Accounting Topic 2 (What info do we get from the annual report?) Flashcards
Company:
- Separate legal entity
- Owned by SHs (invest = equity) = elect directors board = Run company
- Agency problem
Directors of a company
- may own some shares
- Incentivised = options to buy shares at cheaper price
Agency problem
- Conflict between goals of owners (SHs) and executives (directors)
Corporate governance helps balance this problem
Financial reporting
- Reporting to OUTSIDE world (access to limited info)
- financial statements to provide info on company’s: perf, position (changes in), cash generation
objective of financial reporting
- Provide info about financial position, performance and cash flows of entity
Useful to users in making economic decisions
Directors 3 responsibilities relating to financial statement prep
- Select appropriate accounting policies
- Prepare financial statements (present to SHs at AGM) / then published
- Make reasonable estimates -> external audit provide opinions
statement of financial position
AS AT
assets
liabilities
equity
Statement of profit or loss and other comprehensive income (Statement of comprehensive income)
FOR THE YEAR ENDED
a. Comprehensive income: sum of that net income plus the value of yet unrealized profits (or losses) in the same period
Income and expenses, gains and losses
4 statements
- SOFP
- Statement of profit or loss and other comprehensive income
- Statement of cash flows
- Statement of changes in equity
Statement of changes in equity
-> FOR THE YEAR ENDED
1. Contributions in (equity)
2. Distributions out (dividends)
Standards
IASB: International Accounting Standards Board -> sets the IFRS
IFRS: International Financial reporting standards
Adopted previous International Accounting Standards (IAS)
· Standards tell us how any transaction should be reported in the financial statements
GAAP - complying with this provides financial statements that give a “true and fair view”
IFRS & US GAAP are different
statement of cash flows
classification of activities
1. operating activities
2. investing activities
3. financing activities
operating activities
deliver or produce goods for sale & provide services
1. Receive cash from customers
- profit may = -ve cash flows due to accruals (signal quality)
- Pay cash to suppliers (operating expenses)
investing activities
buy or sell long term assets and other investments
- Property, plant and equipment (PP&E)
Other companies securities (not cash equivalents)
financing activities
obtain or repay capital (funding the business)
1. Borrow from creditors and repay the principal -> baseline sum in financial transactions—the initial amount invested or borrowed
2. Issue or repurchase stock
3. Pay dividends
- Don’t tend to buy dividends but buy back shares from the SHs = capital gains
methods of presenting operating cash flows
- indirect
- direct
indirect method
companies tend to use!
1. Begins with net income
2. adjust to operating cash flows
-Show clearly the reason for difference between net income and operating cash flow
- Mirrors forecasting approach (begin with forecast of income then derives cash flows)
direct method
- Shows each cash inflow and outflow related to receipts and disbursements
- Provide info on specific sources of operating cash receipts and payments
Does not net!
evaluating cash flow statement
- Major sources and uses of cash flows are between operating investing & financing activities
- Primary determinants of operating cash flows
- Primary determinants of investing cash flows
- Primary determinants of financing cash flows
questions to ask of a company
- Has cash increased?
- Major sources/uses of cash flow
- Is operating cf positive and sufficient to cover capital expenditures
- Major determinants of operating cash flow
- Which is higher operating cash flow or net operating income and why
- Consistent cash flows from operating activities
- Can the company pay dividends
- “free cash flows”
free cash flows
cash generated after accounting for cash outflows to support operations (whatever is left)
- company to grow = free cash flow
- Grow organically or by assets or buying other companies
