Limited company accounts Flashcards
1
Q
what is a limited company
A
a company owned by its shareholders
separate legal status
can sue and be sued in its own right
2
Q
what two types of limited company are there
A
Private
public
3
Q
what are the characteristics of a private limited company
A
has LTD after its name
minimum shareholder of one
cannot sell its shares to the public
4
Q
what is a public limited company
A
PLC after its name
can sell shares to the general public
can be listed on the stock exchange
minmum share capital of £50,000
needs two documents
5
Q
what two documents are needed to set up a PLC
A
Memorandum and articles of association
statutory declaration
6
Q
what is nominal value
A
face value/ par value of shares
decided when setting up the business
7
Q
what is issued capital
A
nominal share capital issued to share holders
total amount of money raised from selling shares at nominal value
8
Q
what is share premium
A
finance raised from selling shares above nominal value
nominal value £1 sale price £1.5
premium= 50p
9
Q
what are ordinary shares
A
owners of a company
most common
full voting rights
referred as equity capital
variable dividends
10
Q
what are preference shares
A
fixed rate of dividends
entitled to repayment of capital should the company be wound up
not normally have voting rights
safer investment
11
Q
what is dividends
A
share of companies profit paid to shareholders as a percentage of their shareholding
interim paid half through financial year
12
Q
what is a debenture
A
bonds recording a long term loan to a limited company
pays a fixed rate of interest on debentures
interest paid whether the company makes a profit or a loss
form of loan capital
13
Q
what are shareholder funds
A
made up of all share capital of the company plus all reserves
14
Q
what is loan capital
A
part of the medium to long-term capital of a limited company provided by banks or debenture holders
15
Q
what is share issue
A
additional shares are offered at market value as a method of raising finance
sell shares to anybody
16
Q
what are rights issue
A
rising finance by selling shares at a reduced rate to existing shareholders
17
Q
what are bonus issues
A
making it look like money is being moved around
piggy bank for uni and for car move money from uni piggy bank to car
18
Q
What is the difference between a limited company income statement and a sole trader?
A
Profit from operations
Profit for the year before tax
Profit for the year after tax
19
Q
what is profit from operations?
A
earnings from its core business functions for a given period, excluding the deduction of interest and taxes
20
Q
what is profit before tax?
A
measure that looks at a company’s profits before the company has to pay corporate income tax
21
Q
what is profit after tax?
A
amount that remains after a company has paid off all of its operating and non-operating expenses, other liabilities and taxes
22
Q
what should the statement of changes in equity contain?
A
opening equity balances
share issue (including premium)
rights and bonus issue
dividend paid (retained earnings)
profit or loss for the year (retained earnings)
closing balances
23
Q
what sub-headings will be on the statement of financial position?
A
current assets
non-current assets
equity
current liabilities
non current liabilities
24
Q
what are the financial statements for limited companies?
A
income statement
statement of changes in equity
statement of financial position
statements of cashflow
schedules of non-current assets
25
what is an issue of shares?
Issued shares are those that the owners have decided to sell in exchange for cash, which may be less than the number of shares actually authorized
26
what is a rights issue?
invitation to existing shareholders to purchase additional new shares in the company
27
what is bonus issue?
an issue of additional shares to shareholders instead of a dividend, in proportion to the shares already held.
28
what are the reasons for publishing accounts?
to report the financial activity of your company at the end of its financial year
29
what are the benefits of published accounts?
helps show a company's financial strengths and weaknesses.
30
what are the limitations of published accounts?
drawn up on a single day, it is possible to window-dress the data to mask financial problems temporarily.
31
what are the main elements of published accounts?
a ‘balance sheet’, which shows the value of everything the company owns, owes and is owed on the last day of the financial year
a ‘profit and loss account’, which shows the company’s sales, running costs and the profit or loss it has made over the financial year
notes about the accounts
a director’s report
32
what is IAS1?
complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.
33
what is IAS7?
requires an entity to disclose the components of cash and cash equivalents and to present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position.
34
What is the main purpose of IAS1?
