company accounts Flashcards
companies act 2006 – documents that be delivered at the Registrar of Companies
comprehensive income for the accounting reference period
directors report
auditors report
income statement
balance sheet
cash flow statement
statement of changes in equity
companies act 2006 - listed companies (in Listing rules)
> director’s reasons for any significant departure from standard accounting practice
particulars of companies in which the group holds 20% or more of voting shares
statement stating if the company is a close company or not
particulars of any authority for the company to purchase its own shares
produce half yearly accounts
small or medium size firms do not have to deliver full annual reports to registrar of companies
must satisfy at least 2 of the criteria:
small
turnover 10.2m
total assets 5.1m
employees 50
medium
turnover 36.0m
total assets 18.0m
employees 250
audit qualifications
2 categories of qualified report
> limitation in scope
> disagreement
2 magnitudes
> material
> fundamental
non current assets categories (capex)
intangible
tangible (property, plant and machinery)
invesmtents
goodwill is the difference
> fair value of purchase consideration
fair value of the acquired business identifiable assets and liabilities
non current assets helf for sales
not depreciated
lower of the fair value and carrying amount less costs
inventory is valued
at the lower of cost and net realizable value
provisions (uncertain fall in the amount of an asset)
charged as expense on income statement
> provisions for doubtful debt (potential default on receivables)
> provisions for depreciation (accumlated depreciaiotn)
> provisions for unrealised profit on stock (if manufactured good didn’t sell)
share capital and premium
nominal value * number of shares issued
excess over nominal value received
share premium account use
capitalised as part of scrip issue
to write off preliminary expenses on formation of firm
write off costs associated with the issue of new shares
write off the premium or discount on the issue or redemption of debentures
reserves
revaluation reserve - assets revsluated from cost to market value. revaluation reserve credited.
hwvr non-distributable until asset sold, profit not yet realised
profit and loss reserve
profit and loss reserve - distirbutable. net income added on. scrip issues created from here
IAS32 equity
> any contract that evidences residual interest in the assets of an entity after deducting all liabilities
derecognition
> contractual rights to the cash flows of the financial asset have expired
financial asset has been sold
IFRS9 record financial assets at fair value
> fair value through profit and loss (FVPL)
fair value through other comprehensive income (FVOCI)
amortised cost
NET BOOK VALUE
COST of asset - accumulated depreciation
straight line method of depreciation
annual depreciation = (original cost - expected residual value)/ expected useful life
reducing balance method of depreciation
annual depreciation = 1-n(expected residual value / original cost )^(1/2)
disposals of non-current assets
sales proceeds - balance sheet value of the asset at date of disposal
> prfit and loss on income statement
inventory recognition
FIFO
LIFO
weighted avg
post-balance sheet
IAS 10
> aadjusting events
> non-adjusting events
IAS 10: adjusting event and non-adjusting event
> arise from conditions already on balance sheet DATE
stem from new conditions not on the balance sheet DATE
IAS 1 requires an entity to present a statement of changes in equity
> amount of new share capital issued
amount of dividend paid during the year to shareholders
amount by which property, plant and equipment is valued up or down
amount of net income retained during year
any movement in the unrealised loss or gain reserve for changes in foreign exchange gain or loss
IAS7: categories of cash flow
operating: business activities
investing: in relation to the acquisition and disposal of non-current assets
financing: issue or redemption of equity and debt
enterprise cash flow (LENDERS + EQUITY holders, comparable across firms no payments to providers of capital deducted)
total cash flow generated by a company that is available to all providers of capital
FCFF (enterprise CF)
net income + non-cash charges - investment in fixed capital - investment in working capital + net interest payment
FCFE (equity CF)
FCFF - net interest + net borrowing
net cash flow inflow from operating activities
depreciation : add to trading profit
increase in provisions : add to trading profit
increase/decrease in inventory: deduct from/add to trading profit
increase/decrease in debtors (receivables): deduct from/add to trading profit
increase/decrease in creditors (payables): add to/deduct from trading profit
parent & subsidiaries & associate company
> over 50% creates a subsidiary
company own 20-50% of votes of other company (owner does not consolidate associate’s financial statements)
control of a firm can still occur where the parent company own less than 50% of the share capital of the subsidiary
> more than half of the voting rights
govern the financial and operating policies under statute or an agreement
appoint or remove the majority of the members of the board of directors
cast the majority of votes at a meeting of the board of directors
minority interest share’s of profit and assets
out of group results via a minority interest line
low yields and high yields
high growth or firm who’s share is overvalued
low growth or firm which is underrated in the market
dividend cover
EPS/Dividend per share
payout ratio
dividend per share / EPS
Absolute and relative valuation techniques
> absolute : based on discounting techniques
relative : estimate value of equity as some measure of earnings power
EPS
retained profit + ordinary dividends / number of ordinary shares
diluted eps
> indication of the level of EPS dip
dilutive securities:
director’s share options
warrants
convertible debt securities
EV
market value of debt + market value of equity
PE problems
> can be negative when firms make losses and if firm is in a cyclical sector or because of the current state of the economy
based on accounting profit (distorted from one-offs or write-off, estimates)
P/S problems
> SALES MAY NOT PRODUCE PROFITS AND CASH FOR PROVIDERS OF CAPITAL
sales are generated by the use of both equity and debt capital
residual income valuation model
book value + present value of future ‘residual incomes’
> residual income: income part achieved above the expected return on equity
> gd for negative earnings or cf or no dividends paid out
quick ratio (acid test)
(current assets - stock) / current liabilities
operational gearing
> sensitivity of profits to sales revenue
percentage change in trading profits that results from a 1 percent change in sales revenue
sales revenue - variable costs: trading profit
optional gearing
(sales revenue - variable costs)/trading profit
ROCE
PBIT / Capital employed
> PBIT: profit before interest and tax
> Capital employed: share capital + reserves + long-term borrowing
profit margin for manufactures and retail firms
8-10%
lower
rights issue
share buy-back
scrip/bonus issue
stock split
decr. of financial gearing
incr. gearing
no change
no change
net cash flow
Operating profit + depreciation - increase in inventory + increase in payables = net cash flow from operating activities
no or some requirement to produce accounts
no : sole traders and partnerships
some : small (accounts don’t have to be audited) and medium sized firms
companies act 2006 and IASB ( IAS 7)
balance sheet
income statement
cash flow statement
accruals
incurred but not invoiced by supplier
contingent liabilities
warrants and guarantees
> disclose in note to accounts nature of liability and assets committed to covering it
OPS
IAS 19 NAV increase or decrease that can be recognised on BS - 10%
IAS 32: inancial instrument
any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity
IAS 32: FINANICLA SSET
CASH
equity instrument of another entity
contractual right to receive cash or another asset from another entity
exchange financial instruments
contract that will/may be settled in the entity’s own equity instruments
IAS 32: financial liability
contractual obligations
deliver cash or another asset to another enitity
exchange financial instruments under potentially unfavourable conditions
contract that will/may be settled in the entity’s own equity instruments
revenue expenditure or expense money
cover costs not rleated to direct production of goods or services
comprehensive income statement
2 major sections:
> net income from the income statement
> other comprehensive income or changes to net assets from other sources
other stuff:
> unrealised holding gains or losses on investments that are classified as available for sale
> foreign currency translation gains or losses
> pension plan gains or losses
> pension prior service costs or credits
