8.1 Accounting Analysis Flashcards
What is an independent auditor’s report?
Are the statements true and fair?
- auditors can qualify the accounts
What does it mean if auditors qualify accounts?
That company is not giving fair and true representation of performance
What are the notes to the accounts?
Directors making notes to accounts
- explanations
What is shareholder information
- information shareholders may be interested in
eg. new share issues; has share cap increased?
What are 4 reports to analyse corp. performance?
- strategic report
- stakeholder review
- financial review
- directors remuneration
What does statement of financial position show?
- assets
^ what company owns - capital
- reserves
- liabilities
^where money came from
What are accounting standards?
- prescribes form and content of financial statements
What is GAAP?
Generally accepted accounting principles?
Is GAAP standardised globally?
No - in process of standardisation but can still be country specific
Why may it be difficult to compare international companies?
Due to the range of accounting standards across the world, it can be difficult to compare companies internationally
What is IASB?
international accounting standards board
- purpose: to achieve transparent and comparable financial statements to global accounting standards
What are 2 set of standards under IASB?
- IFRS (international financial reporting standards)
- IAS (international accounting standards)
What is an additional listing rule for companies listed on exchanges (eg. LSE)?
Must provide an interim report
What is the other equation instead of assets = liabilities + equity
Non-current assets + Current assets = Capital + Reserves + Liabilities
What is another term for equity?
Capital and reserves
What are non-current assets?
intangible (goodwill etc)
tangible (PPE)
Investments helf for LT
What are current assets?
Cash and cash equiv
inventories
trade receivables
Other current assets (eg. prepayments)
What are capital and reserves?
- share capital
- share premium
- revaluation reserve (some assets appreciate over time, opposite of depreciation)
- retained earnings
What are current liabilities?
Short term borrowings (<1yr)
- trade and other payables (trade payables, accruables)
What are non-current liabilities?
long term borrowings/provisions (>1yr)
long term bank loans
bonds issued by company
What is another name for non-current assets?
Fixed assets
What are intangible non-current assets
Assets that are expected to generate future revenue but have no physical substance
- goodwill
- trademarks
- patents
What are tangible non-current assets
Assets that are expected to generate future revenue and have physical substance
- PPE
must be valued at net book value
What is NBV?
Recognises depreciation of assets
What are non-current asset investments?
generally shares in other companies that intend to be held for >1yr
includes investment in associate companies
What is an associate company?
An associate company is created when share ownership lies from 20% to 50%
What is a subsidiary company?
subsidiary company is created when share ownership lies above 50%, where the subsidiary’s balance sheet is consolidated with that of the
parent
What are investments held for trading?
current assets - count as part of inventory, intend to be converted to cash
What comes under inventory?
- raw materials
- work in progress
- finished stock
- valued at lower of cost (how much cost to make) or net realisable value (how much we can sell it off for) (conservative value)
what are trade receivables
- trade debtors
- pre payments
essentially ppl who owe us money
What are reserves?
amount belonging to shareholders that is retained by company
- revaluation reserve (revaluate assets from cost to market value)
- retained earnings (profit loss reserve)
What can share premium be used for?
- fund a bonus issue
- write off cost of listing and issue
What kind of asset appreciates over long term?
freehold land
what kind of account is retained earnings?
A revenue reserves account
What are share premium and revaluation ?
Capital reserve accounts
What type of account is share capital?
A capital account
what is an accrual?
Expenses not yet invoiced eg. bill (ST liability)
what is a provision?
where we think the receivable is not coming in within next year
eg. doubtful debt
How do we calculate NBV?
Cost - accumulated depreciation
How do we calculate depreciation w the straight line method?
annual depreciation = (original cost - expected residual value)/expected useful life
what is residual value of an asset?
eg. resale value, scrap value
What is the first line on IS?
revenues
Second line of IS?
COGS (cost of sales)
What does IAS 33 require?
earnings per share ratio and the diluted earnings per
share to be shown at the foot of the income statement
What are the main profit lines on an IS?
Gross profit (after COGS)
Operating Profit (after SG&A, distribution)
PBT (after financing costs and exceptional items)
Net income (after tax) = retained earnings
When are revenues recognised?
always at point of sale (even if money hasnt come in yet)
- recognition can be apportioned over several accounting periods for LT contracts
Another name for operating profit?
PBIT
What is the diff. between capex and revenue expenditure?
Capex :
- money spent to buy non-curent assets
- reflected on BS (eg. purchase of PPE)
Revex:
- immediately impacts income statement (eg. wages, rent, professional fees)
what are the 3 headings on the CFS?
- operating activities
- investing activities
- financing activities
