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Corporate Finance Technical Foundations > FSA > Flashcards

FSA Flashcards

9 Questions

1
Q

Most jurisdictions require companies to file …… accounts in accordance with local accounting standards.

1- Annual
2- Quarterly
3- Monthly

A

Annual

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2
Q

If the company has its shares quoted on a stock exchange, a more comprehensive set of audited annual accounts will be required, usually compliant with either US ……….. (for the companies listed on exchange in the US) or …………. (for companies listed on other major stock exchanges)

1- GAAP, IFRS
2- IFRS, GAAP

A

GAAP, IFRS

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3
Q

Quoted companies are also required to make unaudited interim financial disclosures either …….(Canada, Japan, and the US) or ……. (Australia, the EU and the UK)

1- Quarterly, Annually
2- Annually, Half yearly
3, Half yearly, Quarterly
3- Quarterly, Half yearly

A

Quarterly, Half yearly

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4
Q

As quoted companies normally have a number of subsidiaries, the accounts are required to be produced on a …….. basis, i.e., treating the group of companies as if it was a single ……. for accounting purposes.

A

Consolidated Basis, Entity

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5
Q

Profit and loss account, maybe shown as one single document, or it may be divided into two parts (the income statement and the statement of comprehensive income), this is the statement showing the company’s total income and expenses for the last financial year, and its profit or loss for that year

A

The statement of comprehensive income

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6
Q

The statement of the company’s assets and liabilities as at the end of the financial year

A

The statement of financial position also referred to as the balance sheet

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7
Q

The statement showing the sources and uses of cash during the financial year, and the net cash position at the end of that year

A

The statement of cash flows

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8
Q

A breakdown of the different elements contributing to changes in the company’s equity over the year, and notes to the financial statements - which provide breakdowns of the more complex items, as well as explanations and additional information, such as the company’s accounting policies.

A

The statement of changes in equity

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9
Q

True or False

Narrative reporting include:
1. The chairman’s statement
2. Reports by the CEO and other directors
3. A strategic report containing a fair review of the company’s business
4. An audit report
5. A director’s report

A

True

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10
Q

True or False

Companies that are traded on a stock exchange must publish these accounts by the deadline specified by the exchange, usually between six and eight months after the year-end.

A

False
Four and Six months

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11
Q

IFRS have been adopted by an increasingly wide number of countries and markets. with the exception of those companies quoted on US stock Exhange.

Who has developed the IFRS?

A

International Accounting standards board (IABS)

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12
Q

Generally, a parent will be treated as controlling its subsidiary if it owns more than … of the subsidiary’s shares (a simple majority)

  1. 20%
  2. 49%
  3. more than 50%
A

more than 50%

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13
Q

A company may be treated as an associate if the parent company owns or controls a significant shareholding (generally, ….)

  1. 10%-30%
  2. 50%-80%
  3. 20%-49%
A

20%-49%

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14
Q

Parent does not have a significant shareholding. instead, the parent is a passive minority shareholder that holds less than 20% shares, with only the right to receive dividends. The company is classified as:

  1. Associate
  2. Subsidiary
  3. Investment
A
  1. Investment
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15
Q

True or False

The parent company if a group of companies must produce both consolidated financial statements, showing the contribution of its subsidiaries, associates, and investments, and company accounts.

A

True

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16
Q

True or False

Minority interest represents the proportion of the subsidiary’s earnings which belong to the third party owning the minority interest in the subsidiary

A

True

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17
Q

Company M owns 90% of the shares in its subsidiary, Company T. Company M has profit after tax of
$100,000; Company T has profit after tax of $50,000. In summary, Company M’s profit will be shown in
the consolidated accounts as follows:

A

Consolidated Accounts 150,000

Less:minority interest* (5000)

Profit attributable to Company M’s ordinary shareholders 145,000

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18
Q

Provides a snapshot of the company’s financial position at a particular date

  1. Income statement
  2. Balance sheet
  3. Cash flow
A
  1. Balance sheet
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19
Q

True or False

Intangible Assets are assets which are capable of being touched and observed, such as buildings, machinery, plant, vehicles, office equipment and computers.

