Financial Reports and Ratios Flashcards
What is financial accounting?
The process of gathering, recording and reporting data on financial transactions
What is the aim of financial accounting?
To show all stakeholders the financial position of a business (Balance Sheet) and performance (Income Statement)
It also shows Cash Flow Statement (CFS) to summarise the cash inflow and outflow, separated by operations, investing and financing activities.
Users of financial information include
- Owners of business (shareholders)
- Prospective investors
- Financial analysts
- Companies contemplating take-over bids
- Management
- Employees and their trade union representatives
- Creditors
- Clients and customers
- Government agencies
Generally accepted accounting principles (GAAP) are
- A common set of principles that companies must follow when compiling their financial reports
- Relate to different but broadly similar national accounting standards around the world
International Financial Reporting Standards (IFRS) are
- Set up in 2001 by International Accounting Standards Board (IASB) to harmonise accounting practices across countries
- IFRS response to market globalisation, which has made international shareholding grow and opened trade with companies in different countries.
Generally Accepted Accounting Principles (GAAP) include:
- Prudence
- Realisation (Accruals)
- Consistency
- Comparability
- Objectivity
- Fairness
- Disclosure
- Business entity
- Monetary measurements
Reports:
Profit and Loss is put in the ______
The position statement is put in the ______
The last report is the ____
Profit and Loss is put in the Income Statement
The position statement is put in the balance Sheet
The last report is the Cash Flow Statement (CFS)
What is a Financial Stability Ratio?
It is the ratio of capital to risk-weighted assets.
In other words, it is a comparison between core equity and risk-weighted assets.
What is required for a firm to classified as well-capitalised?
The firm must have a capital ratio at least 6%, and not pay dividends which would affect its capital
A firms core equity capital is known as its ____ Capital and is the measure of its financial ____ .
It is based on the sum of its ____ and ____ .
A firms core equity capital is known as its Tier 1 Capital and is the measure of its financial strength.
It is based on the sum of its equity capital and disclosed reserves.
In Altman's Z Score, what is X1 X2 X3 X4 X5
X1 measures liquidity in relation to company size
X2 measures profitability that reflects company’s age and earning power
X3 measures operating efficiency
X4 measures extent of risk company poses to creditors
X5 measures total asset turnover which varies from industry to industry
Companies with a Z score
Above 3 are considered ______.
Below 1.8 are considered ______.
Companies with a Z score
Above 3 are considered solvent and safe.
Below 1.8 are considered potential failures.
Limitations of Financial ratios include
- Cannot provide comprehensive measure of performance
- Creative accounting can misrepresent company status
- Use of historical cost can distort the company financial position
“Securitisation” removes the loans from borrower’s _____, thus transferring _____ associated with the loan.
“Securitisation” removes the loans from borrower’s balance sheet, thus transferring credit risk associated with the loan
A company is bankrupt when
It cannot pay its debts.
Their liabilities exceed their assets (also known as balance sheet insolvency)
