Chapter 8: Accounting Analysis Flashcards
What three main sections are in a balance sheet?
Assets
Equity
Liability
What does equity refer to on the balance sheet?
Total capital amount that the shareholders have contributed and are due.
Which two sides of the balance sheet must equal one another?
Assets = Equity + Liabilities
What is a balance sheet more commonly known as?
Statement of the financial position
What are the three major financial statements?
Statement of financial position/balance sheet
Income statement
Cash flow statement
What 3 sources and uses of cash is a cash flow statement separated into?
Operating
Investing
Financing
What other additional disclosures may a company have to release? (3)
Statement of comprehensive income
Statement in changes of equity
Other notes e.g. changes in accounting
What is an independent verification of a companies accounts called?
Audit
What are the five main components in a financial statement?
Assets
Liabilities
Equity
Revenue
Expenses
What is the combination of accounting regulations often referred to?
GAAP
What does GAAP stand for?
Generally Accepted Accounting Principles
Which foundation is looking to harmonise GAAP worldwide?
International Financial Reporting Standards (IFRS) Foundation
What two boards develop the IFRS standards?
International Accounting Standards Board (IASB)
International Sustainability Standards Board (ISSB)
What is the ISSB?
International Sustainability Standards Board
Why was was ISSB created?
Designed to introduce comparable metrics for environmental, social and governance (ESG) matters.
How are standards issued by the IASB called?
International Financial Reporting Standards (IFRSs)
What standards does the US use?
US GAAP
These are converging with IFRSs
What is the issue with the US and EU using different standards?
The financial statements are not directly comparable without adjustments
How do investments appear in accounts?
Cost of investment in balance statement
Dividends received in income statement
In relation to accounts, what happens when a company has a significant investment in another company so that they control them?
Group accounts or consolidated financial statements must be filed
What are the two issues that can occur when amalgamating companies when doing group reporting?
Goodwill and Non-controlling interests
What is Goodwill?
If a cost of investment exceeds the net assets of the subsidiary this excess is called goodwill. This appears as an asset in the consolidated financial statements.
Essentially the premium that you pay when purchasing a company, its still an asset.
What is non-controlling interests?
The minority shareholders in a situation where the parent company does not own all the shares of a subsidiary.
This means the assets are not fully owned by parent company
E.g. Parent company owns 75%, Non-controlling interest is 25%
What period are current assets and liabilities?
Within 1 year
What is an intangible non-current asset?
Asset that generates economic benefit, no physical form.
E.g. software, patents, trademarks, goodwill (intellectual property)
What is a prepayment?
Where a company has prepaid an expense e.g. Rent
How are current assets ordered and listed in a financial statement?
In ascending order of liquidity (cash last)
Lower of cost or net realisable value (NRV)
What is the difference between depreciation and amortisation?
Depreciation is for tangible non-current (physical) assets
Amortisation is for intangible non-current assets (e.g. software)
What is the depreciable amount?
The difference between the cost and the final disposal value
What is the straight line depreciation formula?
(cost - disposal value) / useful economic life in years
What is the NBV?
Net book value, value of a depreciated asset
May not be market value
How is revaluation of assets reflected on financial statement?
In the revaluation reserve, forms part of equity
How is purchased goodwill accounted for differently to other intangible non-current assets?
It is capitalised and included in the statement of financial position
It is not amortised
What 3 sub-elements makes up equity?
Share captial
Capital reserves
Revenue reserves
What is share captial?
The nominal value of equity and preference shares the company has issued
What is the share premium account sometimes known as?
Additional paid in capital
What are capital reserves? (2)
Revaluation reserves (revaluation of non-current assets)
Share premium (issuance of shares above their nominal value)
How can and cannot capital reserves be distributed to shareholders?
As makes up capital base, cannot be distributed as dividends
Can be issued as bonus issue of ordinary shares
What are revenue reserves?
Accumulated retained earnings of the company
Sum of distributable profits that have not been paid as dividend
What is the equity calculation?
Equity = share capital + reserves
What is called-up share capital?