A

False

Tangible Assets

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20
Q

True or False

In the UK, all tangible fixed assets with a limited economic life must be depreciated (or written down) over their useful economic lives.

A

True

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21
Q

True or False

Intangible Assets cannot be touched or observed such as patents, trademarks, licences and other intellectual propertty.

A

True

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22
Q

True or False

Goodwill arises when the parent company acquires a subsidiary for a price which is lower than the fair value of the subsidiary net tangible assets

A

False

Greater than the fair value of the subsidiary net tangible assets

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23
Q

True or False

If the company has a surplus on a retirement benefit scheme, this surplus maybe shown in current assets

A

False

Non-current assets

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24
Q

True or False

Inventory consists of three items:
1. Raw materials: which have been bought but, as at the balance sheet date, not yet used in producing goods.
2. (WIP): products in the process of being manufactured
3. Finished Goods: products which have been made, but not yet sold as the year-end

A

True

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25
Q

True or False

Receivables represents amounts owned by customers for goods provided or services rendered

A

False

Receivables represents amounts (owning from) customers for goods provided or services rendered

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26
Q

Explain the relationship between Inventory, Receivables and Cash?

A

Inventory: raw materials, unfinished goods, finished goods which are unsold, these will be turned into receivables
Receivables: Finished goods which have been sold but not paid for. these will be sold later for cash
Cash: received in exchange for finished goods, sold and paid for

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27
Q

True or False

An increase in Accounts Receivable and Inventory is a decrease in cash flow

A

True

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28
Q

True or False

An increase in Accounts Payable is a decrease in cash flow

A

False

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29
Q

Which one is not a non-current asset?

  1. Property, Plant and Equipment
  2. Intangible Assets
  3. Cash and Cash Equivalents
  4. Investments In Associates
  5. Financial Investments
  6. Retirement Benefit Surplus
A
  1. Cash and Cash Equivalents
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30
Q

Which one is not a current asset?

  1. Inventories
  2. Property, Plant and Equipment
  3. Trade and Other Receivables
  4. Other Financial Assets
  5. Cash and Cash Equivalents
A
  1. Property, Plant and Equipment
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31
Q

Which one is not a current liability?

  1. Bank overdrafts
  2. Bank loans
  3. Trade and other payables
  4. Financial instruments
  5. Other financial liabilities
  6. Current tax
A
  1. Financial instruments
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32
Q

A company has a current assets of 1,067.3 and current liabilities of 832.9

What are the net current assets?

A

234.4

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33
Q

Which one is not a non-current liability?

  1. Bank loans
  2. Borrowings
  3. Deferred income
  4. Financial Instruments
  5. Deferred tax liabilities
  6. Retirement benefit obligations
A
  1. Bank loans
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34
Q

This includes bank loans, bonds, debentures or mortgages due for repayment in more than one year?

  1. Borrowing (debt)
  2. Bank loans
  3. Bank overdrafts
A
  1. Borrowing (debt)
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35
Q

Situation when the company anticipates an expense arising in the future, but when the amount and timing of that expense is not yet certain.

  1. Borrowing (debt)
  2. Provision
  3. Retirement benefit obligations
A
  1. Provision
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36
Q

When a company has a deficit on its pension scheme (i.e., its future liabilities outweigh the value of the assets in the scheme), this is shown in long-term liabilities?

  1. Borrowing (debt)
  2. Provision
  3. Retirement benefit obligations
A
  1. Retirement benefit obligations
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37
Q

True or False

Borrowings, Provisions, and Retirement benefit obligations fall under non-current liabilities

38
Q

100 million ten-year loans, repayable in equal instalments over the life of the loan. At the beginning of the year, one instalment is due to be paid by the year-end and is thus a current liability. The statement of financial position will show?

A

Current liability: 10 million
Non-current liability: 90 million

39
Q

True or False

Contingent Liabilities (potential, rather than certain, obligations when the amount and timing are Uknown) are recorded in the balance sheet

A

False

Contingent Liabilities are off-balance sheet items, an explanatory information disclosed in the notes to the accounts

40
Q

Which one is not a shareholders’ equity item?

