Financial Statements Flashcards
Statement of Profit & Loss and Other Comprehensive Income - Description
Provides information on the performance of a business as well as the gains and losses that are not recognized in profit or loss
Statement of Financial Position - Description
Shows the assets and liabilities of the company
Statement of Changes in Equity - Description
Provides information about how the equity of a company has changed over a period
Statement of Cash Flow - Description
Shows the movement of cash into and out of the business
Users of Financial Statements
Bank - Lending, security, they want your custom
Suppliers - Credit terms, amount of supply
Shareholders - Return on their investment, whether to buy or sell their inventory
HMRC - VAT, corporation tax, PAYE, NI, imports & exports
Employees - Job security, room for growth
Directors - Decision making, performance related bonuses
Statement of Profit & Loss and Other Comprehensive Income - Layout
Revenue
(Cost of Sales)
= Gross Profit
(Distribution Costs)
(Admin Expenses)
= Profit From Operations
(Finance Costs)
= Profit Before Tax
(Income Tax Expense)
= Profit For The Period
Other Comprehensive Income
Revaluation Gain
= Total Comprehensive Income For Year
Statement of Financial Position - Layout
Non-Current Assets
Property, Plant & Equipment
Intangible Assets
Current Assets
Inventories
Trade & Other Receivables
Cash & Cash Equivalents
Total Assets
Equity
Share Capital
Share Premium Account
Retained Earnings
Revaluation Surplus
Total Equity
Non Current Liabilities
Long Term Loans or Debentures
Current Liabilities
Trade & Other Payables
Bank Overdrafts
Tax Payable
Total Liabilities
Total Equity & Liabilities
IAS 1
Requirements For Company Financial Statements
SPL + other comprehensive income
SFP
Statement of changes in equity
Statement of cashflows
Notes to the accounts
IAS 2
Inventories
Inventory is valued at the lower of cost or net realisable value
Cannot use LIFO
IAS 36
Impairment Of Assets
Compare carrying amount against the greater of
Fair selling value
Value in use
Dr - Impairment expense
Cr - Asset
IAS 16
Property, Plant & Equipment
Cost = purchase price + directly attributable costs
NOT TRAINING
Land is not depreciated
Revaluation
IAS 16 - Property, Plant & Equipment
Reverse accumulated depreciation
Correct asset
Complete double entry
Bottom of P&L For Info Only
IF INCREASED VALUE
Dr - accumulated depreciation
Dr - asset
Cr - revaluation
IF DECREASED VALUE
Dr - accumulated depreciation
Dr - revaluation (if there is anything in the reserve)
Dr - expense
Cr - asset
Must revalue entire class of assets, cannot pick and choose
Debt Financing
Loan, mortgage, overdraft
Equity Financing
Selling shares in the company
Debt Financing - Advantages
Can improve credit score
Debt Financing - Disadvantages
Interest, admin fees
Committed to a repayment
Application process / acceptance
Effects their ratio analysis
Equity Financing - Advantages
No credit checks
More people in the company - more knowledge
Equity Financing - Disadvantages
More people to agree on decisions
More people to pay dividends to
Dilution of control
Nominal Value Of Shares
The set price of a share, decided when the company is formed
Share Premium
Anything paid over the nominal value
Issuing Shares - Double Entry
Dr - Bank
Cr - Share Capital
Cr - Share Premium
Issuing Bonus Shares - Double Entry
Dr - Share Premium (IF AVAILABLE) / Retained Earnings
Cr - Share Capital
Dividends - Double Entry
Dr - Dividends
Cr - Bank
Dividends can only be accounted for when ACTUALLY PAID
IFRS 16
Leases
Long term rental, right to use asset but does not belong to us.
