.
We cannot get along without making allowances for these idiosyncrasies
of judgment. Conversation is impossible where each person insists on
going back, all the time, to first principles, and testing everything by an
absolute standard. With a person who is incapable of changing his point
of view we cannot converse; we can only listen and protest. We are in the
position of one who, conscious of the justice of his cause, attempts to
carry on a discussion over the telephone with “Central.” He only hears an
inhuman buzzing sound indicating that the line is busy. There is nothing to
do but to “hang up the ’phone.”
When a disputed question is introduced, one may determine the true
conversationalist by applying the method of Solomon. Let it be proposed
to divide the subject so that each may have his own. Your eager disputant
will be satisfied, your genial talker is aghast at the proposition, for he
realizes that it would kill the conversation. Instead of holding his own, he
awaits developments. He is in a mood which can be satisfied with
something less than a final judgment. It is not necessary that his friend’s
opinions should be just; it is sufficient that they are characteristic.
Whatever turn the talk may take, he preserves an easy temper. He is a
heresy-hunter,—not of the grim kind that goes hunting with a gun; he
carries only a camera. If he stirs up a strange doctrine he does not care to
destroy it. When he gets a snap-shot at human nature he says,—
Those things do best please me

That befall preposterously.
An English gentleman relates a conversation he had with Prince

Bismarck. The prince was inclined to take a pessimistic view of the
English people. He thought that there was a degeneration in the race,
which he attributed to the growing habit of drinking water. “Not that he
believed that there was any particular virtue per se inherent in alcoholic
drink; but he was sorry to hear that the old ‘three bottle men’ were dying
out and leaving no successors. He had a suspicion that it meant
shrinkage in those qualities of the English which had made them what
they were in the past, and for which he had always felt a sincere
admiration.”
It would have been very easy to drift into debate over this proposition. The
English gentleman, however, defended his countrymen more
diplomatically. “I replied that with regard to the water-drinking proclivities
of my countrymen there was a good deal of calumny connected with the
story. It is true that a certain section of English society has indeed taken to
water as a beverage. But to argue therefrom that the English people have
become addicted to water would be to draw premature conclusions from
insufficient data. In this way I was able to calm Prince Bismarck’s fears in
regard to what the future might bring forth, and our conversation reverted
to Royalty.”
Each nation has its own set of preconceptions. We must take them
altogether, or not at all. They are as compact and as natural a growth as
the concentric layers of an onion. Here is a sentence from Max Müller’s
“Autobiography,” thrown out quite incidentally. He has been telling how
strange it seemed, when first coming to Oxford, to find that the students
got along without dueling. Fighting with swords seemed to him the normal
method of developing manliness, though he adds that in the German
universities “pistol duels are generally preferred by theological students,
because they cannot easily get a living if the face is scarred all over.”
This remark must be taken as one would take a slice of the national
onion. One assumption fits into another. To an Englishman or an
American there is an incongruity that approaches the grotesque,—
because our prejudices are different. It all becomes a matter-of-fact
statement when we make the proper assumptions in regard to dueling in
general and theological duels in particular. Assuming that it is necessary
for theological students to fight duels, and that the congregations are
prejudiced against ministers whose faces have been slashed by swords,
what is left for the poor theologues but pistols? Their method may seem
more dangerous than that adopted by laymen, but Max Müller explains
that the danger is chiefly to the seconds.
Individual peculiarities must be taken into account in the same way.
Prince Bismarck, in dining with the Emperor, inquired the name of the
brand of champagne, which proved to be a cheap German article. “The
Emperor explained, ‘I drink it from motives of economy, as I have a large
family; then again I drink it from patriotic motives.’ Thereupon I said to the
Emperor, ‘With me, your Majesty, patriotism stops short in the region of
my stomach.’”
It is evident that here was a difference not to be arbitrated by reason. If
the Emperor could not understand the gastronomic limitations to the
Chancellor’s patriotism, neither could the Chancellor enter into the
Emperor’s anxieties, as he economized for the sake of his large family.
One cannot but wonder at the temerity of a person who plunges into
conversation with a stranger without any preliminary scouting or making
sure of a line of retreat. Ordinary prudence would suggest that the first
advances should be only in the nature of a reconnoissance in force. You
may have very decided prejudices of your own, but it is not certain that
they will fraternize with those of your new acquaintance. There is danger
of falling into an ambush. There are painful occasions when we remember
the wisdom of the Son of Sirach: “Many have fallen by the edge of the
sword, but not so many as have fallen by the tongue.” The mischief of it is
that the most kindly intent will not save us. The path of the lover of
mankind is beset by difficulties for which he is not prepared. There are so
many antagonisms that are unpredictable.
When Nehemiah came to rebuild the walls of Jerusalem he remarked
grimly, “When Sanballat the Horonite, and Tobiah the servant, the
Ammonite, heard of it, it grieved them exceedingly that there was come a
man to seek the welfare of the children of Israel;” and the trouble was that
a large number of the children of Israel themselves seem to have
resented the interference with their habitual misfortunes. The experience
of Nehemiah is that of most reformers. One would suppose that the
person who aims at the greatest good for the greatest number would be
greeted with instant applause. The difficulty is that the greatest good is
just what the greatest number will not tolerate. One does not need to
believe in human depravity to recognize the prejudice which most persons
have against anything which is proposed as good for them. The most
successful philanthropists are those who most skillfully conceal their
benevolent intent.
In Coleman’s “Life of Charles Reade” there is a paragraph which gives us
a glimpse of a prejudice that has resisted the efforts of the most learned
men to eradicate it. An incident is there recorded that took place when
Reade was a fellow in Magdalen College. “Just as I was about to
terminate my term of office (I hope with credit to myself and the ’Varsity),
an untoward incident occurred which embittered my relations for life with
two very distinguished men. Professor Goldwin Smith and his friend John
Conington, who belonged to us, had attempted to inaugurate a debating
society. A handful of unmannerly young cubs, resenting the attempt to
teach them political economy, ducked poor Conington under the college
pump.”
“Resenting the attempt to teach them political economy!”—What is the
source of that resentment? What psychologist has fathomed the abyss of
the dark prejudice which the natural man has against those who would
improve his mind? It is a feud which reaches back into hoar antiquity.
Doubtless the accumulated grievances of generations of schoolboys have
intensified the feud, but no amelioration of educational methods has put
an end to it. In the most successful teacher you may detect a nervous
strain like that which the trainer of wild beasts in the arena undergoes. His
is a perilous position, and every faculty must be on the alert to hold the
momentary ascendency. A single false motion, and the unmannerly young
cubs would be upon their victim.
Must we not confess that this irrational resentment against our intellectual
benefactors survives, in spite of all discipline, into mature life? We may
enlarge the area of our teachableness, but there are certain subjects in
regard to which we do not care to be set right. The polite conventionality
according to which a person is supposed to know his own business is an
evidence of this sensitiveness. Of course the assumption is not justified
by facts. A man’s own business is just the thing he is conscious of not
knowing, and he would give anything in a quiet way to find out. Yet when
a candid friend ventures to instruct him, the old irrational resentment
flashes out. What we call tact is the ability to find before it is too late what
it is that our friends do not desire to learn from us. It is the art of
withholding, on proper occasions, information which we are quite sure
would be good for them.
The prejudice against our intellectual superiors, which leads us to take
their well-meant endeavors in our behalf as of the nature of personal
insults, is matched by the equally irrational repulsion which many superior
people have for their inferiors. Nothing can be more illogical than the
attitude of these gifted ones who use their gifts as bludgeons with which
to belabor the rest of us. When we read the writings of men who have a
stimulating sense of their own genius, we are struck by their nervous
irritability whenever they mention “mediocrity.” The greater number of the
quarrels of the authors, which the elder Disraeli chronicled, arose from the
fact that the authors had the habit of accusing one another of this vice.
One would suppose mediocrity to be the sum of all villainies, and that the
mediocre man was continually plotting in the night watches against the
innocent man of genius; and yet what has the mediocre man done to
deserve this detestation? Poor fellow, he has no malice in him! His
mediocrity is only an afterthought. He has done his level best; his
misfortune is that several million of his fellowmen have done as well.
The superior man, especially if his eminence be accidental, is likely to get
a false notion of those who stand on the level below him. The biographer
of an English dignitary says that the subject of his memoir was not really
haughty, but “he was apt to be prejudiced against any one who seemed to
be afraid of him.” This is a not uncommon kind of prejudice; and in nine
cases out of ten it is unfounded. The great man should remember that
most of those whose manners seem unduly respectful mean nothing
personal.
As great Pompey passes through the streets of Rome, he may be
pardoned for thinking meanly of the people. They appear to be a
subservient lot, with no proper interests of their own, their happiness
dependent on his passing smile,—and he knows how little that is worth.
He sees them at a disadvantage. Let him leave his triumphal chariot, and,
in the guise of Third Citizen, fall into friendly chat with First Citizen and
Second Citizen, and his prejudices will be corrected. He will find that
these worthy men have a much more independent and self-respecting
point of view than he had thought possible. They are out for a holiday;

