Accounting Revision (and profitability) Flashcards
What 5 items make up equity on the balance sheet?
1) Retained Earnings
2) Revaluation Reserve
3) Share Capital
4) Share Premium
5) Non Controlling Interest
What are capital reserves / share premium?
re: equity on balance sheet
When shares are issued at a premium
Cannot be distributed
What are revaluation reserves?
re: equity on balance sheet
Where non-current assets have their value revised upwards
What is non-controlling interest?
re: equity on balance sheet
when one company owns greater than 50% of another company but not 100%
What do variable costs scale with?
Volume
At 0 production, VC = 0
What is the break even point?
When Revenue = Total Costs
How is BEP calculated?
Fixed Costs / Revenue Per Unit - Variable Cost Per Unit
What does Revenue Per Unit - Variable Cost Per Unit calculate?
Contribution Per Unit
What is the formula for contribution margin?
Total Revenue - Total Variable Costs
What can contribution margin be used for?
- Analyse operational gearing
- Analyse profitability of product lines
- Analyse prices of product lines
- Finding the BEP
Give 2 Drivers of Growth in Sales
1) Increase Volume
2) Increase Sales Price
How can a firm increase sales volume?
1) Expand market reach
2) New Products
3) Increase Marketing
How can a firm increase sales price?
1) Improve brand image
2) Release Luxury Products
How does an increase in sales volume reduce BEP?
Fixed costs per unit decrease
How does an increase in sales price reduce BEP?
Contribution per unit increases
What are risks of increasing price and volume?
1) Demand Falls
2) Diseconomies of Scale
What is operational gearing?
A measure of how a companies costs are structured.
What extent of a companies costs are fixed?
What does operational gearing show?
Sensitivity of EBIT / Profit to a change in sales volume.
More sales = more profit & less sales = more loss.
What is the formula for operational gearing?
Revenue - Variable Costs / Profit
What does EPS show?
The amount of profit available to be distributed to shareholders
What is diluted EPS?
EPS if hypothetical dillutive events take place
Give 3 examples of events that can dilute EPS:
1) Convertible Loan Stock
2) Warrants
3) Share options not yet exercised
What is the formula to calculate diluted EPS?
Net Profit - Preference Share Dividends / No. Shares + Convertibles
What is a bonus issue?
What two other names does it have?
Issue of new shares - no cash raised
1) Scrip
2) Capatalisation
How does a bonus issue effect statement of financial position?
Increase share capital
Reduce Reserves
DOES NOT CHANGE TOTAL NET ASSETS
What is the formula for the bonus fraction?
Shares after issue / Shares before Issue
What is the formula to restate EPS following a bonus issue?
EPS / Bonus Factor
How is the bonus fraction for a rights issue calculated?
Cum-rights price / TERP
cum rights price is the price before the rights issue
What is the other name for horizontal analysis?
Trend Analysis
What is trend analysis
Use ratio’s over a number of periods to establish trends and detect abnormalities
What is the other name for vertical analysis
Common Size Analysis
What is common size analysis?
Entries are expressed as a % of a base value
What two figures are most commonly used as the base value in common size analysis?
1) Revenue
2) Total Assets
Depends on what statement is being analysed
What are the benefits of trend analysis?
1) Data is readily available
2) Can compare with competitors / indsutry average
3) Can predict future trends
What are the limitations of trend analysis?
1) Easiy skewed if inconsistent periods are used
2) Can be easily modified (e.g. change the number of observation periods)
What are the benefits of vertical analysis?
1) Correlates items to net profit / total assets
2) Easy to compare with averages / competitors
3) Can be used to set targets / limits
What is greenwashing?
Making false claims about sustainability in order to improve profits or investments
What other types of “washing” are there
in addition to greenwashing
1) Social washing
2) Governance Washing
3) Rainbow Washing
4) Purple Washing
5) Diversity Washing
Who are the four providers of ESG reporting standards?
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)
