Chapter 8: Accounting Analysis Flashcards
Accounting definition
Recording, measuring and reporting economic events or activities to interested parties in a usable form.
3 types of financial statement
- Statement of financial position/balance sheet
- Income statement
- Cashflow statement
- balance sheet and 3 main sections
Gives a snapshot of a company’s financial position at a given date, usuallly year end.
Has 3 main sections
1. assets (owned by company)
2. equity (amount shareholders have contributed and are due)
3. liabilities (amount the company owe)
Assets are listed on one side of the BS and equity and liabilities on the other. assets=equity+liabilities
– 2. Income statement
Summarises income or revenue earned and expenses. Tracks the trading activities over the accounting period.
Also called the P+L.
the relationship between the income statement and balance sheet by tracking the activity of the company throughout the whole year as income is earned etc and then it feeds into the BS at the end of the accounting period.
– 3. Cash flow statement - 3 types of cash activity
Identifies how much cash a company generated and spent over the accounting period. Splits the sources and uses of cash into 3 activities: operating, investing, financing activity.
5 elements of a financial statement
- Assets = items owned by the company (can usually yield economic benefit)
- Liabilities = money owed to others
- equity = amount invested by shareholders + unpaid dividends
- Reveneue = sales made by the company
- expenses = costs of doing business - rent, paying staff
Accounting regulations (ISSB + IASB)
Generally accepted accounting principles (GAAP)
* IFRS Foundation aims to harmonise GAAP gloablly
* Created 2 boards to set standards International accoutning standards Board (IASB) and international sustainability standards board (ISSB).
* ISSB - recent creation - set up for gloabl investment portfolios to meet ESG standards.
* IASB - Designed to set up gloabl standard accounting practices. Stdrds of IASB are set by IFRS
* The US uses it’s own US GAAP nationally that is based on IASB but not exact.
Group and company accounts and 2 issues when creating group accs
Group = AKA consolidated FSs - Includes accounts of the parent and all subsidiares rolled into 1 set of accs.
Company = entity level accs.
Issues with grouping accs
1. Goodwill = Assets and liabilities of SUBS are added to accs of the parent. This cancels out the cost of investment of the parent in the SUB. If cost of investment exceeded the value of assets of the SUB it is called goodwil and appears as an asset.
2. Non controlling interests = When a sub isn’t owned 100% by the UP, the shares that aren’t owned are called non controlling assets. NCAs are added onto the balance sheet despite not being owned by the UP as the BS measures all assets.
Non-current assets - how are they further categorised
Assets in long term and continuous use by the company. they are major investments that teh company hopes to make moeny from.
Catagorised into tangible and intangible assets
3 Types of non current asset - tangible etc
- tangible non current = physical assets like land, buildings. They are recorded initially at their actual cost but will need to be depreciated in following years accounts to make up for the economic gain it provides.
- Intangible non currentt = non physical but return econ benefit like intellectual property, computer software and purchased goodwill.
- non current investments = invested assets like equity, bonds, etc that will not be sold or mature in the next coming year. Recorded at cost in the FS minus impairment.
Current assets
Assets purchased with the intention of resale or conversion into cash within the next 12 months.
Include products ready to be sold, prepayments and cash balances.
Usually listed on the balance sheet in ascending order of liquidity.
Depreciation and amortisation - how are they recorded in the balance sheet
- Depreciation = applies to tangible non current that lose value over time as a result of use. For example farming equipment will be worth less afte 5 years of use.
- Amortisation = Intangible non current that lose value over time for example licenses.
- Recorded as expenses on the balance sheet as it infers the value is being used up.
Straight line depreciation calculation and meaning
(Cost - disposal value)
= ————————————–
Useful economic life in years.
Straight line depreciation is the most common depreciation calculation.
The expesnse is not linked to any cash expedniture so depreciation is entered as a non cash charge to reflect the fall in value.
The FS value of the asset is given by its cost-depreciation to date and is called net book value
4 types of equity
- Share capital = nominal value of equity and pref. share capital the company has issued.
- Capital reserves = revaluation reserves (increase in value of non current assets) and the share premium (when shares are issued above their nominal value) account. Cannot be issued as dividends
- Revenue reserves = accumilated profits of the company that haven’t been paid to shareholders.
- Non controlling interests = when a UP owns part of but not all of a subsidiary. The equity not owned by the UP is non controlling.
Equity = share capital + reserves
Current and non current liabilities
- Non current liabilities = money owed to another party that will not be paid in the next 12 months e.g. bond issues. Provisions also apply here (when there is an obligation to pay someone but the amount and when it is due hasn’t been established)
- Current liabilities = Money owed that is to be paid in the next 12 months. Amount owed to suppliers, trade payables etc.
THE INCOME STATEMENT - 10 components
- Revenue - all sales
- Cost of sales - productions costs, wages.
- Gross profit - total sales-the cost of sales
- Operating profit - gross profit-other operating expenses (marketing etc). Does not consider finance costs (interest) or tax.
- Finance costs/income - gains/losses from interest.
- Profit before tax -
- Tax
- Net income - tax and financing costs are deducted from profit. Helps calculate dividend
- Earnings per share (EPS) - shows profit after tax for shareholders per share.
- Dividends - profits that will be distributed to shareholders. Paid either in 1 go, half yearly, or quarterly.
Some flexibility on the format from IFRS
PBIT, EBIT, EBITDA
- PBIT = profit before interest and tax
- EBIT = Earning before interest and tax
- EBITDA = Earnings before interest tax depreciation or amortisation. Helps calculate a sustainable level of debt for a compamy.
Earnings per share calculation
Net income for fin year - dividends on preference shares
EPS = ——————————————————————————
Number of ordinary shares in issue
Capital and Revenue expedniture
- Capital expenditure = money spent to buy non current assets such as property. Shown on FS
- Revenue expenditure = moeny spent that immediately impacts the income statement like paying staff, rent etc.
CASH FLOW STATEMENT
Summary of all payments and receipts of cash trhoughout the year and shows how a company uses it’s cash
Cash flow statement contents and what governs them
IAS 7 accounting standard requires the below to be included
* Operating activities and net cash from operating activities - cash generating from business operations
* Investing activities and net cash used in InvAct - income from investment recieved in the form of cash over the year and cash used in buying/selling non current assets. Can include interest
* Financing activities and net cash generated from financing activities - cash spent on paying dividends, long term borrowing and cash from issuing shares-cash spent buying shares back/paying off debt. can include interest.
