Financial Accounting- Annual Report and Ratio Analysis Flashcards
What are the main sections of the annual report?
-Main Statements
-Subsidiary Statements
-Explanatory
-Narrative
Non-Narrative
What is included in the Main Statements section of the annual report?
- Income Statement
-Statement of Financial Position
-Statement of Cash Flows
What is included in the Subsidiary Statements section of the annual report?
-Statement of Changes in Equity
-Note on reconciliation of net cash flow to movement in net debt
-Note on historical cost profits and losses
What is included in the explanatory section of the annual report?
-Accounting policies
-Notes to accounts
-Principal subsidiaries
What is included in the Narrative section of the annual report?
-Business review
-Chairman’s statement
-Directors’ report
-Review of operations
-Social and environmental accounting
-Statement of corporate governance
-Directors’ remuneration report
-Auditors’ report
-Statement of directors’ responsibility for the financial statements
-Shareholder information
What is included in the Non-Narrative section of the annual report?
-Highlights
-Historical Summary
-Shareholder Analysis
What are the audited sections of the annual report?
-Main Statements
-Subsidiary Statements
-Explanatory
What are the non-audited sections of the annual report?
-Narrative
-Non-Narrative
What are the main forms of impression management used in annual reports?
-Emphasising the positive
-Using overly technical language for bad news
-Focussing on the future instead of negative results
-Using graphs to distort the actual picture
What are the main financial statements in the annual report?
-Statement of Financial Position
-Income Statement
-Statement of Comprehensive Income
-Statement of Cash Flows
-Statement of Changes in Shareholders’ Equity
What is a typical cash flow statement profile for a start up?
-Low/negative operating cash flows
-Highly negative investing cash flows
-High financing cash flows
What is a typical cash flow statement profile for a company experiencing early growth?
- Moderately positive operating cash flow
-Negative investing cash flows
-Low/moderate financing cash flows
What is a typical cash flow statement profile for a mature company?
-Highly positive operating cash flows
-Low negative investing cash flow
-Negative financing cash flow
What is the purpose of notes to the accounts?
To provide more detailed information behind the figures contained in the main accounting statements
What are contingent liabilities?
These are liabilities that a company might incur which are dependent on the outcome of a future event (e.g. lawsuit)
What is the purpose of including events after the reporting period in the notes to the accounts?
To provide information in what may have happened in the period from the end of the reporting period and the annual report being published
Why is the ‘future commitments’ section of the annual report useful?
It allows you to gain some insight into the company’s investment plans and future cash flows
What are the profitability ratios?
-Return on Capital Employed (ROCE)
-Gross Profit Margin
-Return on Sales (Operating Profit Margin)
-Net Profit Margin
What is the equation for return on capital employed?
-[(Operating Profit Before Exceptional Items)/(Average Total Assets - Current Liabilities)]*100
-[(Operating Profit before exceptional items)/(Fixed Assets + Current Assets - Current Liabilities)]*100
What is the equation for gross profit margin?
(Gross Profit before exceptional items/ Sales)*100
What is the equation for return on sales?
(Operating profit before exceptional items/ Revenue)*100
What is the equation for net profit margin?
(Net Profit before tax/Revenue)*100
What are the efficiency ratios?
- Asset Turnover
-Debtors’ Collection Period
-Creditors Payment Period
-Inventory Turnover Ratio
-Inventory Turnover Days
What is the equation for asset turnover?
- Revenue/ Average Total Assets - Current Liabilities
–Revenue/ Fixed Assets + Current Assets - Current Liabilities
What is the equation for debtors’ collection period?
(Average Trade Receivables/ Credit Sales)*365
What is the equation for creditors’ payment period?
(Average Trade Payables/ Credit Purchases or COGS)*365
What is the equation for inventory turnover ratio?
Cost of sales/ Average Inventory
What is the equation for inventory turnover days?
(Average Inventory/ COGS)*365
What are the liquidity ratios?
-Current Ratio
-Quick/ Acid-Test Ratio
What is the equation for the current ratio?
Current Assets/ Current Liabilities
What is the equation for the quick ratio?
Current Assets- Inventory/Current Liabilities
What is the equation for gearing?
(Fixed Return Finance/ Total Finance)*100
