Preface ix
Acknowledgements xii
List of abbreviations xiii
1. Introduction 1
Crucial errors in finance 2; The content and sequence of the book 3;
Generally accepted accounting principles 5
Part I. The purpose and content of financial statements
2. The profit and loss account 9
The profit and loss account 9; The measurement of profit or loss 10;
The nine major types of income 12; Expenditure 20; Statement of total
recognized gains and losses 30
3. The balance sheet 36
Misconceptions about the balance sheet 36; Key items in the balance
sheet 38; Financing the assets 49; What a balance sheet does not tell
you 64; Summary 65; Other balance sheet items 67
4. The cash flow statement 78
The eight categories of cash flows 86; Reconciliations 90; Strategic cash
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flow planning 93; Complications in preparing cash flow
statements 96; Summary 98
5. Cash forecasting 99
A cash forecasting example 101; Presenting cash forecasts in funding
negotiations 116; Control against cash forecasts 125; Summary 125
Part II. Testing financial statements
6. Ratio analysis 129
Financial stability ratios 130; Profitability ratios 141; Trends in the
financial structure 150; Productivity ratios 153; Competitiveness
ratios 154; Investment ratios 156; Types of investment strategy 167;
Summary 168
7. Working capital 169
The real meaning of working capital 170; Over-trading 172; Working
capital ratios 178; Effective management of working capital 188;
Summary 199
Part III. Financial planning and control
8. Budgeting 203
The purposes of budgeting 203; Length of budget period 204; Key
elements of a good budgeting process 206; The sequence of
budgeting 209; The purchasing and production budget 214;
Zero-based budgeting 219; Cost reduction 221; The final elements of
the budgeting process 227; Summary 228
9. Financial control 229
Variances 230; Departures from budget 232; The qualities of an
effective financial control system 244; Summary 247
10. Total costing 249
Principles of cost attribution with more than one product or
service 250; The cost centre approach 257; Activity-based costing 264;
Transfer pricing 270; Summary 276
11. Contribution costing 277
Using the fixed and variable cost classification to set sales targets 280;
Capacity costs and their effect on a profit forecast 287; Operating
leverage 291; Summary 294
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Contents
Part IV. Finance techniques for developing the organization
12. Capital investment decisions 299
The appraisal tools 300; Errors in forecasting project cash flows 317;
The impact of forecasting errors on project viability 322; The weighted
average cost of capital (WACC) 326; Profitability index 329; Accept/
reject criteria in project evaluation 330; The 10 priorities of an
excellent approach to capital investment 331; Summary 332
13. Financial strategy and shareholder value 333
Competitive advantage 333; Shareholder value 336; The standard
shareholder value model 340; The real drivers of growth 344;
Strategic initiatives that help to enhance shareholder value 346;
Linking value enhancement to remuneration 349; Shareholder value
in a diversified business 349; Summary 349
14. Foreign currency transactions and translations 351
Risks associated with foreign currency transactions 352; Types of
transactions 354; Recording transactions 355; Exchange risks and
rewards 367; Summary 382
15. Mergers and acquisitions 383
Reasons for take-over activity: the buyer perspective 384; The
valuation of businesses in take-over negotiations 387; Exchange
mechanisms 389; Group accounts 396; Special considerations in
mergers and acquisitions 404; ‘Unbundling’ 407; Summary 408
16. Any other business 409
Corporation tax 409; Group accounts 410; Deferred tax 411; Leased
assets 417; Pension funds 423; The life of a business 424; Summary of
our meeting 429
Appendix 431
Index 435