Accounting analysis Flashcards
The Purpose of Financial Statements
Statement of Financial Position (IAS1) – Balance sheet Income statement Cash flow statement – Statement of cash flows (IAS1) Additional reports • Independent auditor’s report • Notes to the accounts • Shareholder information • Reports to analyse corporate performance - Strategic report - Stakeholder review - Financial review - Directors remuneration
Additional information
In addition to the statements opposite, companies may also produce:
• Statement of other comprehensive income
• Statement of changes in equity
• Comparative figures from the previous year’s financial statements
• Explanatory notes to accompany certain individual statements of financial position and profit and loss account items
• Disclosure of the company’s accounting policies
Accounting standards
• The form and content of company financial statements are prescribed by laws and mandatory accounting standards
- Generally accepted accounting principles (GAAP)
- Often country specific
International Accounting Standards Board (IASB)
• To achieve transparent and comparable financial statements to global accounting standards
- International financial reporting standards (IFRS)
- International accounting standards (IAS)
Listing rules
• Many exchanges will require additional disclosure by traded companies
- Interim report
The Accounting Equation
Assets = Equity + Liabilities
Non-current assets + Current assets = Capital + Reserves + Liabilities
Non-current assets (fixed assets)
• Typically assets intended to be used by the business for more than one year
• Intangible non-current assets
- Expected to generate future revenue but have no physical substance
• Goodwill
• Trademarks
• Patents
• Tangible non-current assets
- Expected to generate future revenue and have physical substance
• Property, plant and equipment (PPE)
• Valued at net book value (NBV)
• Non-current asset investments
- Generally shares in other companies intended to be held for greater than one year
Current assets
• Assets held for conversion into cash • Inventory (stock) - Raw materials - Work-in-progress - Finished goods • Trade receivables (debtors) - The amount the company is owed on the statement date • Trade debtors • Prepayments • Cash
Inventory is valued prudently at the lower of cost and net realisable value.
Share capital and share premium account
• Share capital
- Nominal value of total shares in issue
• Share premium
- Any excess above the nominal value raised on issue
Reserves
• The amount belonging to shareholders that is retained by the company
• Revaluation reserve
- Created when a company revalues its assets from cost to market value
• Retained earnings (profit and loss reserve)
- Running total of retained earnings
Liabilities
• Current liabilities - Amount owed by the company and due for payment within one year • Trade payables (creditors) • Accruals - Expenses not yet invoiced • Non-current liabilities - Amount owed by the company and due for payment after one year • Long-term bank loans • Bonds issued by the company • Provisions - E.g. Doubtful debt
Depreciation
• Tangible non-current assets recorded on statement of financial position at net book value (NBV) • Annual depreciation charge - Straight line method • Freehold land - Not depreciated
IAS33:
Requires earnings per share ratio and diluted earnings per share to be shown at the foot of the income statement.
Contents of Income Statement
- Income generated by a company from selling its goods and services
- Recognised at point of sale
- Recognition can be apportioned over several accounting periods for long term contracts
Cost of sales (cost of goods sold)
Revenue (Turnover)
• Income generated by a company from selling its goods and services
• Recognised at point of sale
• Recognition can be apportioned over several accounting periods for long term contracts
Cost of sales (cost of goods sold)
• Costs directly associated with the cost of producing a product or service
Other operating costs
• More general costs of running a business
- Selling
- Distribution
- Administrative expenses
Operating profits
• Profit before interest and tax (PBIT)
Capital vs. revenue expenditure
• Expenditure
- Money spent by the company
• Capital expenditure
- Money spent to buy non-current assets
- Reflected on the statement of financial position
• E.g. Purchase of property, purchase of plant and machinery
• Revenue expenditure
- Immediately impacts the income statement
• E.g. Wages, rent, professional fees
Cash flow types
Free cash flow
The cash available after all expenses and reinvestments needed to maintain the operating capacity of the business have been made.
Enterprise cash flow (free cash flow to the firm)
• The free cash flow before considering payments made to any of the providers of finance to the firm (both debt and equity holders)
• Comparable cash flow irrespective of capital structure
Equity cash flow (free cash flow to equity)
• This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment
• Includes all debts related cash flows
Stuff on the cash flow statement
Operating activities (cash receipts and paid, income taxes paid, net cash from operating activities). Investing activities (interest received, dividends received, proceeds on disposal of non-current assets, net cash used in investing activities) Financing activities (equity dividends paid, repayment of debt, proceeds on issue of bonds or equities, bank loans raised, increase/decrease in bank overdrafts, net cash from financing activities, net increase/decrease in cash and cash equivalents.
Profit v cash
Because of the difficulty in arriving at free cash flow from the cash flow statement, many users calculate a free cash flow figure from the income statement.
This is generally arrived at by taking the operating profit from the income statement, then making adjustments. For example:
• Non-cash expenses (such as depreciation) are added back to profits
• Any increase in current assets, or decrease in current liabilities, must be subtracted from profits
• Any decrease in current assets, or increase in current liabilities, must be added to profits
Consolidating the accounts if the subsidiary is not entirely owned:
- 100% of the assets, liabilities, revenues and expenses of the subsidiary added
- Minority interest in shareholders’ funds on the statement of financial position
- Minority interest in the income statement after income tax expense