  1. Called up share capital
  2. Share premium account
  3. Retirement benefit obligations
  4. Capital redemption reserve
  5. Share options reserve
  6. Other reserves
  7. Retained earnings
    Shareholders’ equity
  8. Non-controlling interest
    Total Equity
A
  1. Retirement benefit obligations
41
Q

True or false

A revenue reverse is created when the company has made a profit from its trading activities and retained some or all of this profit within the business.

42
Q

True or false

Capital reserves can be used to pay dividends to shareholders

A

False

Capital reserves are not distributable and cannot be used to pay dividends to shareholders.

Correction: Revenue reserves can, as they are distributable, i.e., can be used to pay dividends to shareholders.

43
Q

True or false

Capital reserves generally represent wealth created for the company out of some change to the company’s capital base.

44
Q

True or false

If a company has accumulated losses (so that it has a deficit on retained earnings reserve), it is not allowed to pay dividends until it has accumulated enough profits to create a positive balance

45
Q

A company might have 1 nominal value shares in issue, and be preparing to issue 1 million shares, the appetite in the market for the shares is strong, and the company has a good track record, so investors are prepared to pay a premium of, say, 1.50 for the shares bringing the price to 2.50 per share. the total funds raised will be 2.5 million

How will the effect of the share issue accounts be recorded?

A

Assets Liabilities
Increase Cash 2,500,000
Increase Share Capital 1,000,000
Increase Share Premium Reserve 1,500,000
Total 2,500,000 2,500,000

46
Q

True or false

The share capital shown in the statement of financial position comprises the issued share capital of the company, i.e., the shares which are currently in issue and owned by shareholders. directors may increase the issued share capital by issuing new shares to raise capital, providing that they have the approval of shareholders to do so.

47
Q

True or false

Some jurisdictions require shares to have a par value, i.e., a price below which they cannot be issued, eg, the UK, while others such as Canada, Australia and many states in the US, allow shares to be issued with no par value

48
Q

True or false

In the accounts, we can see depreciation in two places. the first of these is in the statement of financial position, where we can see the value of assets reducing in value in consecutive periods. the second place is in the company’s income statement, where the depreciation is shown as an expense.

49
Q

True or false

Non-current assets are shown in the statement of income at net book value (NBV), which is simply the cost of the asset less the accumulated depreciation to date

A

False

In the statement of financial position

50
Q

Smithson purchases a new item of plant costing 20,000. the company expects the plant will have a scrap value of 5000 at the end of a ten-year asset life. company policy is to depreciate the asset in equal annual amounts (straight-line)

A

asset value - scrap value/expected useful life of asset
20,000 - 5,000/ 10 Years

51
Q

True or False

Reducing balance depreciation reduces the book value of the asset by a set percentage each year (rather than by an equal amount). this results in a higher depreciation charge in the early years of the asset’s life but a lower charge in the later years

52
Q

True or False

The statement of comprehensive income (also known as the profit and loss account) is intended to provide a formal record of the company’s performance over a particular accounting period.

53
Q

True or False

A company may choose to present its statement of comprehensive income in only one way

A

False

It can be presented in two ways

  1. As two separate documents, the first shows all the components of profit or loss (from revenue to profit/loss for the year). and is named the income statement. the second starts at profit/loss for the year, and shows all other, non-regular elements of comprehensive income, such as exchange rate movements. this is then named the statement of comprehensive income. this dual-statement approach is more common for UK companies
  2. the company is permitted to present all of this information in a single document; this is then named the statement of comprehensive income.
54
Q

Total value of goods and/or services that the company has supplied and invoiced during the accounting period.

  1. COGS
  2. Gross Profit
  3. Turnover (or sales or revenue)
A
  1. Turnover (or sales or revenue)
55
Q

Direct costs associated with the production of goods and/or services supplied by the company

  1. COGS
  2. Gross Profit
  3. Turnover (or sales or revenue)
56
Q

Represent the profitability of the principal activity alone and thus is a useful indicator of the basic efficiency of the company’s core trading process.