So that companies all publish the same information which means financial situation of different companies can be compared more easily
35
Who are the published accounts of limited companies used by?
Shareholders/investors/prospective investors
Customers and Suppliers (Payables/receivables)
Financial analysts/ financial press
Employees/ management
Competitors
Banks and financial institutions
Government
Local community/ pressure groups
36
What parts of a companies published accounts will a shareholder be interested in?
Profits as the amount that might be dividends
Profits retained in reserves (expansion)
Cash flow statement
37
Why will a shareholder be interested in a companies accounts?
As they own a part of the business
Want to maximise financial returns
38
What part of the accounts will mangers be interested in?
Profit figures
39
Why will mangers be interested in accounts?
As this may be how performance is assessed by directors
40
What is a more likely way a mangers performance will be monitored from published accounts?
Performance of relevant section they’re responsible for
41
What is divorce of ownership from control?
Conflict between objectives of shareholders and objectives of mangers
42
What are the shareholders and mangers objectives?
Shareholders= maximise profits
Mangers= maximise sales
43
What are directors in a company?
agents of the company, appointed by the shareholders to manage the company's day-to-day affair
44
Why will published accounts be useful for directors?
Presenting the form to potential investors in most favourable light
45
What part of the accounts will be useful for directors?
Profits to asses performance
Want profit to be as favourable as possible
46
What will directors want to hide?
How profits have been generated (change in depreciation policy)
47
Where will hidden changes to increase profit be shown?
In the auditors report to the shareholders
48
What part of accounts will employees be interested in?
Profits
49
Why will employees be interest in profit?
Workers may be in a better bargaining position to ask for a wage increase
Jobs may be more secure
Lack of profitability may increase job insecurity
50
What does a company share scheme allow?
Allows employees who participate to benefit from rising profit
51
What has become more common for employees to do over the last 20 years?
Join company share scheme
52
Why will receivables be interested in published accounts?
To see whether or not the firm is likely to be continuing to trade into the future
53
What is the main indicator that receivables will be interested in?
Profits
54
What might mean customers ask for better price or quality?
Is profits are favourable in business to business situation
55
Why will payables be interested in accounts?
To see if the firm is capable of repaying amounts owed
56
when will most suppliers offer credit?
will only offer to a firm after first checking the published accounts of the firm
when the firm has profits or cash resources to repay
57
what accounts will payables be interested in?
current assets of the statement as information about liquidity can be acquired (ability to meet short term debts)
58
what will banks and other financial institutions check before offering a loan?
income statement
statement of financial position
59
what will loan lenders examine from the statements?
profit earned in recent years
forecasted profit
liquid resources (current assets and cash)
60
will forecasted accounts be published?
no but might be requested by by loan lenders
61
why will the local community want to see the published accounts of companies?
as all business effect their local community within which they operate some positive and some negative
62
what are some external costs that a business has on the local community?
pollution
congestions
63
why will pressure groups be interested in a companies accounts?
will want to see if the company is making a profit so they can pressure them into making donations to local causes or changing some activities that impose costs on local community
64
why will local communities want to see the success of local firms?
for employment opportunities
multiplier effects in generating jobs in other firms that may be come suppliers
65
what accounts will the financial media look at?
all of them among with additional information
66
why are financial media interested in published accounts?
will provide forecasts and evaluations on performance to inform potential investors
67
what headline figures will financial media use?
profits
sales
debt
68
why will the government be interested in a companies published accounts?
purposes of taxation
government are decision makers and their forward economic plans are influenced by the performance of all businesses within various sectors in the economy
69
why will competitors be interested in published accounts?
in order to evaluate its financial condition
knowledge they gain could alter their competitive strategies.
