Chapter 8: Accounting Analysis Flashcards
What is a Balance Sheet?
What is the equation for balance?
Provides a snapshot of a companies financial position. Its 3 sections are Assets, equity and liabilities. These must balance.
Assets = equity + liabilities
What Are Three Major Statements?
- Balance Sheet (Statement of financial position)
- The Income Statement
- A Cash Flow Statement
What is the Income Statement?
What does it show?
Summarises income and revenue that is earned and the expenses that are incurred by the company.
What is a Cash Flow Statement?
What are the 3 activities?.
The statement identifies how much cash the company has generated over the accounting period and how much cash has been spent.
The three activities are operating, investing and financing activities.
What are Additional Statements to Help Stakeholders Compare to Previous Years?
The local state…..
Statement of comprehensive income and a statement of changes in equity and notes.
What is an Audit?
What does these do?
An independant assesment of the companies account that have been prepared by the directors.
Release an auditors report to the member / shareholders confirming this is a fair and accurate view of the company.
What are the 5 Elements that Appear in a Set of Financial Statements?
There are 5.
- Assets
- Liabilities
- Equity
- Revenue
- Expenses
What is the Combination of Accounting Regulations?
This is similar the FRM people?
Generally accepted accounting principles (GAAP)
What is the IASB?
What do they do?
The International Accounting Standards Board.
Produce a set of high quality, transparent comparable information for financial statements.
What is the ISSB?
What do they do? ESG?
International Sustainability Standards Board.
Produce standards for high quality documentation surrounding ESG matters.
What is the IFRS?
What do they do? Its a mouthful but simple…
International FInancial Reporting Standards
A non profit, public interest organisation established to develop high quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards.
What was the IASB Formally Called?
The International Accounting Standards.
What is a Group Account and When is it Needed?
A consolidated financial statement from a parent company and all the subsidary companies that it controls. Appearing as a single statement.
What are the 2 Issues that can Arise When Amalgamating Group Accounts?
Car show?
- **Goodwill **(Cost of investment in the subsidary, over the net assets)
- Non Controlling Assets (% of a subsidary that is owned by other investors e.g. if the firm only owns 70% the non controlling interest would be 30%)
What is Depreciation?
What asset type does this apply to?
Is applied to tangiable non-current assets (plant / machinery), whereby the reflection of its use over time is called depreciation on the financial statement.
What is Depreciation of Intangiable Non-Current Assets Called?
Amortisation.
What are Depreciation and Amortisation Recorded as on Financial Statements?
Expenses.
What is the Equation for Straight Line Depreciation?
SLD = (Cost-disposal value) / Useful economic life in Years
What is the Formula for Equity?
What is it the sum of (Accounting)?
Equity = Share Capital + Reserves
What are the 4 Main Types of Equity?
- Share Capital (Nominal value of share capital in issue)
- **Capital Reserves **(From revaluation reserves and share premium account)
- Revenue Reserves (Retained Profits)
- Non-Controlling Interests (When a parent company controls a subsidary but does not own all of the share capital)
What is a Non-Current Asset?
These can be either…..?
Those in long-term, continuing use by the company. They represent major investments made by the company.
Either tangiable (physical: land or plant) or** Intangiable** (non-physical: knowledge or patents)
What are Current Assets?
Assets purchased with the intention of resale or conversion into cash, usually within a 12 month period.
What is a Non-Current Liability?
What are examples of this?
Companies borrowing not repayable within the next 12 months e.g. long term loans or leases.
What is a Current Liability?
What are examples of this?
This includes the amount of money the company owes to its suppliers or trade payables, that is due within the next 12 months. (Overdrafts or tax)
What does the “Bottom Line” of an Income Statement Show?
Earnings per Share.
What is Cost of Sales?
On an income statement, what are examples of this?
Costs to the company of generating sales made in the financial year. E.g. raw materials or wages to staff.
What is Operating Profit?
The gross profit before financing costs and tax, less other operating expenses that the company has incurred.
This could include distribution costs, management salaries, legal fees etc.
What is Operating Profit AKA?
The classic.
Profit before interest and tax (PBITA) or earnings before interest and tax (EBIT).
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What is Net Income?
Net Income reflects all of the revenues earned during the period, less all of the expenditures incurred.
What is the Equation for Earnings Per Share?
FOR ORDINARY SHARES
Net Income for the Financial Year **- **Dividends on Preferred Shares / No. Ordinary shares in issue
What is EBITDA?
Earnings before interest, Tax, Depreciation and Ammortisation.
What are the 3 Main Headings in a Cash Flow Statement
- Operating Activities
- Investing Activities
- Financing Activities
What are Operating Activites?
On a cash flow statement.
The cash that has been generated from the trading activities of the company i.e Interest paid.
What are Investing Activities?
On a cash flow statement.
Investment income (dividends and interest) received in the form of cash during the year, the cash paid to purchase non current assets and sales of these during the year.
What are Financing Activities?
On a cash flow statement.
Includes the cash spent during the year on paying dividends to shareholders, borrowing on a long term basis or the cash raised from issuing shares, less the cash spent repaying debt or share buybacks.
What is Enterprise Cash Flow?
Is the free cash flow before considering payments made to any of the providers of the finance firm.
What is Equity Cash Flow?
Is the free cash flow to the shareholders, after financing cost to lenders, but before dividend payments to the shareholders.
What is the Return on Capital Employed Calculation?
ROCE = Operating Profit / Capital Employed x 100
What is the Equation for Return on Assets?
This should give you the same answer as ROCE
ROA = Operating Profit / Total Net Assets x 100
What is the Equation for Return on Equity?
ROE = Net income / Shareholders Equity x 100
What is the Equation for Asset Turnover (Number of times)?
AT = Revenues / Total Net Assets
What is the Current Ratio Formula?
What does the number mean.
CR = Current Assets / Current Liabilities
The higher the number, the better the company is suited to meet its liabilities.
What is the Quick Ratio (Acid test) Formula?
QR = (Current assets - inventory) / Current Liabilities
What is the Price Earnings Ratio (P/E Ratio) Equation?
P/E = Current Market Price per share / Earnings per Share
What is the Debt to Equity Calculation?
All non-current liabilities / Total Equity
What is the Net Debt to Equity Calculation?
The normal Debt to Equity ratio, less the cash and short term investments that are within the current assets.
What is the Equation for Interest Cover?
IC = Operating Profit / Interest costs
What is the EQ for EPS?
Ordinary Shares?
Net profit or loss attributable to ordinary shareholders / average weighted number of ordinary shares in an outstanding period
What is the EQ for EPS on Preference Shares?
(Net Income - Dividends on Preferred Shares) / Number of ordinary shares in Issue
What is Capital Expenditure?
Caps?
Money spent to buy non-current assers, such as PPE, It is reflected in the Balance Sheet
What is Revenue Expenditure?
What comes out the revenue immediately?
Money spent that immediatley impacts the income statement, such as wages paid to staff, rent on property and professional fees.
