Accounting in a Nutshell: Accounting for the Non‐specialist (3rd Edition)

Citation

Sharma, U. (2010), "Accounting in a Nutshell: Accounting for the Non‐specialist (3rd Edition)", Pacific Accounting Review, Vol. 22 No. 1, pp. 77-79. https://doi.org/10.1108/01140581011034245

The book by Walker is a useful introductory book that provides self‐guided training for non‐specialists who need an appreciation of the purpose and use of accounting information. The text is designed for middle managers and junior managers dealing with financial information, students who are studying accounting as a non‐specialist subject, and students who are embarking on a course of study to become a professional accountant.

The book is in three parts. Part 1 explains the scope of the text, who it is for and how to use it effectively. Part 2 identifies the people who use accounting statements and the sort of information that they might need. The final chapters of part 2 explain the basic techniques used to interpret the information contained within these financial statements. Part 3 covers management accounting and the use of financial information to manage a business. The final part of the text contains a glossary of major financial and management accounting terms.

The language used in the first and subsequent chapters is simple and easy to understand by the intended readership. Chapter 1 outlines user groups of financial statements. However, the environment group is a significant omission from the list as they have recently become an influential group. The author states that most businesses include three statements in their annual published accounts that include the income statement, balance sheet and cash flow statement. These statements provide answers to three basic questions about an organisation:

1. 1.

   What return is the organisation making?

2. 2.

   What is the risk associated with this organisation?

3. 3.

   Does the organisation have sufficient cash?

The author ignores a number of pertinent subsidiary questions at this point, which could have included issues, such as, Is the business financially stable? What sort of working capital does it have? What is the relationship between the organisation's debt and equity? Each chapter ends with a set of self‐test questions. Those at the end of chapter 1 could be extended. More questions would enable the reader to practice more with the concepts covered in the book. However, solutions to the self‐test questions are provided, which reinforce readers' learning.

Chapter 2 covers the income statement – its nature and purpose. Some good exercises follow so that readers can comprehend the concepts of accruals and prepayments. An exhibit of an income statement is shown on page 25. It lists expenses such as distribution costs, administrative expenses and other expenses but does not give examples of the specific expenses relating to these categories. Also, the cost of sales figure is given but the detail of the opening inventory, purchases and closing inventory figures are not provided. The self‐test question at the end of the chapter could have contained at least one on the construction of an income statement.

Chapter 3 focuses on the balance sheet. The author introduces a balance sheet first and defines technical terms later such as current assets, intangible assets and working capital. However, it may have been better to introduce the technical terms first before illustrating a balance sheet. The chapter also covers inventory valuation and stipulates that inventory needs to be measured at the lower of cost and net realisable value. The section on inventory appears somewhat ambitious. In a short subsection labelled “raw material”, the text introduces valuation methods “first‐in‐first out” and “weighted average price”. These methods are complex and almost a chapter needs to be devoted to those. Chapter 3 is extensive (running from pages 41‐94) and could have been easily split into two chapters to better orientate the reader.

The subject of chapter 4 is cash flow reporting and the topic is introduced with a nice story that illustrates cash flow reporting and how a shortage of cash can distract one from realising his/her goals. An example of a cash flow statement is set out at the beginning of the chapter. However, it may be appropriate to introduce technical terms such as cash flow from operating activities, cash flow from investing activities and cash flow from financing activities before introducing the cash flow statement to better orientate the reader. The cash flow statement example provided on page 102 is a bit simplistic. For instance, under “cash flows from operating activities”, it considers only “cash received from customers and outstanding accounts receivable.” It does not go into detail by considering sales, opening accounts receivable, closing accounts receivable and so on.

Chapter 5 is on the accounts of not‐for‐profit organisations. It sets out explanations of the income and expenditure account and the balance sheet for not‐for‐profit organisations. It may have been helpful to have been provided more questions at the end of the chapter covering the preparation of an income and expenditure account and balance sheet for such entities.

Chapters 6 and 7 cover the analysis and interpretation of sets of financial statements. Some limitations of ratio analysis are provided. However, these could have been supplemented to emphasise the importance of other background information such as the state of economy, economic trends, competitive forces, technological changes, seasonal factors and unforeseen natural disasters that are not covered by the annual report. Last, more questions at the end of the chapter would help readers better understand the concepts covered in the chapter.

Part 3 of the text considers the use of financial information for managing a business. Chapter 8 establishes management accounting as an aid to management and considers the financial information necessary to help managers run the business. Chapter 9 deals with analysis of costs and sets out an account of total cost of production. Some end of chapter questions on activity based costing and its relationship with traditional costing may have been helpful to readers. Currently, there are no questions apart from the example shown in section 9.4.4. The use of cost information for decision‐making is illustrated in chapter 10, while chapter 11 covers budgetary planning and control. Questions at the end of the latter chapter are limited to three questions and could be extended to provide more practice for the non‐specialist students. The subject of the final chapter, chapter 12, is long‐term investment decisions. The chapter outlines the techniques used to support longer‐term capital investment decisions, such as investing in new machinery.

In summary, I feel the book is well written and covers most of the important topics necessary for non‐specialists. The book is a good attempt to bridge the gap in understanding accounting concepts by a non‐specialist. However, other areas such as preparation of journals, ledgers, closing entries, balance day adjustments, internal controls are not covered and non‐specialists may have to rely on other text books to fully understand these basic accounting techniques. Readers are given the opportunities to test their progress with regular reviews and self‐test questions throughout the book. The third edition of the book is different from previous editions as it includes a new chapter on the investment appraisal process, covering main investment appraisal techniques from the non‐specialist's point‐of‐view. I strongly recommend this textbook to non‐specialist students, as well as middle and junior managers who struggle with their understanding of financial information.