70
why will customers be interested in public accounts?
order to judge the financial ability of a supplier to remain in business long enough to provide the goods or services mandated in the contract
71
What does IAS1 state a company must prepare?
income statement
statement of financial position
cash flow statement
statement showing changes in equity
statement of accounting policies and explanatory notes
72
What does IAS1 require documents to have?
financial statements are clearly shown separately from other information shown in corporate report
name of company shown
period covered
currency used and magnitude
no offsetting of income and expense or assets and liabilities
comparative information from previous periods
73
what is the use of the companies act 2006?
provide a simple, efficient and cost effective framework for the operation of companies
74
what did the 2006 companies act replace?
provisions contained in the 85 and 89 companies act
75
according to the companies act what accounts need to be published for the year?
income statement and statement of financial position
directors report
auditors report
groups accounts where applicable
statement of cash flow
notes of summary of significant accounting policies and explanatory information
76
how many days before the annual general meeting does every company have to send a copy of the account?
at least 20 days before
77
who gets sent a copy of the companies accounts before the annual general meeting?
every shareholder
every debenture holder
all persons entitled to receive copies (auditors)
companies house
78
what does the companies act say about authorised share capital?
requirement for authorised share capital is abolished but shares must still have a nominal value
79
what is the minimum authorised share capital of a public company?
£50,000
80
what methods can be used to communicate with shareholders under C-2006?
electronic methods- emails and websites
81
what is no longer needed under the C-2006?
memorandum of association
no requirement to have an object clause
82
what do the articles of association do?
set out the way in which a company conducts its business
83
what is a model for accounts provided to private limited companies?
article of association if they wish to adopt it
84
what must the directors report include under c-2006?
main trends and factors likely to affect future development, performance and position of business
info about environmental matters the company's employees and social and community issues
info on contractual arrangements
85
how are the duties of directors controlled under C-2006?
set out in law
86
what is an important aim of companies act and accounting standards board?
make it easier to analyse published accounts and compare to other companies
87
how does C-2006 make it easier to compare and analyse?
reducing scope for inconsistency, fraud and misinterpretation
88
why can investors and shareholders have confidence in calculation of account figures?
as the values have been made in accordance with relevant standards and checked by auditors
89
who is responsible for the shareholders of the company?
the directors as they are appointed by shareholders
90
how are directors usually chosen?
major shareholders or voted in by shareholders
91
what is a directors job?
maximize profits/ returns to investors
value of share to rise (shareholder capital gain)
92
what happens if the business starts performing poorly? (directors)
the directors job to ensure the business returns to previous higher levels of performance
93
what must the directors do if they cannot return to high performance?
must give the illusion or look of good performance
window dressing
94
is window dressing illegal?
no
95
what can they not do with window dressing?
lie but can present accounts in the best way possible
96
why is window dressing done?
to make the business look more attractive then it actually is
97
what are the 2 types of director?
executive
non-executive
98
what is an executive director?
actively involved in running part of or all of business
99
what is a non-executive director?
not employees of the company and usually act as independent advisors
100
what are the directors responsible for?
whole process of completing the financial statements ready for publication
101
what factors must the directors take into account in the decision making process?
interests on employees
business relationships with suppliers and customers
impact on community and environment
need to maintain a reputation for high standards of business conduct
need to act fairly between shareholders of the company
102
what duties do the directors have?
act within their powers
exercise independent judgement
exercise reasonable care, skill and diligence
avoid conflicts of interest
not accept benefits form third parties
declare interest in any proposed transactions or arrangements with the company
103
what is the directors report?
report produced by the board of directors summarizing the main activities of the firm
commentary on current and future performance
any subsidiary firms controlled by the company
104
what are subsidiaries?
other firms, usually smaller, that the company owns a large proportion of the shares in
105
what does the directors report include details on?
Main activities of the company during the year and any changes made
Names of all directors and their interests (shareholdings)
Employees statistics/ health and safety information/ employment of people with disabilities
Donations to charitable concerns over the year (political orgs)
Dividends recommended for shareholders
Research and development activities
Any significant changes to fixed assets
106
what are auditors?