Shares issued that will be paid by investors at a later date
What is a provision in regards to a liability?
When a company has an obligation to make a payment at a later date, but the exact amount or timing has not been determined yet.
They calculate an estimate of the obligation
Does revenue include sales where payment has not yet been received?
Yes
Does COGS include wages?
Yes, of staff who make products
What is operating expenses sometimes known as?
SG&A (Selling, General and Administrative)
What does EBITDA stand for?
Earnings before interest, tax, depreciation and amortization
What is the EPS calculation?
(net income - dividends on preferred shares) / number of ordinary shares
What is the difference between capital and revenue expenditure?
Capital - money spent to buy non-current assets
Revenue - money pent that immediately impacts income statement, e.g. wages/rent
What does PPE stand for in accounting?
Plant, property and equipment
How can profit versus cash differ?
Profit includes all sales, even those that are not final e.g. made on credit.
Profit takes into account expenditure incurred, not cash paid.
How is free cash flow generally calculated?
net income - depreciation/amortization - capital expenditure
Capital expenditure used as figure to maintain business operation
What is the difference between enterprise and equity cash flow?
Enterprise cash flow is free cash flow before payments made to providers of finance (lenders/equity holders)
Equity cash flow is free cash flow to shareholders, after these payments but before dividends
What is ROCE?
Return on Capital Employed
Profit generated as a percentage of the finance put into the business
Capital is equity + long-term debt
What is ROCE sometimes known as?
ROA, Return on Assets
What is the formula for ROCE?
operating profit / capital employed (x100)
What is the calculation for capital employed?
Total equity plus non-current liabilities
What is the calculation for ROA/ROCE?
operating profit / total net assets
What is the calculation for ROE?
net income / shareholders equity * 100
How do you calculate gross and operating profit margins?
Gross profit margin (%) = (Gross profit / Revenues) x 100
Operating profit margin (%) = (Operating profit / Revenues) x 100
How do you calculate asset turnover?
Revenues / Total net assets
How would you calculate ROA/ROCE?
Operating profit margin x asset turnover = ROCE or ROA
What is financial gearing?
Measure of the risk arising from company debt
What is gearing sometimes known as?
Leverage
How is debt/equity calculated?
Debt = non-current liabilities
Equity = total equity
How is Net Debt calculated in Net Debt / Equity
Debt minus cash and short-term investments
What is interest cover?
Operating Profit / Interest Cost = Interest Cover
What is the current ratio?
current assets / current liabilities
higher the result the more likely a company can meet liabilities
What is the Quick Ratio known as?
Acid test
What is the Quick Ratio?
It excludes inventory from calculation of current assets in the current ratio
Inventory often not liquid
Quick ratio = (current assets – inventory) / current liabilities
What is the Earnings Per Share calculation?
(Net income - Dividends on preferred shares)
/
Average weighted number of ordinary shares outstanding in a period
How is net profit or loss attributable to ordinary shareholders calculated?
Net profit shown on the income statement, less any dividends on preference shares
What is P/E?
Price earnings ratio
How is P/E calculated?
Share price / EPS
What is diluted EPS?
EPS if all potential dilution approved occurs
e.g. convertible bonds / warrants / shelf
What is trailing P/E?
Backwards looking P/E ratio over the last 12 months
What is forwards P/E?
Estimation of earnings by analysts
How is enterprise value (EV) calculated?
Market capitalisation plus all of its outstanding debt, noncontrolling interests and preferred shares, minus all of the cash and cash equivalents.
What is enterprise value?
A simplified and intuitive way to understand EV is to consider it as the cost of purchasing an entire business. If you settle with all the security holders, you have essentially purchased the company at its EV.
What is the gross dividend yield?
Total dividends per share as a percentage of the current share price
What is the Gross Dividend Yield calculation?
Dividend / Current Share Price * 100
What is the Gross Dividend Cover calculation?
EPS / Dividends per share
What is Gross Dividend Cover ?
The companies ability to pay the dividend, earnings / dividend payment - per share
