limited companies Flashcards
what is overdraft?
occurs when there isnt enough money in an account to cover transactions, but the bank allows it anyways. it is credit.
what is debenture?
long term loans that a company can take from a lender
who are auditors?
independent scrutineers of financial statements of a company
what is auditors report?
a document containing the auditors opinion on whether a company’s financial statement is complaint with the accounting standards and if they contain a true and fair view of the company’s financial reports
what do auditors report? what is their DUTY?
report how directors have used funds invested by shareholders, their duty is to the shareholders.
how to auditors report corporate governance? LEARR
- leadership
- effectiveness of board
- accountability of risk management
- remuneration of the board
- board relationship with shareholders
why are auditors important through qualifications (2)
- professional supervisory boards, like the auditing practices board, exists to give guidelines to auditors
- they are usually professionally qualified through tests, like chartered accountants.
advantage of auditors report (2)
- may give tax authorities more confidence that the tax computation is correct
- may give assurance that the company financials are free from fraud
disadvantage of auditors report (5)
- auditors can be misled by the directors of the company and provide an inaccurate report
- auditors might not be very independent and may go along with the wishes of their clients
- auditors do not guarantee that fraud has not occurred
- expensive
- have to compile the whole year’s data in a few weeks, might make mistakes
what is directors report?
report written by directors of a company that outlines the company’s activities over a period of one year, it can be a requirement for companies as per the stock exchange regulations.
who benefits from the directors report?
shareholders, as it is presented to them and they can get all the information about the company through it.
benefits of a directors report (5)
- provides clear view of company’s performance
- improves communication between board and shareholders, can be considered to be a part of corporate governance.
- helps identify any cause of concern so shareholders can make decisions
- provides a record of director’s decisions and actions
- shareholders can know if the company aligns with their ethics
disadvantages of director reports (4)
- costs personnel time to prepare and money to print and research
- director’s may use the report to “window dress” their financial health and give an unrealistic view of the statistics, or make it seem better than it is.
- director’s are not unbiased and might not be a reliable source of information for shareholders
- in the time to prepare reports, changes might occur.
who is the financial performance targeting
investors that want to know the general well being of the firm
what is gearing
total debt / total assets * 100
percentage form
what percentage gearing is good
under 50% is good
what does gearing percentage tell us
gearing checks the ratio of debt to equity, which can help us know if the business can pay off these debts comfortably. at 50% or higher, they cannot.
things to check for when commenting on financial performance (6)
- profitability ratios
- liquidity ratios
- corporate tax date to pay and bank value
- gearing
- Profit for this year added to retained earnings
- short term loans that may relate to liquidity problems
profitability rations to look out for (5)
- gross profit margin
- net profit margin
- return on assets
- return on equity
- return on capital employed
liquidity rations
- current ratio
- quick ratio or acid test
gross profit margin / net profit margin + standard
gross/net profit margin / revenue *100
gp standard - 20 to 50%
net profit standard - 5 to 20%
return on assets / return on equity + standard
total assets / revenue (above 5%)
total equity / revenue (15-20%)
current ratio + standard
current assets / current liabilities
ratio shld be between 1.5 and 2:1,
A ratio below 1 indicates
liquidity issues, while above 2 suggests excessive cash holdings.
acid test ratio + standard
current assets - closing inventory / current liabilities
ratio of 1 or more is considered good, showing the company
can cover its liabilities without selling inventory