Independent of the company and act as unbiased checking device that declare financial information and the companies position is accurately reported
107
what is the role of the auditor?
form an opinion and declare whether a true and fair view is provided
will asses whether the accounting policies used by the firm are appropriate
108
what are auditors entitled to?
any information they require to enable them to form an opinion
109
what can auditors never do?
state the final accounts are 100% accurate because they can only check the information the company provides them with
110
what do all auditor reports include?
respective responsibilities of the directors and auditors
basis of the audit opinion
opinion
111
what will auditors do if they are happy with the published accounts?
sign off the accounts as unqualified
112
what is an unqualified auditor report?
no further adjustments are needed
113
what might lead to an unqualified auditors report?
financial statements prepared properly
they give a true and fair view of a company's affairs in accordance with IFRS as adopted by EU
info in the directors report consistent with financial statements
114
what is a qualified audit?
would mean certain aspects of the firms accounts must be adjusted
115
what can make a audit qualified?
if the auditors feel certain parts of the financial statements have not been dealt with correctly and is important enough to be bought to the user of the accounts
116
what is the job of the auditors?
ensure the directors do not mislead the general public and existing shareholders
117
what act requires both directors and auditors reports?
companies act
118
what is the main difference between auditor and director reports?
directors report variable between companies while auditor similar
119
what notes are required by IAS1?
basis of preparation of financial statements
information required by international standards
any additional information that is relevant to understanding of financial statements
120
what are notes to the accounts?
in effect explanations given to accompany the published accounts
some are legally required
some just help inform potential and current investors
121
what must the notes of account contain?
disclosure of accounting policies
turnover/ revenue
directors emoluments
earnings per share
non-current assets
interest
income
rent from land
hire of plant and machinery
auditors remuneration
taxation
particulars of staff
share capital
auditors report
dividends
122
what are accounting policies?
decisions made by managers in deciding on which are the most appropriate accounting techniques to use
123
what will disclosure of accounting policies cover?
depreciation policy
valuing inventories
124
why shouldn't accounting policies be changed when decided?
as it allows more meaningful comparison between different period
125
what is turnover?
the amounts received from the sale of goods and services of what is considered the companies main activities
126
what is income from other forms of income called?
non operating income
127
Why might turnover need to be broken down?
if the company has different types of sales income
sales vary significantly according to different geographical areas
128
what are directors emolument?
earnings of each director of the company
129
what are some examples of directors emoluments?
total earnings
pension contributions
fringe benefits (company car)
pensions paid to past directors
130
what is a requirement of companies quoted on the stock exchange?
should show their earnings per share
131
how do you work out earnings per share?
profits divided by the number of ordinary shares
132
how should NCA be shown in the notes to the accounts?
should be shown at cost (or revalued amount if applicable) at the beginning of the year
Additions (purchases) and disposals (sales) during the year must be included
provision for depreciation of NCA at beginning and changes must be included
any revaluation shown in revaluation reserve
133
how should interest be treated in notes to the accounts?
interest on bank loans and overdrafts and any other loan must be put in expenses when paid and total shown in liabilities on SFP
134
what is income?
amount received form investments on any recognized inventories exchange
135
how should rent form land be treated in notes to the accounts?
net amount should be shown it it represents a significant proportion of companys earnings for that year
136
how should hire of plant and machinery be treated in notes to the accounts?
amount charged to the years income statement for hire of plant and machinery should be included
137
how should auditors remuneration be treated in the notes to the accounts?
amount charged to income statement in respect of fees due to the auditors by the company
138
what details on tax should be included in the notes to the accounts?
UK corporation tax
UK income tax
irrecoverable corporation tax
tax attributed to dividends received from other UK companies
139
what details should be included on the particulars of staff?
average number of persons employed during financial year
average number of employees within each category of employment
wages and salaries paid in the year
social security costs
other pension costs
number of employees earning over £30,000 within each band of £5,000 over that amount
140
what should the notes to the account do with share capital?
authorized share capital
number and aggregated nominal value of each class of share
dates and details for any redeemable shares
141
how are dividends treated in the notes to the accounts?
interim paid halfway through year (based on profit reported by company)
Final dividend are paid on the profits based on the results of the whole year being considered
only dividends paid are recorded in financial statements
142
what do published accounts not provide information on?
non-financial factors such as quality of the workforce and business location
factors outside businesses control (inflation, exchange rates)
143
what is window dressing?
businesses deliberately mislead shareholders and investors to make the business look better or worse than it really is
144
what are some limitations of published accounts?
