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CWM Financial Markets > Accounting Revision (and profitability) > Flashcards

Accounting Revision (and profitability) Flashcards

1
Q

What 5 items make up equity on the balance sheet?

A

1) Retained Earnings
2) Revaluation Reserve
3) Share Capital
4) Share Premium
5) Non Controlling Interest

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2
Q

What are capital reserves / share premium?

re: equity on balance sheet

A

When shares are issued at a premium

Cannot be distributed

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3
Q

What are revaluation reserves?

re: equity on balance sheet

A

Where non-current assets have their value revised upwards

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4
Q

What is non-controlling interest?

re: equity on balance sheet

A

when one company owns greater than 50% of another company but not 100%

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5
Q

What do variable costs scale with?

A

Volume

At 0 production, VC = 0

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6
Q

What is the break even point?

A

When Revenue = Total Costs

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7
Q

How is BEP calculated?

A

Fixed Costs / Revenue Per Unit - Variable Cost Per Unit

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8
Q

What does Revenue Per Unit - Variable Cost Per Unit calculate?

A

Contribution Per Unit

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9
Q

What is the formula for contribution margin?

A

Total Revenue - Total Variable Costs

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10
Q

What can contribution margin be used for?

A
  • Analyse operational gearing
  • Analyse profitability of product lines
  • Analyse prices of product lines
  • Finding the BEP
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11
Q

Give 2 Drivers of Growth in Sales

A

1) Increase Volume
2) Increase Sales Price

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12
Q

How can a firm increase sales volume?

A

1) Expand market reach
2) New Products
3) Increase Marketing

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13
Q

How can a firm increase sales price?

A

1) Improve brand image
2) Release Luxury Products

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14
Q

How does an increase in sales volume reduce BEP?

A

Fixed costs per unit decrease

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15
Q

How does an increase in sales price reduce BEP?

A

Contribution per unit increases

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16
Q

What are risks of increasing price and volume?

A

1) Demand Falls
2) Diseconomies of Scale

17
Q

What is operational gearing?

A

A measure of how a companies costs are structured.

What extent of a companies costs are fixed?

18
Q

What does operational gearing show?

A

Sensitivity of EBIT / Profit to a change in sales volume.

More sales = more profit & less sales = more loss.

19
Q

What is the formula for operational gearing?

A

Revenue - Variable Costs / Profit

20
Q

What does EPS show?

A

The amount of profit available to be distributed to shareholders

21
Q

What is diluted EPS?

A

EPS if hypothetical dillutive events take place

22
Q

Give 3 examples of events that can dilute EPS:

A

1) Convertible Loan Stock
2) Warrants
3) Share options not yet exercised

23
Q

What is the formula to calculate diluted EPS?

A

Net Profit - Preference Share Dividends / No. Shares + Convertibles

24
Q

What is a bonus issue?

What two other names does it have?

A

Issue of new shares - no cash raised

1) Scrip
2) Capatalisation

25
Q

How does a bonus issue effect statement of financial position?

A

Increase share capital

Reduce Reserves

DOES NOT CHANGE TOTAL NET ASSETS

26
Q

What is the formula for the bonus fraction?

A

Shares after issue / Shares before Issue

27
Q

What is the formula to restate EPS following a bonus issue?

A

EPS / Bonus Factor

28
Q

How is the bonus fraction for a rights issue calculated?

A

Cum-rights price / TERP

cum rights price is the price before the rights issue

29
Q

What is the other name for horizontal analysis?

A

Trend Analysis

30
Q

What is trend analysis

A

Use ratio’s over a number of periods to establish trends and detect abnormalities

31
Q

What is the other name for vertical analysis

A

Common Size Analysis

32
Q

What is common size analysis?

A

Entries are expressed as a % of a base value

33
Q

What two figures are most commonly used as the base value in common size analysis?

A

1) Revenue
2) Total Assets

Depends on what statement is being analysed

34
Q

What are the benefits of trend analysis?

A

1) Data is readily available
2) Can compare with competitors / indsutry average
3) Can predict future trends

35
Q

What are the limitations of trend analysis?

A

1) Easiy skewed if inconsistent periods are used
2) Can be easily modified (e.g. change the number of observation periods)

36
Q

What are the benefits of vertical analysis?

A

1) Correlates items to net profit / total assets
2) Easy to compare with averages / competitors
3) Can be used to set targets / limits

37
Q

What is greenwashing?

A

Making false claims about sustainability in order to improve profits or investments

38
Q

What other types of “washing” are there

in addition to greenwashing

A

1) Social washing
2) Governance Washing
3) Rainbow Washing
4) Purple Washing
5) Diversity Washing

39
Q

Who are the four providers of ESG reporting standards?

A

1) Task force on climate related disclosures (TCFD)
2) Global Reporting Initiative (GRI)
3) Sustainability Accounting Standards Board (SASB)
4) International Sustainability Standards Board (ISSB)

CWM Financial Markets (58 decks)

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