14- Company Accounts

Question 1

What are the 4 mandated documents under Companies Act 2006?

Answer 1

• Balance sheet
• Income statement
• Director’s report
• Auditor’s report

Question 2

What are the 2 conclusions on the accounts that the auditor reports to shareholders?

Answer 2

• Whether they’re properly prepared
• Whether they give a true and fair view

Question 3

What is the Accounting equation, derived from the balance sheet?

Answer 3

Assets = Equity + Liabilities

Question 4

What does the Balance sheet show?

Answer 4

The condition of the company as at the balance sheet date

Question 5

What are the 2 halves the Balance sheet is composed of?

Answer 5

Total assets | Capital & reserves + Liabilites

Question 6

What is the difference between capital and revenue expenditure?

Answer 6

Capital expenditure is money spent to create future benefits, whereas revenue expenditure covers day to day costs

Question 7

What are non-current assets?

Answer 7

Assets intended to be kept for greater than one year

Question 8

What are Intangible non-current assets?

Answer 8

Expected to generate future revenue but have no physical substance e.g. patents

Question 9

What are Tangible non-current assets?

Answer 9

Expected to generate future revenue and have physical substance e.g. factories

Question 10

What are non-current investments?

Answer 10

Generally shares in other companies intended to be held for greater than one year

Question 11

What are current assets?

Answer 11

Assets held for conversion into cash

Question 12

What does Inventory incorporate?

Answer 12

Raw materials, finished goods, etc

Question 13

What are receivables?

Answer 13

The amount the company is owed on the balance sheet date

Question 14

What is share capital?

Answer 14

Nominal value of total shares in issue

Question 15

What is share premium?

Answer 15

Any excess above the nominal value raised on issue

Question 16

What are Reserves?

Answer 16

The amount belonging to shareholders that is retained by the company

Question 17

What is the Revaluation reserve?

Answer 17

Represents the cumulative amount by which non-current asset values have increased

Question 18

What are Retained earnings?

Answer 18

Running total of profits not distributed as dividends

Question 19

What does the Statement of changes in equity outline?

Answer 19

Explains any change in the Equity section of the balance sheet (capital & reserves) e.g. it will give an account of rights issues and share buy-backs

Question 20

What does the Statement of comprehensive income outline?

Answer 20

Discloses income beyond that generated through the activities of the company e.g. incidental FX PnL, pension plan PnL

Question 21

What are Current liabilities

Answer 21

Amount owed by the company and due for payment within one year e.g. trade payables

Question 22

What are Long-term liabilities?

Answer 22

Amount owed by the company and due for payment after one year e.g. long-term bank loans

Question 23

What are Contingent liabilities?

Answer 23

Uncertain liabilities, so are disclosed in a note to accounts not on the balance sheet itself

Question 24

What is the formula for Net Book Value (NBV)?

Answer 24

NBV = Cost - Accumulated depreciation

Question 25

What is the Annual depreciation charge formula (straight line)?

Answer 25

Annual depreciation charge = (Cost of asset - Residual value of asset)/Useful life of asset

Question 26

What is the Annual depreciation charge formula (reducing balance)?

Answer 26

Depreciation charge = 1-n√(expected residual value/original cost)

Question 27

What are the 3 methods of inventory valuation?

Answer 27

• Weighted average
• First in first out (FIFO)
• Last in first out (LIFO)

Question 28

How does weighted average inventory valuation work?

Answer 28

Inventory drawn down proportionally

Question 29

How does First in first out (FIFO) inventory valuation work?

Answer 29

Old inventory assumed to be used first

Question 30

How does Last in first out (LIFO) inventory valuation work?

Answer 30

New inventory assumed to be used first

Question 31

What is Turnover?

Answer 31

Income generated by a company from selling its goods and services- recognised at point of sale or apportioned over life of project

Question 32

What are Cost of sales?

Answer 32

Costs directly associated with the cost of producing a product or service

Question 33

What is the formula for Operating/Trading profits/Profit before interest and tax (PBIT)?

Answer 33

PBIT = Turnover - Cost of sales - Other operating costs - General costs of running a business

Question 34

How does an increase in the following cash flows affect operating profits?:
-Depreciation charges
-General provisions
-Inventory
-Receivables
-Payables

Answer 34

-Increases
-Increases
-Decreases
-Decreases
-Increases

Question 35

What is Free cash flow?

Answer 35

Cash flows available for distribution to the owners of a firm’s securities

Question 36

What is Enterprise cash flow (FCFF)?

Answer 36

Comparable cash flow irrespective of capital structure

Question 37

What is the Enterprise cash flow (FCFF) formula?

Answer 37

FCFF = Net income + noncash charges + net interest payments - investment in fixed capital - investment in working capital

Question 38

What is Equity cash flow (FCFE)?

Answer 38

Excludes cash owed to lenders

Question 39

What is the Equity cash flow (FCFE) formula?

Answer 39

FCFE = FCFF - net interest - net borrowing

Question 40

How do Group accounts work?

Answer 40

Group = Parent company + subsidiaries

Question 41

When is a subsidiary company created?

Answer 41

When share ownership lies above 50%

Question 42

When is an associate company created?

Answer 42

When share ownership lies between 20% & 50%