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CONTENTS vii
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
viii CONTENTS
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
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
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x CONTENTS
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
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.
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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.
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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.
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xiv
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
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.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
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
Therefore, each lease payment is similar to the loan repayment that Company A would be required to make
NSW 2153
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.
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
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.
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.
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xvii
MINDTAP
Premium online teaching and learning tools are available on the MindTap platform - the personalised eLearning
solution.
MindTap is a flexible and easy-to-use platform that helps build student confidence and gives you a clear picture of
their progress. We partner with you to ease the transition to digital – we’re with you every step of the way.
The Cengage Mobile App puts your course directly into students’ hands with course materials available on their
smartphone or tablet. Students can read on the go, complete practice quizzes or participate in interactive real-time
activities.
MindTap for Contemporary Accounting: A Strategic Approach for Users is full of innovative resources to support
critical thinking, and help your students move from memorisation to mastery! Includes:
• Contemporary Accounting: A Strategic Approach for Users 10th edition eBook
• Introduction to Financial Mathematics
• “What do you think?” polling questions
• “Why it matters” whiteboard animations illustrating core concepts
• Concept Check and Revision Quizzes
• Additional case studies and appendices
• And more
MindTap is a premium purchasable eLearning tool. Contact your Cengage
learning consultant to find out how MindTap can transform your course.
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.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
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.
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xix
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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)
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
Financial Accounting
Part
1
1 Introduction to accounting
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
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.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
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.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
Another random document with
no related content on Scribd:
children like stories, and during the telling of the story, if it is at all
worth while, the children will be quiet and attentive. The teacher
may, however, call the restless child to herself, saying to him, “I like
to have somebody stand by me.” Better still, she may gather all the
pupils around her and say to the mischievous boy, “Robert, I am
going to tell you a story. The other boys and girls may listen.” This
will captivate the child, and when she has finished she may ask him
to tell the story.
By this time the reader will sigh and ask, “Must all this be done to
keep one mischievous boy at work?” Yes, but it is far easier to
interest him than to be worried by his pranks. Then, too, by keeping
him interested, the teacher is administering to his development,
while to let him loll in his mischief would only tend to create in him
habits of inattention and idleness. At the close of the day the boy will
go home happy and the benediction of a happy teacher will follow
him. Nothing adds more to a teacher’s usefulness and happiness
than the thought of work well done.
In the above procedure the teacher has practiced suggestive
control. She has led the mischievous boy into activities that interest
him, that appeal and fascinate as well as satisfy that active mind, and
that will mature into right action. It is far easier to deal with a child
full of life, than to deal with a dullard. Direct properly the impulse
that causes this mischief, and it will become a force for real good in
the child’s life. The discreet teacher will look ahead and avoid
difficulties, and nowhere will she get more valuable clues to a
method of control than on the playground.
Watch the child in his play at recess to see what activity interests
him most. Suggest to him some point about that activity which he
has overlooked and commend him on his skill. Every child has a
hobby. If you can find this boy’s hobby and tell him something about
it which he does not know, you will make a warm place in his heart
for yourself. Then utilize the knowledge thus gained, and his
increased confidence in you, in order to add to his school work just
the element that will make it so interesting for the child that he will
find the work more delightfully fascinating than the mischief.
The first grade teacher needs to be in her room but a few days
before she will see some little child making grimaces at his neighbor
and not infrequently he may make a grimace at the teacher,
especially if he feels that the teacher has not dealt fairly with him.
This is not a serious annoyance and should give the prudent teacher
no worry. It can not be repeated too often that many of the small
offenses that harass a school day are doubly intensified by the
attention that is paid them. Often when a pupil does some petty
misdemeanor, he would soon forget it were it not that the teacher
notices it and pounces upon the offender with some brand of
punishment and thereby the child learns that this certain offense is a
thing that the teacher dislikes. In the future, whenever that child’s
feelings are ruffled, he will resort to this certain offense to annoy the
teacher. The discreet teacher will train her pupils in such a way that
they will not settle upon any specific type of annoyance.
In cases where a child resorts to the practice too frequently, the
teacher will find it well to devise some means by which she can
substitute one activity for another; that is, substitute a more
interesting activity for the making of grimaces. The teacher may use
the following method and conversation:
“Children, we are planning to have a little play party once a month.