  1. COGS
  2. Gross Profit
  3. Turnover (or sales or revenue)
A
  1. Gross Profit
57
Q

True or False

Operating (indirect) expenses represent the remaining ongoing costs of running the business. Some companies divide operating expenses into separate categories, such as distribution and administrative expenses.

58
Q

True or False

Only revenue expenses are recorded on the income statement

59
Q

Money spent to buy non-current assets, such as plant, property and equipment. This is not shown in the income statement, which instead shows depreciation over the life of the asset. It is shown in the cash flow statement, and its effects (i.e., increase in assets and capital) are reflected on the balance sheet

  1. Revenue Expenditure
  2. Capital Expenditure
A
  1. Capital Expenditure
60
Q

Money spent in order to generate revenue, and is, therefore, shown both in the income statement and the cash flow management

  1. Revenue Expenditure
  2. Capital Expenditure
A
  1. Revenue Expenditure
61
Q

Represents trading profit plus/less income and expense from non-core business related activities

  1. Gross profit
  2. Profit before taxation
  3. Profit for the year
  4. Operating profit (EBIT)
A
  1. Operating profit (EBIT)
62
Q

True or False

Finance income and finance costs show the cost of borrowing money, and the income from financial investments including cash deposits. these may also be referred to as interest costs and interest income

63
Q

Company’s profit after all deductions except taxation and dividends

  1. Gross profit
  2. Profit before taxation
  3. Profit for the year
  4. Operating profit (EBIT)
A
  1. Profit before taxation
64
Q

True or False

Any corporation tax still unpaid at the year-end will appear on the statement of financial position as a current liability

65
Q

All deductions, except dividends. this profit may be used to pay dividends, or it may be retained in the business, and transferred to the retained earnings. it represents the consolidated profit generated by the group of companies

  1. Gross profit
  2. Profit before taxation
  3. Profit for the year
  4. Operating profit (EBIT)
A
  1. Profit for the year
66
Q

True or False

These are other items show separately, under the heading of other comprehensive income (OCI)

  1. Actuarial gains or losses on defined benefit pension schemes
  2. Profits or losses on revaluation of assets
  3. Gains or losses on financial instrument hedges
67
Q

A statement that shows how a company’s cash has been generated over the accounting period and how it has been expended. The statement is vital in helping investors, lenders and directors understand whether the company is generating adequate cash to invest, pay its suppliers, support its pensioners, service its capital providers

  1. The income statement
  2. The statement of financial position
  3. The statement of cash flow
A
  1. The statement of cash flow
68
Q

Cash flows arising from generating revenue and meeting the company’s costs of managing its operations

  1. Operating activities
  2. Investing activities
  3. Financing activities
A
  1. Operating activities
69
Q

Cash flows arising from the management of the company’s assets, both in investing in new assets and selling existing ones

  1. Operating activities
  2. Investing activities
  3. Financing activities
A
  1. Investing activities
70
Q

Cash generated from raising new loans and issuing new shares; and cash spent on repayments of loans and redemption of shares

  1. Operating activities
  2. Investing activities
  3. Financing activities
A
  1. Financing activities
71
Q

True or False

Revenue is shown in the income statement as cash received, and not based on sales invoiced

A

False

Revenue is shown in the income statement is based on sales invoiced, and not on cash received

72
Q

True or False

Expenses, as shown in the income statement, are based on costs incurred during the year, rather than invoices paid

73
Q

In the Cash Flows from Operating Activities. an item has to be deducted any reduction, and added in any increase

  1. Trade Receivables
  2. Inventories
  3. Trade Payables
A
  1. Trade Payables
74
Q

In the Cash Flows from Operating Activities. an item has to be added in any reduction, and decreased in any increase

  1. Trade Receivables
  2. Inventories
  3. Trade Payables
A
  1. Trade Receivables
  2. Inventories
75
Q

Cash flow activities that relate principally to acquisitions or disposals of non-current capital assets such as land, buildings, machinery, and other significant investments. This is referred to as capital expenditure

  1. Cash flow from operating activities
  2. Cash flow from investing activities
  3. Cash flow from financing activities
A
  1. Cash flow from investing activities
76
Q

True or False

The statement of cash flows records the payment of the consideration as and when it is actually paid, rather than when the transaction is completed

