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Business > Financial reporting > Flashcards

Financial reporting Flashcards

1
Q

What does a steward do (stewardship)?

A

Has control over finance, purchasing & hiring decisions. Needs to show records of in and outcomes.

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2
Q

What defines a private company, sole trader & partnerships?

A
  • No public shareholders
  • Need for record keeping and statements: for tax, decisions, bank loans, equity.
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3
Q

What defines a public company?

A
  • Shareholders, traded on stock exchange.
  • May have controlling shareholder or no overall control.
  • Need to account for investor needs, less freedom

Need to account for:
Managers - scope for fraud -> need to report regularly.
Owners - no access to company records.
Investor needs

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4
Q

What are the 2 accounting standards?

A

US GAAP: Generally Accepted Accounting Principles.

IFRS: International financial reporting standards.

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5
Q

What are the 3 primary financial reports?

A

Statement of financial position: at a moment in time (assets, liabilities, equity)

Statement of profit & loss: commercial substance instead of cashflow. For a period of time (revenue + expenses + profit)

Statement of cashflows:
Cashflows. For an accounting period (operating, investing and financing activities)

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6
Q

What is an audit?

A

A formal examination of an organization’s or individual’s accounts or financial situation

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7
Q

What is an internal audit?

A
  • Controls and procedures to protect assets.
  • Avoid fraud
  • Give reasonable assurance
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8
Q

What is an external audit?

A
  • Provide external reasonable assurance
  • Follows standards
  • Review work of international audit
  • Identify and report problems
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9
Q

What is the difference between financial accounting and management accounting?

A

Financial:
- Backward looking
- Key user outside firm
- Reports highly standardised
- Regular schedule

Management:
- Forward looking
- Inside firm
- Free form and unregulated

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10
Q

Define assets

A

A present economic resource controlled by the entity a result of past events e.g. cash, property.

Current: <12 months
Non-current: >12 months

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11
Q

Define liabilities

A

A present obligation of the entity to transfer on economic resource as a result of past events e.g. taxes, loans, employee pay.

Current and non-current

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12
Q

Define equity

A

Residual interest in the assets of the entity after deducting all its liabilities.

Assets - Liabilities = equity

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13
Q

What assets are excluded from the the statement of financial position?

A
  • Human resources
  • Intangible assets e.g. trademarks, logos
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14
Q

Define owners equity

A
  • Share capital and premium
  • Retained earnings (profit after tax)
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15
Q

What is the going concern principle?

A

Financial statements are prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future.

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16
Q

Define credit sale

A
  • Firms transact most business with one another on credit terms.
  • Typically 30-60 days.
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17
Q

Define trade receviable

A
  • Amounts owed from credit sales.
  • Used to record invoices issued for goods sold on credit.
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18
Q

Define trade payables

A
  • Amounts owed for good bought on credit.
  • Records invoices from suppliers bought on credit
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19
Q

How do you calculate trade receivables at the end of a period?

A

Trade receivables at end period = Trade receivables at start + revenue from credit sales - payments received from customers

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20
Q

What does the statement of profit and loss record?

A

Revenue & expenses

  • Where profit comes from and where it goes.
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21
Q

What are the 3 different means of payment for goods and services?

A

Cash on delivery: paid at time received.

Paid in arrears: paid at a later date.

Paid in advance: paid for in advance.

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22
Q

Why can’t cashflow be used for profit?

A
  • Timing mismatch makes it impossible to produce a value profit for accounting period.
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23
Q

What is the accrual principle?

A

Revenue should be recognised when earned regardless of when paid for. So should expenses.

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24
Q

What are the IFRS revenue recognition requirements?

A
  • Based on satisfying contractual obligations.
  • Returns can be reliably estimated.
  • Revenue and costs can be measured reliably.
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25
Q

What is the flow diagram of profits?

A

Gross profit -> core operating profits -> operating profit -> tax/owners/shareholders

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26
Q

What is a non current asset?

A

Long term investments not easily converted to cash

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27
Q

What are the 3 main types of non current assets?

A

PPE: property, plant & equipment

Investment property: property kept to rent out

Right of use assets: don’t own, just have right to use

(Others: intangible, associates, goodwill)

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28
Q

What is capital expenditure?

A

Investments made in the expectation needed to run the firm or that will generate future revenues -> return on investment

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29
Q

What do depreciation costs take into account?

A

Capital cost of ownership:
- Initial cost
- Residual value (value when disposed)

Length of use

Benefits earned from asset

(Running costs and maintenance taken as expenses at the time)

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30
Q

What are the 2 methods calculating depreciation?

A

Straight line
Reducing balance

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31
Q

How do you use straight line depreciation formula?

A

Used when lasts longer than expected

1) calc depreciable amount (purchase cost-residual value) - capital cost

2) calc annual depreciable change by:
depreciable amount/no. of years of useful life

3) calc netbook value (value start - annual depreciation value)

32
Q

How do you use reducing balance depreciation?

A

Used when benefits from asset are front loaded.

Estimate residual value and depreciation rate

1) Take net book value @ start of year

2) x by depreciation rate = annual depreciation charge

3) Netbook end of year = net book start - annual depreciation charge

33
Q

How do you calc annual depreciation charge?

A

(Net book value - residual value) x depreciation rate

34
Q

How do you calc net book value after n years?

A

(initial book value year - residual value) x (1-depreciation rate) + residual value

35
Q

What are some causes of impairment on PPE?

A

Physical damage: fire, flooding

Valuation: market condition, periodic reviews/

36
Q

What are some causes of impairment on PPE?

A

Physical damage: fire, flooding

Valuation: market condition, periodic reviews/D

37
Q

Define amortisation

A

Same as depreciation but for intangible assets

38
Q

What are the 3 accounting methods?