This is to be on the last Friday afternoon of each month. Each one of
you is to bring either a cooky, an apple, an orange, or a banana, and I
will bring some candy. We will play all kinds of games and just before
school dismisses we will eat our dainties. Won’t that be fine? But,
children, I have just thought that any one who makes grimaces or
ugly faces during the month ought not to be invited. We do not want
our party spoiled. What do you say?”
Of course all, or nearly all of the children will say that any one who
is guilty of making faces shall not come. The teacher who has not
tried anything like this will think it is absurd and impracticable, but
it will greatly assist in removing grimacing and many other evils that
troop through a teacher’s school experiences.
The means of discipline need not necessarily be a party. It can be
some other affair or activity that children like. If the teacher chooses
a party, she must have a goodly number of games ready and keep her
children intensely interested.
The luncheon is an important feature of the party and must be well
managed by the teacher. All the sweetmeats must be divided into
small parts and so mixed that a child does not get the dainty he
contributed. A cooky can be cut into four pieces, a banana into four
or five pieces, and the same with other sweetmeats. Children like
little things. Then, too, the teacher may suggest that they play at
having a luncheon.
CONSTRUCTIVE TREATMENT
COMMENTS
CONSTRUCTIVE TREATMENT
Mr. Briggs did well to search for underlying causes and effective
remedies, because the use of authority in such a case is a mistake, as
he found. Make no attempt to suppress the practice, but proceed at
once to the constructive plan of building up a good sentiment.
Whatever you do, do not assume that the pupil is disrespectful to
you. If the pupils have shown such disrespect in the past, simply set
about gaining their confidence.
Face-making is largely an outgrowth of the play impulse, no matter
what its motive. Substitute a better form of play. Dramatizing a story
that emphasizes the opposite of the undesirable characteristics, is
one of the best ways of overcoming the fault. Read “The Little Knight
of Kentucky” during the twenty-minute periods just before school
closes. Dramatize parts of it. When the children are imbued with the
chivalrous spirit of the story, suggest the incongruities of face-
making and other spiteful acts, by saying to the boy whom you
“catch”: “Harold, the little knights of Kentucky did not make faces at
each other. Would we be as proud of them as we are, had they done
so? Then, let’s not have any one who makes faces play that story
today.”
COMMENTS
CONSTRUCTIVE TREATMENT
Miss Stone has one simple task: to rouse from absorption in one
duty and wisely distribute her attention to several matters.
Promises must not be taken as fulfillment; assurances of any sort
must not be taken for more than they are worth. Find a safe medium
between espionage and disastrous indifference.
COMMENTS
CONSTRUCTIVE TREATMENT
Avoid asking such questions as, What made you laugh? Why did
you do it? etc., except privately. Even then unless you are reasonably
sure of a satisfactory answer to these questions you may complicate
your case by so doing instead of helping it toward a solution.
Pass over details of causes which pupils most often allude to and
lay hold of the prime provocation for bad order. Use your power of
analysis and apply an effective remedy. Henry needs an abundance
of heavy but interesting work. Bear down so deep into his interest in
geology that he cannot menace your loyalty to him by trifling with
you in respect to discipline. Treat him so squarely, frankly,
generously that his respect for you will be an unremitting check on
small misdemeanors.
COMMENTS
Pupils may not know what to answer when asked, “Why did you do
so and so?” The truth is the causes are numerous. The last cause may
have been the stumbling of one pupil over another one’s foot. But
another cause lies behind this—disrespect for the teacher; behind
this, fondness for another teacher. Why does a pupil act in a certain
fashion? He is underfed, improperly clothed, irritated from
insufficient sleep—these are all proper answers to the question,
“Why?” Hence, every time the query is put a teacher runs the risk of
provoking a worse situation and yet of gaining nothing from the
inquisition.
ILLUSTRATION
A bright lad and into all sorts of mischief, George had gradually
acquired the reputation among the teachers of being “a bad boy”;
and the new superintendent was informed to this effect when he
came to the school.
One day there was a great commotion in Snake in School-
his grade; an innocent garter snake had room
been let loose in the school-room. George was accused, and as the
disturbance had begun in his corner of the room, and as he was
known to have a great fondness for all sorts of animals, insects,
snakes, etc., the evidence seemed decidedly against him.
