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)