lack of detail
historical information
non-money factors and intangible assets
subjectivity
differences in accounting policy
window dressing
145
why is lack of detail a limitation of published accounts?
published accounts only provide a summary of financial position
not on relative performance of different parts of the business
only contain the figures for 2 years so cant make trends
146
why is historical information a limitation of published accounts?
info published based on historical data so is outdated when published
so might not be a reliable guide to current or future performance
147
what is the information contained in the financial accounts mainly focused on?
factors measured in monetary terms
148
what are some non-financial factors that are important?
workforce and management
location
intangible assets
149
why are workforce and management important?
quality of people working for business can significantly affect performance
150
how can workforce enhance performance?
well trained
highly motivated
flexible
loyal
151
why is the location of a business important?
can be benefitted or negatively affected by location does it meet a demand in the locations its based
152
when would you include intangible assets in the accounts?
if they have been purchased
153
what assets are extremely valuable to the business but not measured in monetary value?
goodwill
brand names
patents
trademarks
154
what will happen if a business doesn't include intangible assets?
SFP will tend to undervalue business
155
what has to be done when dealing with subjective accounts?
must be interpreted with care
156
what is an example of subjectivity in accounts?
businesses can decide whether to value assets at historical cost or at current market valuation
157
what is differences in accounting policy?
businesses have considerable leeway in deciding how to draw up their accounts
158
why can differences in accounting policy be a limitation to published accounts?
because different techniques are used comparing accounts of different companies can be misleading
159
how can comparisons of a business overtime be misleading?
if a company changes its method of depreciation
160
what reasons might a company window dress their accounts?
fend off a takeover bid
attract investment
increase market price of share
lower market price of shares
reduce taxation
161
How can window dressing fend off a takeover bid?
by making a company look stronger than it is really shareholders might want to hold onto shares preventing unwanted bids as a string company is expensive to buy
162
how can window dressing attract investment?
exaggerating the financial strength of a business it might be possible to persuade potential investors to provide funding
163
how can window dressing increase the market price of shares?
if mangers have received a share option that allows a share to be bought at a particular price
profit can be made if share price increases
164
why would a company want to lower the market value of shares?
to encourage shareholders to sell shares causing the price to fall allowing directors to buy shares at a lower price knowing the price of shares is false
165
how can window dressing reduce taxation?
company might try to disguise the amount of profits it makes in order to reduce the amount of corporation tax paid
166
what ways can accounts be manipulated?
earnings management
depreciation
payables and receivables
inventories valuation
asset manipulation
167
what is earnings management?
in some industries its possible for a business to choose when to recognise business income
168
why will a business do earning management?
by choosing to recognise income in the next financial period current years profit will be reduced so tax liability is reduced
169
how can depreciation be manipulated?
companies can choose the method of depreciation to be used in their accounts
so assets can be depreciated faster or slower
higher depreciation reduces profit and value of assets on SFP
170
How can changing a companies depreciation policy for research and development manipulate their accounts?
can either write it off immediately as an expense or can capitalise it and treat it as an intangible asset
171
what happens if you change the research and development policy to an intangible asset?
depreciated over a period of time
172
what is the difference between immediately writing of depreciation and if expense is capitalised?
if written off profits reduced immediately
if capitalised effect is to reduce profits in the future
173
how can manipulation of receivables and payables affect the business outlook?
by collecting all debts at the end of the financial year a company
can reduce total receivables on balance sheet
or pay bills to reduce payables
174
What is IAS2?
in UK inventories can be valued in different ways either on average cost or most resent inventory
175
What asset manipulation?
a way to improve liquidity by selling some NCA and leasing them back provides cash to be used to pay payables
raising liquid capital ratio
176
what is the problem with asset manipulation?
long term will likely be expensive
177
what external factors will have a significant effect on turnover and profitability but are not shown on final accounts?
economic cycle
government legislation
exchange rates
interest rates
inflation
178
what is the econmic cycle?
periods of high demand for a product and business confidence usually followed by recession where demand and investment falls
179
how can government legislation effect turnover and profitability?