“No, sir!” he replied to the superintendent, when sent for to go to
the office. “No, sir! I didn’t do it!”
“I’m afraid that you are not telling me the truth, George. You have
a bad reputation. I think that I shall punish you by sending you into
the next lower grade, until you can learn to become more of a man.”
“It’s such a disgrace, mother! No, I can’t go back. The boys will all
make fun of me. Besides, I didn’t do it!”
Finally, however, his mother made him see that the manly thing
would be to take his punishment, even if he wasn’t to blame. So, on
the following morning, he reported himself to the teacher of the next
lower grade, and told her that he was to study there.
Later in the day the superintendent made his rounds, and
exclaimed surprisedly, when he saw George,
“Why, you here? I didn’t expect to ever see you again!”
Needless to say that was the last appearance of George at school,
and a life that might have been helped was spoiled by an unjust
punishment and a careless remark. Even superintendents may make
mistakes!
CONSTRUCTIVE TREATMENT
COMMENTS
The fact that George was fond of animals, insects, snakes, etc., was
the clew for the teacher to work upon in gaining the good will and
coöperation of the troublesome boy. Knowing one strong interest
that he had, the teacher should start with that and work out from it
to other and broader fields of action.
Unless the teacher had actual proof to the contrary, she should
have accepted the boy’s statement that he did not bring in the snake.
It is far better that a guilty boy go unpunished, than that an innocent
person be punished. Take the initiative in coöperation with the
troublesome pupil and the troubles will soon disappear.
Henry Gould was very fond of his collie The Pet Dog
and insisted upon having his company every
day at school. His teacher, Miss Greenway, probably would have
made no objection to this had it not been for a fact that the dog was
inclined to snap at any child except his master and thus endanger the
safety of the other children. How to forbid the presence of the dog
without arousing the antagonism of his owner was the problem. She
resolved to try approval and initiative in coöperation. So she called
Henry to her at noon time and said:
“Henry, I noticed the collie snapping at one of the little girls today,
and I think we shall have to ask him to stay at home after this. But he
is such a bright little fellow we shall miss him. Don’t you think it
would be fine for the children to take his picture before he goes? How
would you like to get him into a good position when the drawing
period comes and let the children use him for a model?”
Henry was proud to have his pet honored, stood by him patiently
while the children drew, and made no further insistence that he
should come to school.
Teasing Rhymes
“Hey Diddle Diddle!
Parts his hair in the middle!”
This was the couplet that greeted John Fraser as he entered his
eighth grade room one September noon. Above the couplet was a
portrait of himself, the style of his hair indicated very clearly. He
erased the decorations hastily, but said nothing about it. He was very
young, however, and the thoughtless disrespect shown him hurt
sadly.
A day or two passed, during which he noticed the covert
amusement at his faultlessly pressed clothes, his punctilious
manners, his careful grooming, all new and strange to the crude little
town in the Southwest in which he taught. Then, one noon, he
entered the room from the playground to find a rough cartoon on the
board, labeled, “Mr. Fraser pressing his pants to make creases at 2
a.m.” The pupils were vastly entertained by it.
“Who made this picture?” John demanded, very angry and feeling
that his dignity demanded that the offender be punished. Every head
turned instantly toward Cleaver Trotter, who seemed much pleased
to be singled out for attention.
“Cleaver, you may remain in at recess. I want to see you.”
“Just as you say, Mr. Fraser!” sang out Cleaver, jauntily. There was
a half-suppressed titter of admiration, and Mr. Fraser felt that he
had come out second best.
At recess he ascertained that Cleaver had really drawn the picture,
and forbade him sternly to repeat the offense. The interview took
place in the otherwise empty school-room, and when Cleaver was
allowed to go he joined a group of gaping admirers on the
playground.
“What did he do to you?” they demanded to a man.
“Oh, he asked me why I did it, and I told him I couldn’t help it; I
just knew it took him all night to press his pants that way.”
“And what did he say then?”
“Well, he smelled of the smelling-salts and said that’d be all for
today, so I came on out.”
None of this account was true, but Cleaver won by it the thing his
boyish vanity wanted, the admiration of his crowd. They approved
the ridicule because it furnished them with fun, and Cleaver was
shrewd enough to know that his leadership depended upon their
approbation of his attitude. He annoyed John Fraser constantly