77
Q

A section of a cash flow that might include interest received and dividend income

  1. Cash flow from operating activities
  2. Cash flow from investing activities
  3. Cash flow from financing activities
A

Interest and dividend income may be included either under cash flows from operating activities or cash flows from investing activities, at the discretion of the company and its auditors

78
Q

A statement of cash flows that shows fund flows arising from the company’s capital sources, including income from raising new debt or issuing new shares, and cash outflows for debt redemptions and repayment, or share buybacks. it also includes purchases of shares for the employee share scheme

  1. Cash flow from operating activities
  2. Cash flow from investing activities
  3. Cash flow from financing activities
A
  1. Cash flow from financing activities
79
Q

A section of a cash flow that might include interest payment

  1. Cash flow from operating activities
  2. Cash flow from investing activities
  3. Cash flow from financing activities
A
  1. Cash flow from operating activities
  2. Cash flow from financing activities
80
Q

True or False

Free cash flow is defined as the cash flow generated by a company’s underlying activities, after tax, including any financing deductions or income

A

False

FCF is defined as the cash flow generated by a company’s underlying activities, after tax, but EXCLUDING any financing deductions or income

81
Q

True or False

There are two alternative measures of cash flow: enterprise cash flow and equity cash flow. Enterprise cash flow is discounted at the cost of equity, whereas equity cash flow is discounted at the weighted average cost of capital

A

False

Enterprise value is discounted at the weighted average cost of capital, whereas Equity cash flow is discounted at the cost of equity to give an equity value

82
Q

FCF of the company before considering payments made to any of the providers of finance to the firm

  1. Enterprise cash flow
  2. Equity cash flow
A
  1. Enterprise cash flow
83
Q

FCF available for the shareholders alone

  1. Enterprise cash flow
  2. Equity cash flow
A
  1. Equity cash flow
84
Q

True or False

Changes in working capital: positive cash flows arise from increases in trade payables and decrease in inventory and receivables. negative cash flow arise from decrease in trade payables and increase in inventory and receivables

85
Q

Build an enterprise cash flow EBITDA/USA method

A
  1. Operating Profit/EBIT
  2. Add back-noncash items (D&A)
  3. EBITDA
  4. Deduct tax
  5. Deduct capital expenditure
  6. Capital allowance for capital expenditure
  7. Adjust for changes in working capital
  8. Enterprise Value
86
Q

Build an enterprise cash flow NOPAT/UK method

A
  1. Operating Profit/EBIT
  2. Deduct Tax
  3. NOPAT
  4. Add back-noncash items (D&A)
  5. Deduct Capital Expenditure
  6. Adjust for changes in working capital
  7. Enterprise Value
87
Q

True or False

Cash flow available for debt servicing (CFADS) is useful to banks in particular, to establish a potential borrower’s debt capacity, and an ongoing basis to measure whether that borrower’s ability to service its debt is improving or deteriorating

88
Q

Build a CFADS

A
  1. Operating Profit/EBIT
  2. Add back non-cash items
    EBITDA
  3. Cash taxes payable
  4. Capital expenditure
    • of which maintenance capex
  6. Changes in working capital
    Cash Flow Avaliable for Debt Servicing
  7. Interest payable for the year
  8. Debt repayment for the year
    Total Debt Service Obligation
    CFADS/TDSO which is a multiple
89
Q

Build an Equity Cash Flow EBITDA Method

A
  1. Operating Profit/EBIT
  2. Add back non-cash items
    EBITDA
  3. Deduct interest payable
    Pre-tax cash flow/EBT
  4. Deduct tax
  5. Deduct capital expenditure
  6. Adjust for changes in working capital
    Debt repayments
    Debt raised
    Equity free cash flow
90
Q

Profits made by the company before payments made to any of the capital providers, i.e., before interest payments and dividends. it takes into account the tax on these pre-interest profits, rather than the actual tax paid by the company

91
Q

What are the three main groups of analysts of financial statements?

A
  1. Supplies/lenders
  2. Investors
  3. Management

Corporate Finance Technical Foundations (4 decks)

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