Accounting Analysis

Question 1

what is an accruals basis

Answer 1

can put revenues that haven’t been realised yet on the balance sheet

Question 2

what are the capital and reserves on balance sheet

Answer 2

share capital: nominal value of shares
share premium: extra value raised on issue
revaluation reserve: balancing figure, some assets appreciate over time
retained earnings: ongoing profit or loss in company

Question 3

what are some intangible non-current assets

Answer 3

goodwill,
trademarks,
patents

Question 4

what are non-current asset investments and where on balance sheet

Answer 4

non-current asset,

unless held for less than a year (trading), then current asset

Question 5

net realisable value

Answer 5

how much can sell it on for

Question 6

what is a consideration on balance sheet

Answer 6

ordered in terms of liquidity

Question 7

share capital: nominal value of shares
share premium: extra value raised on issue
nominal value of share: 25p

what happens to both of those accounts when new shares issued for £1.80

Answer 7

25p share capital account

£1.55 in share premium account

Question 8

what can share premium account be used for

Answer 8

used to fund bonus issue,

write off cost of listing and issue

Question 9

what can revaluation reserve account used for

Answer 9

in equity,

if building goes up in value, assets increase, this is in equity which increases.

Question 10

what is a capital reserve account

Answer 10

share premium,

revaluation reserve

Question 11

what is a revenue reserve account

Answer 11

retained earnings

Question 12

what is the time difference between current and non-current assets

Answer 12

current assets: within 1 year

NCA: other

Question 13

ammortisation

Answer 13

depreciation but for intangible non-current assets

Question 14

how do you calculate depreciation

Answer 14

annual depreciation = (original cost - expected residual value) / expected useful life

Question 15

is freehold land depreciated

Answer 15

no, that’s why we have revaluation reserve

Question 16

what are the three things on the cash flow statement

Answer 16

operating activities,
investing activities,
financing activities

Question 17

What is the effect of ‘capitalisation’ of expenditure on the statement of financial position?
ACash decreases and shareholders’ funds increase BCash increases and shareholders’ funds increase CCash decreases and non-current assets increase DCash increases and non-current assets decrease

Answer 17

Cash decreases and non-current assets increase,

When expenditure is capitalised it leads to an increase in non-current assets rather than a decrease in profit.

Question 18

what is gearing

Answer 18

level of debt within business, how much is financed through debt relative to equity

Question 19

What is the interest cover ratio equation

Answer 19

interest cover ratio = profit before interest and tax / interest expense

Question 20

return on capital employed (ROCE) equation

Answer 20

return on capital employed (ROCE) = operating profit / capital employed X 100,

capital employed = total assets - current liabilities = equity + NCA

Question 21

Earnings per share ratio

Answer 21

EPS = profit available to ordinary shareholders / number of ordinary shares

Question 22

what is diluted eps

Answer 22

if warrants called and all shares issued, what is earnings per share, basically possible worst case scenario this year

Question 23

what is an interpretation of high P/E ratio

Answer 23

may indicate high growth prospects or overvalued

Question 24

what is EV/EBITDA

Answer 24

EV: enterprise value = market value of debt + market value of equity
EBITDA: earnings before interest, tax, depreciation + amortisation

Question 25

what happens if dividend cover < 1

Answer 25

uncovered dividend, paid from retained earnings

Question 26

Four shares have the following share prices and EPS. Which is the most highly-rated?
A190p and 6p B275p and 12p C200p and 10p D150p and 8p

Answer 26

190p and 6p,

Share price divided by EPS gives the PE ratio. ‘190p and 6p’ gives the highest PE ratio (31.7x) and so is the most highly-rated.