1) Account for asset (deposit & liability)
Dr - Asset
Cr - Lease Liability / Bank (deposit)
2) Work out depreciation policy over the right of use period
3) Unwind the liability - account for payments & interest each year
Payment
Dr - Lease Liability
Cr - Bank
Interest
Dr - Finance Costs
Cr - Lease Liability
4) Split the liability into current and non current
Paying In Advance
CL = Payment
NCL = Difference
Paying In Arrears
CL = Difference
NCL = Next Years Balance
Excess Depreciation Journal
IAS 16 - Property, Plant & Equipment
To adjust retained earnings due to excess depreciation from revaluation - to keep shareholders happy with dividends
Dr - Revaluation Reserve (If funds allow)
Cr - Retained Earnings
Disposal Of Revalued Asset
If there is any money in the revaluation surplus, this will be moved to retained earnings
Dr - Revaluation Reserve
Cr - Retained Earnings
Gross Profit Margin
Gross Profit / Revenue X 100
= %
For every £1 of sales, the % converted to gross profit
ONLY SALES & COST OF SALES
Operating Profit Margin
Operating Profit / Revenue X 100
= %
For every £1 of sales, the % converted to operating profit
DISTRIBUTION & ADMIN EXPENSES
Net Profit Margin
Net Profit / Revenue X 100
= %
For every £1 of sales, the % converted to net profit
TAX
Specified Expense Ratio
Specified Expense / Revenue X 100
=%
For every £1 of sales, the % spent on a specific expense
Return On Capital Employed
Profit From Operations / Capital Employed X 100
= %
Shows profit made from long term funding / investment
Capital Employed = Total Equity + NCL
OR
Total Assets - CL
Return On Net Assets OR Shareholders Funds
Net Profit / Equity X 100
= %
Showing the profit made (goes to retained earnings) from equity only
Asset Turnover
Revenue / Capital Employed
= no of times
The amount of times the long term funding is converted to revenue
Capital Employed = Total Equity + NCL
OR
Total Assets - CL
Non Current Asset Turnover
Revenue / NBV of Non Current Assets
Shows how much revenue is generated from assets
Total Asset Turnover
Revenue / Total Assets
Shows how much revenue is generated from assets
Current Ratio
Current Assets / Current Liabilities
= X:1
How the many times the Current Assets would cover Current Liabilities
Ideal 2:1
Measure of liquidity
Quick Ratio (Acid Test)
Current Assets - Inventory / Current Liabilities
= X:1
How the many times the Current Assets, without inventory, would cover Current Liabilities
Inventory is the least liquid / slowest moving asset
Ideal 1:1
Measure of liquidity
Inventory Holding Period (Inventory Days)
Closing Inventory / Cost of Sales X 365
= X Days
Average days inventory is held in the stock room
Inventory Turnover
Cost of Sales / Closing Inventory
How many times the stock room has been refilled
Trade Receivables Collection Period (Receivable Days)
Trade Receivables / Credit Sales X 365
= X days
The average time to collect money from credit customers
Puts pressure on credit control
Trade Payables Collection Period (Payable Days)
Trade Payables / Cost of Sales X 365
= X days
Average time to pay credit suppliers
Working Capital Cycle
Inventory Days + Receivable Days - Payable Days
The days the company has to fund itself
Interest Cover
Profit From Operations / Finance Costs
The amount of times the profit can cover the finance costs
Gearing Ratio
Non Current Liabilities / Equity + Non Current Liabilities X 100
= %
The % of the company that is funded by debt
High gearing = High risk
IAS 38
Intangible Assets
What is an Intangible Asset?
An asset with no physical form
Must either:
Be capable of being separated or divided from entity
Arise from contractual or other legal rights
Cost can be measured reliably (have invoice for it)
Internally generated intangible assets cannot be recognized
Amortise - Not Depreciate
When Does Research Become Development?
Research cannot be capitalised
Development can be capitalised if:
Probable future economic benefits
Intention to complete and use / sell
Resources adequate to complete and use / sell
Ability to use / sell
Technical feasibility
Expenditure can be readily measured
Amortisation Double Entry
Dr - SPL - Amortisation Expense
Cr - SFP - Accumulated Amortisation
Performance Indicator Written Question Model Answer
Introduction - repeat the question back
Write one sentence describing each ratio
State whether there has been an increase / decrease, use figures and percentages
State if there is an ideal and how they compare
State any possible reasons for the changes
Conclusion - State whether the performance has improved / declined, state areas of concern which require further investigation
Underlying Assumption
Going Concern
Assumes that the entity will continue in operation
for the foreseeable future
Fundamental Qualitative Characteristics
Relevance
Faithful representation
Enhancing Qualitative Characteristics
Comparability
Verifiability
Timeliness
Understandability
IAS 12
Income Taxes
Accrue for tax paid using accruals
IFRS 15
Revenue From Contracts With Customers
COPAR
1. Contract
2. Obligations
3. Price
4. Allocate price into obligations
5. Recognise revenue when obligation is satisfied
Indicators That Control Has Passed To The Customer (Satisfied Obligation)
Customer has physical possession of the asset
Customer has significant risks and rewards of ownership
Customer has the legal title
The seller has a right to payment
IAS 37
Provisions, Contingent Liabilities & Contingent Assets
Provision Definition
A liability where there is uncertainty regarding either the exact amount and/or the timing of the payment
Need to be estimated using a best estimate
When To Recognise A Provision?
