Analysis and Issue In Reporting

Question 1

4 main areas of ratio analysis

Answer 1

• investor rations
• Analysis of management performance
• liquidity and current assets
• gearing (leverage)

Question 2

Investor rations

Answer 2

Provide some measure of how the price of a share in the stock market compares to key indicators of the performance of the company

Question 3

Analysis of management performance

Answer 3

Indicate how well the company is being run in terms of using assets to generate sales (revenue) and how effective it is in controlling costs and producing profit based on goods and services sold

Question 4

Liquidity and current assets

Answer 4

The management of cash and current assets and the preservation of an adequate but not excessive level of liquidity is an essential feature of business survival especially in difficult economic circumstances

Question 5

Gearing

Answer 5

A measure of the extent to which there is financial risk indicated in the statement of financial position (balance sheet) and in the income statement (profit and loss account)
Financial risk means the risk associated with having to pay interest and having an obligation to replay a loan

Question 6

Investor ratios

Earnings per share

Answer 6

Profit after tax for ordinary equity holders
———————————————
Number of issued ordinary shares

Question 7

Investor ratios

Price-earnings ratio

Answer 7

Share price
—————-
Earnings per share

Question 8

Investor ratios

Dividend per share

Answer 8

Dividend of the period
———————————
Number of issues ordinary shares

Question 9

Investor ratios 
Dividend cover (payout ratio)

Answer 9

Earnings per share
—————————-
Dividend per share

Question 10

Investor ratio

Dividend yield

Answer 10

Dividend per share
————————— X 100%
Share price

Question 11

Analysis of management performance

Return of shareholders’ equity

Answer 11

Profit after tax for ordinary equity holders
—————————————— X 100%
Share capital + reserves

Question 12

Analysis of management performance

Return on capital employed

Answer 12

Operating profit (before interest and tax)
—————————————— X 100%
Total assets - current liabilities

Question 13

Analysis of management performance

Return on capital employed

Answer 13

Operating profit (before interest and tax)
—————————————— X 100%
Ordinary share capital + reserves
+ long term loans

Question 14

The operating and financial review

Answer 14

Provides a balanced and comprehensive analysis of the business, it’s year-end position, the trends in performance during the year and factors likely to affect future position and performance. It is good practise for quoted UK companies

Question 15

The highlighted statement in the annual report

Answer 15

Shows what the company regards as important information for investors as the primary users of the annual report. A table of five-year trends is also useful in evaluating the position and performance of the business

Question 16

Segmental reporting

Answer 16

Has developed as a means of supplementing the consolidated financial statements by providing more insight into the activities of the group

Reports information about the different types of products and services that an entity produces and the different geographical areas in which it operates

Question 17

Off-balance sheet finance

Answer 17

Describes the situation where an asset and a liability are omitted from the financial statements of an entity
The UK ASB takes the view that such transactions should remain on the entity’s statement of financial position (balance sheet) if the risks and rewards remain with the entity.
The IASB has specific rules to deal with special purpose vehicles, which are one form of off-balance sheet finance

Question 18

Corporate social responsibility

Answer 18

Means that companies integrate social and environmental concerns in their business operations and in their interactions with stakeholders
Many companies include social and environmental disclosures in their annual reports
The global reporting initiative provides a framework for such disclosures

Question 19

Corporate governance

Answer 19

Is used to describe the way in which companies are directed and controlled
Listed companies in the UK are required to follow the combined code of corporate governance
In the annual report the directors must either confirm compliance with the code or explain reasons for non-compliance

Question 20

Entry price values

Answer 20

Values that measure the cost of buying, acquiring or replacing an asset or liability

Question 21

Exit price values

Answer 21

Represent the sale, disposal or other form of realisation of an asset

Question 22

Fair value

Answer 22

The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction

Question 23

The statement of cash flows provides information about

Answer 23

Changes in financial position that adds to the understanding of the business obtainable from the balance sheet and income statement (profit and loss account)

Question 24

Statement of cash flows explains

Answer 24

Changes in cash and cash equivalents arising from operating activities, investing activities and financing activities

Question 25

Cash

Answer 25

Comprises cash on hand and demand deposits

Question 26

Cash equivalents

Answer 26

Short-term, highly liquid investments that are readily con-vertible to known amounts of cash and which are subject to an insignificant risk of changes in value

Question 27

Alternative approaches to calculating the cash flow arising from operating activities

Answer 27

Indirect method

Direct method

Question 28

Indirect method

Answer 28

Starts with the profit from operations, eliminates non-cash expenses such as depreciation, adds on or deducts the effects of changes in working capital to arrive at the cash flow arising from operating activities

Question 29

Direct method

Answer 29

Takes each item of operating cash flow separately from the cash records to arrive at the cash flow arising from operating activities

Question 30

The cash flow is useful in analysis when

Answer 30

Combines with ratio analysis that shows relationships of liquidity, working capital management, rates of investment in non-current and financial gearing