Audit and financial statements Flashcards
What is a balance sheet?(3)
Balance Sheet is a snapshot at a point in time. On the top half you have the company’s assets and on the bottom half its liabilities and Shareholders’ Equity (or Net Worth). The assets and liabilities are typically listed in order of liquidity and separated between current and non-current
What is an income statement?(3)
The income statement covers a period of time, such as a quarter or year. It illustrates the profitability of the company from an accounting (accrual and matching) perspective. It starts with the revenue line and after deducting expenses derives net income.
What are cashflow statements?(3)
The cash flow statement look at the cash position of the company . It answers it answers the questions ; How much of the organisation’s cash goes to its creditors and shareholders? Does it keep enough for its own investment and growth? has 3 components cash from
operations, (excludes depreciation and amortisation-closing cash balance) cash used in investing (non-current assets-all cash transactions), and cash from financing (shares or debt-opening cash balance). It “undoes” all of the accounting principles and shows the cash flows of the business.
Given an example of current assets and liabilities.(2)
Assets • Expected to be converted into cash in less than 1 year • Accounts receivable, inventory Liabilities • Will be paid in less than 1 year • Trade accounts payable
Given an example of non-current assets and liabilities.(2)
Assets • Expected to be held greater than 1 year • Property, plant, and equipment Liabilities • Repayment terms longer than 1 year • Loan repayable over a 5 year
Two main types of liabilities.(2)
Commitments or contingencies.
Commitments are future obligations that a company agrees to e.g. building improvements or leasehold improvements
Contingencies are liabilities that may or may not happen, depending
on circumstance.
e.g. lawsuit
The liability must be recorded if:
1.A loss will be suffered in the future
2.The loss amount can be reasonably estimated
If not, just disclose a note.
Contingent gains are never recorded in financial statements
3 main types of asset.(3)
Goodwill:
• Non-current asset
• Company has intangible Value
e.g. brand, customers,intellectual capital
If a company is purchased for more than
the fair value of net assets (assets less
liabilities)
Intangible asset: Intangible assets are items of value that are used to generate revenues and have no
physical substance e.g. trademarks, copyrights, patents
Unearned/Differed revenue: Unearned revenue arises when a company
sells something it has not yet delivered e.g.
licenses, subscriptions 12 month
subscription sold for $1,200 in January.
Common vs. Preferred shares.(2)
Common:
Allow for participation in the profits of the
company
– Comes in the form of a dividend
• Allow for voting rights in a company
– One vote for every share held
• If dissolved, any residual amount after
everyone else is paid would go to the
common shareholders
Preferred:
• Offer investors a fixed dividend
– It may not be paid annually
• Will accumulate/pay before common share
dividends
• Most businesses don’t issue because they
are viewed as debt with a tax disadvantage
– Dividends do not reduce taxable income
Authorised vs Issues shares.(1)
Authorised shares • The total number of shares a company can sell Outstanding (Issued) shares • The total number of shares a company has sold/issued
Aspects of equity.(2)
-Other comprehensive income (OCI):
• certain company gains and losses that are not always recorded through the income statement
e.g. unrealised gains and losses on investments and hedging instruments (can also appear on income statement)
-Contributed surplus: the accounting term used whenever shares are sold at a price above their stated par value the value authorized in the company’s charter and included on the stock certificate.
Different expenses.(2)
-Selling goods and administrative expenses includes office supplies, other related expenses, legal insurance and accounting expenses, advertising and promotion cost
-Cost of sales includes direct costs of materials, labour and overheads
-Gains and losses, They are related
to activities that are incidental to operations such as: sale of investments, foreign exchange translations, financial instrument transactions.
Direct vs indirect cashflow method.(2)
Direct method of cash flow starts with cash transactions.
(Transactions are separated into cash received and cash
paid.)
Indirect method of cash flow starts with net income. (Non-cash adjustments are then added.)
Key elements in a cashflow statement.(4)
Net cash provided by operating activities:
Represents operating ‘lifeblood’ of business after paying necessary outgoings for financing
and tax
Changes in working capital:
Shows whether business is absorbing funds for working capital or releasing them. Trend may indicate either financial stress or loose control over working capital
PPE investment:
Companies must invest in PPE to maintain their productive capacity. A downward trend may indicate a declining company. Identify the necessary sustainable
level of expenditure.
Financing requirement/surplus:
Shows whether internally generated funds are sufficient to cover investments made in fixed assets and businesses. Continuous deficits indicate that growth depends on regular injections of external finance.
3 key notes contained in a full disclosure.(3)
Significant accounting policies e.g. PP&E is amortized, revenue is recognised
Direct information: breakdown of types of investment or financial instruments used
Indirect information:Notes of indirect information:
• Help provide the entire financial picture of
an organisation
• Not related to the numbers in the financial
statements
Assets vs Equity.(1)
While assets represent the value the company owns, equity represents investment provided in exchange for a stake in the company.
