Accounting Flashcards
interest coverage ratio
EBIT/Interest expense
ROCE
(EBIT) / Capital Employed = EBIT/Total Assets – Current Liabilities = EBIT/Equity+Net Debt
Briefly explain, with one good example, the concept of a “provision” in financial accounting.
A liability of uncertain timing or amount
Probable outflow of resources
Accrual, non-cash-flow on intitial recognition
Example: lawsuit
Briefly explain the meaning of an “Associated Company” and describe its impact on the balance sheet.
Equity investment where one company has ‘significant influence’ over another
Typically 20-50% equity
Significant influence evidenced by Board membership, influence on dividend policy etc
Single line on balance sheet for % investment in equity of associate
Goodwill possible also
Assoc. Co. profit increases the investment (and equity); dividend reduces it (increases cash)
Financial leverage
Net debt/Capital employed = Debt-Cash/Equity+Net Debt
Receivable turnover (in days)
Accounts Receivable/Sales * 365
Current Ratio
Current Assets/Current Liabilities
In what ways is Operating Profit different from Operating Cash Flow?
In general, accruals
Non-cash expenses - depreciation, impairment
Non-cash income - revaluations through the income statement
Changes in working capital
Also, interest and tax
Why is Property, Plant and Equipment (PPE) typically measured in company accounts at historical cost and not at fair value?
Allowed as an option under IFRS Less costly FV not obviously relevant FV less reliable HC more controllable in reporting of gains/losses FV more volatile
How are brands accounted for?
Expensed if internally generated
Capitalised if acquired
Amortised over useful life, or
Indefinite life and tested for impairment
Liquidity
In accounting, liquidity (or accounting liquidity) is a measure of the ability of a debtor to pay their debts as and when they fall due. It is usually expressed as a ratio or a percentage of current liabilities. Liquidity is the ability to pay short-term obligations.
Solvency
Solvency directly relates to the ability of an individual or business to pay their long-term debts including any associated interest. To be considered solvent, the value of an entity’s assets, whether in reference to a company or an individual, must be greater than the sum of its debt obligations. A company that is insolvent must often enter bankruptcy.
Briefly explain, with one good example, the concept of “Impairment” in Financial Accounting.
Reduction of carrying amout of an asset because of loss of value
Unexpected event, such as change in market conditions, physical condition, technology
Example: write-down of PPE to recoverable amount
Briefly explain the meaning of “Goodwill” and describe its treatment on the balance sheet.
Excess of economic value over book value of equity Arises on acquisition Never revalued Never amortised Tested for impairment annually Separate category of intangible asset
Suppose that Company Z sells a product to a customer and receives the full sales price in cash, but that the company provides a warranty and other services on the product for a period of three years after the sale. Explain the concept of revenue recognition and describe how the company should account for the sale.
Revenue recognised as earned (company has right to receive payment)
Effectively two sales - sales of product and sale of other services; the former a sale now, the latter deferred over three years
Also a liability (provision) if the warranty is likely to be exercised
Affects: cash, deferred revenue (performance obligation), warranty provision, retained profit on balance sheet
