Analysis and Issue In Reporting Flashcards
4 main areas of ratio analysis
- investor rations
- Analysis of management performance
- liquidity and current assets
- gearing (leverage)
Investor rations
Provide some measure of how the price of a share in the stock market compares to key indicators of the performance of the company
Analysis of management performance
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
Liquidity and current assets
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
Gearing
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
Investor ratios
Earnings per share
Profit after tax for ordinary equity holders
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Number of issued ordinary shares
Investor ratios
Price-earnings ratio
Share price
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Earnings per share
Investor ratios
Dividend per share
Dividend of the period
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Number of issues ordinary shares
Investor ratios Dividend cover (payout ratio)
Earnings per share
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Dividend per share
Investor ratio
Dividend yield
Dividend per share
————————— X 100%
Share price
Analysis of management performance
Return of shareholders’ equity
Profit after tax for ordinary equity holders
—————————————— X 100%
Share capital + reserves
Analysis of management performance
Return on capital employed
Operating profit (before interest and tax)
—————————————— X 100%
Total assets - current liabilities
Analysis of management performance
Return on capital employed
Operating profit (before interest and tax)
—————————————— X 100%
Ordinary share capital + reserves
+ long term loans
The operating and financial review
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
The highlighted statement in the annual report
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
Segmental reporting
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
Off-balance sheet finance
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
Corporate social responsibility
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
Corporate governance
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
Entry price values
Values that measure the cost of buying, acquiring or replacing an asset or liability
Exit price values
Represent the sale, disposal or other form of realisation of an asset
Fair value
The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction
The statement of cash flows provides information about
Changes in financial position that adds to the understanding of the business obtainable from the balance sheet and income statement (profit and loss account)
Statement of cash flows explains
Changes in cash and cash equivalents arising from operating activities, investing activities and financing activities
Cash
Comprises cash on hand and demand deposits
Cash equivalents
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
Alternative approaches to calculating the cash flow arising from operating activities
Indirect method
Direct method
Indirect method
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
Direct method
Takes each item of operating cash flow separately from the cash records to arrive at the cash flow arising from operating activities
The cash flow is useful in analysis when
Combines with ratio analysis that shows relationships of liquidity, working capital management, rates of investment in non-current and financial gearing