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5 Presentation of financial position 6.4 The profit or loss statement 154

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16 Cost-volume-profit analysis 502 17.8 Qualitative factors 549

Guide to the text

PART OPENING FEATURES CHAPTER OPENING FEATURES

Chapter 1 IntroductIon to accountIng 9

FEATURES WITHIN CHAPTERS

Key concept 3.5: Audit committee Stop and think 1

3.5 Enforcement of corporate governance LO 3.5

is made to these extracts. These will help you become

The liability is1Bella

in Case study209.1. August 2018

Dear Board Members

Stop and think 4

Format used in the book

learning through the Review questions, There

Take if further activity and Problems Take it further

Cool Value Cinemas

Suggested answers to stop and think exercises

Guide to the online resources

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ARTWORK FROM THE TEXT

FOR THE STUDENT

MINDTAP FOR CONTEMPORARY ACCOUNTING: A STRATEGIC APPROACH FOR

About the authors

2 Business structures and financial reporting

3 Sustainability reporting, ethics and corporate

4 Different measurement methods

5 Presentation of financial position and the

6 Presentation of financial performance and the

7 Presentation of cash flows

8 Accounting for selected assets

9 Accounting for selected liabilities and sources

10 Analysis of financial statements

11 From the worksheet to debits and credits

Wee sleekit, cow’rin’, tim’rous beastie.

wee-bit housie, too, in ruin!

Those things do best please me

An English gentleman relates a conversation he had with Prince

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