Ch 10 - The main accounts Flashcards
Non-current assets (NCA)
def: long lives & bought with the intention of using them in the business. (also known as FIXED ASSETS)
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2 types:
1) tangible (PPE & valued at cost - depreciation)
2) intangible (not physical in nature, eg. incl. R&D costs, concessions, patents, trademarks & brand names)
Goodwill
non-current, intangible asset which arises when a co. buys another company for more than the value of the target company shown in its accounts, its book value. The difference between the price paid & the BV = goodwill.
Investments
non-current asset which may consist of interests in other companies in the form of shares, LS, debentures or conventional loans (shown at MV)
Current assets (CA)
def: are cash & items which will be converted into cash in the normal course of business
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types include:
i) INVENTORIES - raw materials, consumables, WIP & finished goods awaiting sale (shown at lower of cost & net realisable value)
ii) TRADE RECEIVABLES (DEBTORS) - amounts which company is owed by its customers
iii) CASH & OTHER C.A - money held on ST deposit
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(Revaluation for inventories & trade receivables should allow for any anticipated losses due to obsolescence or deterioration in the case of inventories & the likelihood of default for debtors)
Equity
SH’s equity directly made for purchase of shares -> Share capital + share premium (other reserves + revaluation reserve)
& retained earnings (profits not distributed in the form of dividends or share buybacks)
Current liabilities (CL)
def: balances which are due within 1 year
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Net current assets or Working capital = CA-CL
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Types of CL include:
i) TRADE PAYABLES (OR CREDITORS)
ii) ST BORROWINGS
iii) CURRENT PORTION OF LT BORROWINGS
iv) CURRENT TAX PAYABLE
Non-current liabilities (NCL)
def: liabilities which are not due within 1 year
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Types of NCL include:
i) LT borrowings
ii) LT provisions (estimated deferred tax & other matters such as pension commitments) -> amount & timing are subject to uncertainty
iii) Contingent liabilities (potential one)
Cost of sales (C.O.S)
def: reflect raw materials, components, wages & salaries expended in producing the goods sold.
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changes in inventory levels (both finished goods & raw materials) will need to be included as well as the charges for depreciation
Distribution costs & admin expenses
def: costs associated with sales, distribution & advertising; admin expenses include wages, salaries & directors remuneration -> overheads
Finance income & costs
Income: investments such as rent from property, interest on bonds, dividends from shares
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Costs: interest payments made on loans
Tax expense
def: companies pay corporation tax on their adjusted profit figures
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> tax charge = corporation tax rate * pre-tax profit
(where a co. believes its current-year tax figure does not reflect its LT tax liability, it will create a provision for deferred tax in the SFP)
Categories of profit
1) GP (Gross profit) = Turnover - C.O.S
2) OP (Operating profit) = GP - expenses (excluding interest)
3) PBT (Profit before tax) = OP adjusted for financing (interest) costs & income.
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Profit for the year = PBT - tax
Earnings per share (EPS)
Earnings attributable to the OSH’s / # of OS in issue
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earnings of OSH’s = Profit for year - preference dividends (if any)
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total comprehensive income is found by adding other comprehensive income (e.g gains on revaluation)
Cashflow statement & its components
def: shows where money has come from & where it has gone. Accruals concept is ignored.
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> CF’s from OPERATING activities
> CF’s from INVESTING activities
> CF’s from FINANCING activities
Why is the cashflow statement needed?
1) to show CASH MOVEMENTS: liquidity as SPL & SFP doesn’t provide sufficient insight into movements in cash balances (used to supplement financials)
2) CASH is important: very few businesses could survive a prolonged cash outflow (whether company is run efficiently)
Why do CF’s need to be monitored?
-for expansion of business, & that it doesn’t force it into a cash deficit
-also not good to have too much “unnecessary, unused” cash as it could be used productively
-can be used to pay dividends if need be
CF’s from operating activities
OP profit made with an adjustment for depreciation, changes in WC (inventories, trade & other receivables, trade & other payables) , interest paid & tax paid
CF’s from investing activities
- purchase & sale of NCA, PPE + intangible assets
- receipts of interest & dividends from investments
- transactions involving ‘liquid’ assets other than cash, such as ST investments in securities
CF’s from financing activities
- payment of dividends to the company’s SH’s
- CF’s arising from the repayment of loans & from fresh borrowing & the issue of shares
Notes to the accounts
def: UK legislation requires co’s to produce accounts which include detailed disclosures
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notes include details such as:
i) ACCOUNTING POLICIES used in prep of financials
ii) ANALYSIS OF TOTALS shown in the SFP
iii) ANALYSIS OF ITEMS in the SPL
iv) SIGNIFICANT EVENTS after the end of the accounting year
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additionally , company would disclose additional info designed to help the readers of accounts to gain a ‘true & fair view’ of the companies position
