FInancial accounting cours 11

Question 1

What are financing ratios?

Answer 1

• These ratios help to understand the company’s financing structure and debt position.
• They may be relevant by making links between the evolution of the ratios and what is observed in the financing section of the Statement of Cash Flow.

Question 2

What happens without accounting standards for financing ratios?

Answer 2

Certain choices made by the company could affect these ratios, such as lease agreements.

Question 3

What does IFRS require for the leased asset? Under which accounting principle does it work?

Answer 3

Under the principle of substance over form, it requires that a leased asset be included in the company’s assets and that, at the same time, the debt that would have had to be incurred to acquire that asset is included in liabilities.

Question 4

What are the entries in the SFP related to leasing agreements?

Answer 4

• In Assets: right-of-use assets
• In Liabilities: Lease obligations

Question 5

What are the entries in the SOI related to leasing agreements?

Answer 5

In expenses: Depreciation of Right-of-use assets; Interest on Lease obligations.

Question 6

What is the formula of the debt ratio?

Answer 6

Total Liabilities/Total Assets (%)

Question 7

What does the debt ratio indicate?

Answer 7

It shows the proportion of assets financed through debt.

Question 8

Why is the debt ratio can consider interest-bearing liabilities?

Answer 8

Because several items within liabilities do not constitute debt financing.

Question 9

What is the formula for debt ratio including interest-bearing liabilities?

Answer 9

Total interest-bearing liabilities/Total Assets (%)

Question 10

Give examples of interest-bearing liabilities.

Answer 10

• Bank loans
• Mortgages

Question 11

What is the formula of the long-term Debt to equity ratio?

Answer 11

Long-term Debt/Equity (multiple)

Question 12

What does the long-term Debt to Equity ratio show?

Answer 12

It shows the company’s financing strategy.

Question 13

What does a long-term Debt to Equity ratio above 1 show?

Answer 13

It shows that the company is funded primarily through debt (external financing).

Question 14

What does a long-term Debt to Equity ratio below 1 show?

Answer 14

It shows that the company is funded primarily through equity (internal financing)

Question 15

Is the current portion of Long-term Debt need to be included in the long-term debt of the ratio?

Answer 15

Yes it is.

Question 16

What are the objectives of the statement of cash flow?

Answer 16

• It is to show changes in cash flows during a certain period.
• It is to identify sources of cash inflows and see how they have been used by the company.
• It is to establish if the company has enough liquidity to support its activities and goals.

Question 17

What is the difference between the 2 methods of calculating cash flows?

Answer 17

It differs in the method of calculating operating activities.

Question 18

What are the 2 methods to calculate Cash Flow?

Answer 18

• Direct method
• Indirect method

Question 19

Describe the direct method for calculating cash flows.

Answer 19

It requires converting revenues into receipts and expenses into disbursements.

Question 20

Describe the indirect method for calculating cash flows.

Answer 20

It requires adjusting net income by removing all items included in the calculation of net income that does not affect the company’s cash flow. Then, the changes in the company’s working capital are added back in. This is the method used by most public companies.

Question 21

What is the cash flow from operating activities composed of?

Answer 21

It includes the sale and purchase of goods and services, including cash collected from customers, payment to suppliers or employees, and payment f items such as rent, taxes, and interest.

Question 22

What is the cash flow from investing activities composed of?

Answer 22

It shows the cash effects of all transactions involving long-term assets. (fixed assets, long-term investments, etc.)

Question 23

Give examples of cash flow from investing activities.

Answer 23

Acquisitions of fixed assets, disposals of fixed assets, and sales of long-term investments.

Question 24

What is the cash flow from financing activities composed of?

Answer 24

It shows the cash effects of all transactions involving shareholders or creditors.

Question 25

Give examples of cash flow from financing activities.

Answer 25

Share issues, loan repayments, dividends paid, and interest paid.

Question 26

What is the formula of working capital?

Answer 26

Current asset - current liabilities