IAS 37
If there is an obligation
If it is probable that there will be an outflow of economic benefits (money)
If the outflow of economic benefits can be reliably measured (best guess)
A provision cannot be made for future operating losses
Provisions - Double Entry
IAS 37
DR - Expense (SPL)
CR - Provisions (SFP) - Payables
When paid:
DR - Provision (SFP)
CR - Bank (SFP)
At year end, re estimate the provision and adjust if required
Contingent Liability
IAS 37
A possible obligation, the outcome will be determined by future events outside of their control
An obligation which cannot be reliably measured will also be treated as a contingent liability
Contingent Asset
IAS 37
A possible asset, the outcome will be determined by future events out of their control
How To Account For Contingent Assets / Liabilities?
IAS 37
It is not recognised in the financial statements (No double entry)
Should be disclosed in the notes - brief description and estimated financial effect
IAS 10
Events After The Reporting Period
Events which occur between the SFP date and the date accounts are sent to companies house (9 months + 1 day)
Examples of Adjusting Events
IAS 10
Post year end court case
Bankruptcy of a credit customer
Sale of inventory at less than cost
Discovery of fraud / error in statements
Examples of Non-Adjusting Events
Mergers and acquisitions
Reconstructions
The issue of shares or debentures
Purchase / sale of NCA or investments
Loss of assets as a result of catastrophe
Dividends (only accounted for when paid)
Cash Flow From Operating Activities Layout (Profit Before Tax)
Profit before tax
Adjust for:
Depreciation
(Gain)/Loss on disposal of PPE
Finance Costs
(Investment Income)
(Increase)/decrease in inventory
(Increase)/decrease in receivables
Increase/(decrease) in payables
= Cash generated from operations
(Tax Paid)
(Interest Paid)
= Net Cash From Operating Activities
Cash Flow From Operating Activities Layout (Profit From Operations)
Profit from operations
Adjust for:
(Gain)/Loss on disposal of PPE
(Investment Income)
(Increase)/decrease in inventory
(Increase)/decrease in receivables
Increase/(decrease) in payables
= Cash generated from operations
(Tax Paid)
(Interest Paid)
= Net Cash From Operating Activities
Statement of Cash Flows Layout
Net Cash From Operating Activities
Cash Flows From Investing Activities
(Purchase of PPE)
Proceeds from sale of PPE
Interest Received
Dividends Received
= Net cash from investing activities
Cash Flows From Financing Activities
Proceeds from issue of shares
Proceeds from long term borrowing
(Dividends paid)
= Net cash from financing activities
Net increase / (decrease) in cash
Cash at beginning of the year
= Cash at end of the year
Consolidation Workings (SFP)
W1 - Group structure - who owns who?
W2 - Goodwill - Difference between what was paid and what we physically get - Compare cost of investment + NCI against Equity
W3 - Consolidated retained earnings
W4 - Value of NCI - W2 + W3
How To Calculate Consolidated Retained Earnings
R/E as per question
(R/E at purchase)
= After purchase R/E
Transfer % To Parent From Sub
(Impairment)
(PURP Adjustment For Seller)
= Group Retained Earnings
Provision For Unrealised Profit Adjustment (PURP)
- Who was the seller?
- How much profit is in the sale?
- How much is still in inventory? (%)
Reduce inventory and profit by 2 x 3
Consolidation Workings (SPL)
- Look for inter company transactions (sales, dividends)
- PURP Adjustment - reduce profit & inventory
- Group Structure (% of ownership)
- Profit share working
Profit for Sub From Question
(PURP)
X NCI %
= Sub Profit
Parent Profit = balancing figure
Measurement - Conceptual Framework
Measurement - Determining the monetary amounts items are recognised in the financial statements
Historical cost - Assets are recorded at the value of the cost incurred to acquire them plus any transaction costs
Current value:
- Current cost - the amount it would cost to currently replace the asset
- Fair Value - the amount you would get for selling the asset
- Value in use - the amount the asset will generate for the business
The Elements of Financial Statements
Assets - present economic resource controlled by the entity, as a result of past events
Liabilities - present obligation to transfer economic resource, as a result of past events
Equity interest - what is left after all liabilities
Income - consists of revenue and gains
Expense - expenditure and losses
