Accounting Analysis

Question 1

Main sections of a balance sheet/statement of financial position (3)

Answer 1

Assets owned by the company

Liabilities owed to the company by others

Equity showing total capital amount the shareholders have contributed and are due

Question 2

Main content of an income statement

Answer 2

Summary of revenue and expenses incurred by the company over that accounting period

Question 3

Main content of a cash flow statement

Answer 3

Identifies how much cash the company generated over the accounting period and how much as been spent

Question 4

What organisation is trying to harmonise generally accepted accounting practise (GAAP) throughout the world?

Answer 4

International Accounting Standards Board

Question 5

Company Accounts vs. Group Accounts (2)

Answer 5

If a co invests in another co, it’s fine to display the original cost of investment in the company accounts

If a co invests and becomes the controller of another co, group/consolidated accounts will need to be prepared where the parent and subsidiary are presented as one entity

Question 6

What is goodwill on group accounts? (2)

Answer 6

If cost of investment exceeded net assets of the subsidiary co being bought, the excess is described as goodwill

Displayed as an asset in consolidated statements

Question 7

Types of assets on a statement of financial position (2)

Answer 7

Current and non-current

Question 8

What is a tangible non-current asset?

Answer 8

Physical assets which are expected to generate economic benefits over a number of accounting periods

Question 9

What is an intangible non-current asset?

Answer 9

Assets which are expected to generate economic benefits over a number of accounting periods

Question 10

Depreciation vs amortisation

Answer 10

Depreciation is for tangible assets and amortisation is for non-tangible assets

Question 11

Straight line depreciation formula

Answer 11

(cost - disposal value) / useful economic life in years

Question 12

Ways in which equity is displayed in group accounts (4)

Answer 12

Share Capital

Capital Reserves

Revenue Reserves

Non-controlling interests/minority interests

Question 13

Earnings per share formula

Answer 13

(Net income for financial year - dividends on pref shares) / No of ordinary shares in issue

Question 14

What is capital expenditure?

Answer 14

Money spent to buy non-current assets e.g. property, equipment

Question 15

What is revenue expenditure?

Answer 15

Money spent that immediately impacts income statement e.g. wages, rent

Question 16

What is return on capital employed used for?

Answer 16

It compares the money invested with generated return to measure overall management performance

Question 17

Return on capital employed formula

Answer 17

(Operating profit/capital employed) x 100

Question 18

What is financial gearing?

Answer 18

Measure of risk within a co. which looks at the amount of financing that comes from debt and how much come from equity

Question 19

Risks of a highly geared/leveraged company

Answer 19

Debt to Equity may not be representative as co may have a lot of short term investments that can be easily cashed

More debt means more interest and principal to pay off so default is more likely

Question 20

Interest Cover formula

Answer 20

Operating Profit/Interest Costs

Question 21

Price Earnings ratio formula

Answer 21

Current market price per share/earnings per share

Question 22

What is trailing P/E?

Answer 22

backward looking version of price/earnings ratio which takes net income for the most recent 12 month period

Question 23

What is forward P/E?

Answer 23

Based on estimated net earnings over next 12 months

Question 24

Gross dividend yield formula

Answer 24

(Dividend x share price) / 100

Question 25

Dividend cover formula

Answer 25

EPS/dividends per share