A

FIFO - first in first out
LIFO - last in first out
AVCO - average cost

39
Q

What are the 3 types of cash flow?

A
  • operating activities (goods sold)
  • investing activities (non-current assets)
  • financing activities (issuing bonds, borrowing from banks)
40
Q

How do you calculate cash position?

A

= (cash + short term financial assets) - (overdrafts +short term liabilities)

41
Q

How do you calculate cash position?

A

= (cash + short term financial assets) - (overdrafts +short term liabilities)

41
Q

How do you calculate cash position?

A

= (cash + short term financial assets) - (overdrafts +short term liabilities)

42
Q

How do you calculate indirect cash flow from operating activities?

A

(PBIT + non cash charged) - (increase in non cash working capital + investment income + tax expenses)

43
Q

Define window dressing

A

Making firm look more liquid @ the end of an accounting period

44
Q

Define inventory days and how to calculate it?

A
  • How long firm takes to turn inventory over once.

= inventory/cost of sales x 365

45
Q

What does an increase in inventory days mean?

A

Stock build up.

Could be preparing for a sale or a drop in demand

46
Q

Define days-sales-outstanding and how to calculate it

A

How long it takes customers to pay for goods bought on credit.

= Trade receivables/revenue (from credit sales) x 365

47
Q

Define days-purchase-outstanding and how to calculate it

A

how long it takes to pay for trade payables

=trade payables/cost of sales x 365

48
Q

Define non current assets turnover and how to calculate it

A

How effective a firm is at creating revenue from non current assets

=revenue/non current assets x 365

49
Q

How do you calculate the current ratio of a firm and what is it?

A

Value driven by nature of business

=current asset/current liabilities

> 1 more current assets
<1 more current liabilities

50
Q

Define days-free-cash and how to calculate it

A

Number of days between receiving customer payment and having to pay supplier for goods sold.

=(days purchase outstanding) - (inventory days) - (days sales outstanding)

51
Q

Define days to be financed and how to calculate it

A

Number of days between paying the supplier and receiving a payment.

=(inventory days) + (days sales outstanding) - (purchases outstanding)

52
Q

Define gross margin and how to calculate it

A

Difference (%) between firm sales & how much it costs to produce and deliver.

=gross profit/revenue

53
Q

Define cost-income ratio and how to calculate it

A

How much of company’s gross profit go on paying for running costs

=other operating expenses/gross profit

54
Q

Define operating margin and how to calculate it

A

Cents from each dollar of revenue left after paying costs.

=profit before interest & tax/revenue

55
Q

Define asset turnover and how to calculate it

A

Dollars of revenue generated from each $ invested

=revenue/operating assets

Or =revenue/non current assets + working capital

56
Q

Define return on capital employed and how to calculate it

A

Return on firms operating assets

=operating profits/operating assets

Or =PBIT/non current assets + working capital

57
Q

Define net profit margin

A

Operating profits post tax that go to the owners.

58
Q

Define financial leverage multiplier and how to calc it

A

Measure of debt gearing

=capital employed/equity

59
Q

Define return on equity and how to calculate it

A

Annual accounting return to owners of firm.

=profit after tax/equity

60
Q

Define interest cover and how to calculate it

A

Number of times finance expense covered by PBIT

=PBIT/finance expenses

61
Q

What factors impact ROE (return on equity)?

A
  • Operating profitability (ROCE)
  • Level of debt gearing (D/E)
  • Cost of debt (rD)
  • Marginal tax rate (tr)
62
Q

What is the role of the board of directors?

A
  • Safeguard assets
  • Record keeping
  • Accounting policies
  • Law
  • Sign off statements
  • Report presentation; going concern assumption
63
Q

What is the true & fair view?

A

True: Financial statements are factually accurate: no omissions/errors, follows standards.

Fair: No bias + “economic reality”

64
Q

What is the IFRS foundation?

A

Standards -> describe economic reality faithfully & neutrally.

65
Q

What are the limitations of financial reporting?

A
  • Backward looking: past periods
  • Subjective
  • Fraud & earning’s manipulation
  • Partial
66
Q

Difference between objective & subjective values?

A

Objective: One value

Subjective: Vale determined in a number of ways (choices + estimates)

67
Q

What is the principle of prudence?

A

Caution when making judgements under conditions of uncertainty.

Nothing over or understated

68
Q

What are the 2 common reporting goals?

A
  • Bring gains forward
  • Push back impairments
69
Q

What are some ways of committing accounting fraud?

A
  • Overstating earnings

Common frauds:
- Delaying book closing
- Bring forward unearned revenue
- Selling with buy back agreement
- Fictitious sales
- Booking loans received as revenue
- Failure to recognise receivables as impairments

70
Q

How do you commit fraud with your inventory?

A

Falsifying physical stock.

Extra fraud:
- PP&E & intangibles: estimates & toxic assets.
- Expenses: treating expenses as prepayments, recurring expenses into one-off charges.

71
Q

How does employee fraud occur?

A
  • Theft
  • Fake employees & supplies
  • Stealing payments
  • Overbilling
72
Q

How does management fraud with connect parties occur?

A
  • Selling assets below market prices
  • Buying assets at inflated prices
  • Supplier frauds
  • Making loans
73
Q

What does the audit committee do?

A

Check accounts to ensure no fraud:

  • Approved by shareholders, responsible to them.
  • Review firm’s financial system, risk mgmt & internal controls.
74
Q

What are the audit market structural issues?

A
  • High degree of industry concentration
  • Big 8 (80s) -> Big 5 (2000)
  • All FTSE 100 audited by big 4
  • Too big to fail, too fragile to prosecute

Business (5 decks)

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