changes in the law can affect the performance of businesses
180
what is an example of how government legislation affects a business?
minimum wage introduced in 1999 raising labour costs for some businesses
181
what is the main area that will be affected by a change in exchange rates?
profitability
182
what types of business will be directly affected by a change in exchange rates?
businesses that import or export goods and servives
183
what type of will company be indirectly affected by a change in exchange rates?
businesses that produce goods with foreign components and those which compete with foreign supplier
184
what happens when interest rates change?
the cost of borrowing changes
185
how will the impact of changing interest rates vary between companies?
a rise in interest rates will increase costs for a highly geared business with large bank loans may cause a reduction in demand as less demand and disposable income
186
what is inflation?
a general and persistent rise in prices
187
how can inflation affect the accounts?
hard to make comparisons over time
if inflation high turnover and profit may be overstated
188
how can inflation affect IAS2?
assets should be valued at historical cost or NRV but inflation might make replacement cost higher
189
what characteristics should companies that you want to compare have in common?
should be in same industry
should be roughly the same size
similar capital structure
performance of business/ info used should be from the same period
190
What does IAS1 require details of?
revenue
finance costs
taxation
profit for year after tax
191
when publishing IS what do companies not need to do?
not have to give details on individual expenses and overheads as it would give too much info to opposition
192
what can businesses do with expenses and overheads?
acceptable to summarise some of the info
193
what 2 ways can expenses be grouped?
nature
function
194
what is nature grouping of expenses?
more appropriate for manufacturing businesses e.g. raw materials, employees costs, depreciation etc
195
what is function grouping of expenses?
commonly used by trading companies
e.g. cost of sales, distribution expenses, sales and marketing, admin expenses etc
196
what does IAS1 say must be on the SFP?
property, plant and equipment
investment property
intangible assets
inventory
trade and other receivables
cash and cash equivalents
trade and other payables
tax liabilities
issued share capital
197
what must be included in the further info for the SFP? (Shares)
number of shares authorised (if applicable)
number of shares issued that are full or part paid
nominal value per shares or that shares have no value
198
what is a schedule of non-current assets?
a summary of what has happened to NCA between beginning of the year and the end of the year
199
what will be on schedule of NCA?
assets bought (additions)
assets sold (disposals)
any changes to existing NCA (revaluation/ impairment)
depreciation
200
what is the cost at the start on schedule of NCA?
original cost of NCA before depreciation is applied
201
what is revaluation on schedule of NCA?
how much NCA have increased in value
202
what are additions on schedule of NCA?
any NCA bought throughout the year at cost
203
what are disposals on schedule of NCA?
any NCA which has been sold during the year at original cost
204
what is impairment on the schedule of NCA?
the loss in value when something negative happens to the asset (fire)
205
what is cost at end on schedule of NCA?
total value of all NCA held at the end of the year as valued at cost
after any additions, disposals, revaluation or impairments accounted for
206
what is depreciation at start on schedule of NCA?
accumulated depreciation at the start of the year
207
what is disposals of depreciation on schedule of NCA?
depreciation that was attached to an asset that has been disposed of needs to be removed as it will be included in start figure but you no longer have asset at the end
208
what is impairment of depreciation on schedule of NCA?
if an asset is impaired then remove all previous depreciation and then start depreciating afresh
209
what do you do when an asset is depreciated on schedule of NCA?
ignore any previous depreciation
210
what is charge for the year on schedule of NCA?
depreciation for the year based on assets held
211
what is depreciation at the end of year on schedule of NCA?
depreciation at the start less disposals/ revaluation/ impairment + this years depreciation charge
212
what is net book value?
cost at end less depreciation at the end of the year
amount that appears on SFP
213
what is stage one of schedule of NCA?
enter the cost of NCA at start of accounting period
214
what is stage 2 of schedule of NCA?
if there was a revaluation include this by adding to cost at start only add amount of increase (to or by what amount)
215
what is stage 3 of schedule of NCA?
disposals need to be removed at the price paid for them
216
what is stage 4 of schedule of NCA?
addition/ cost needs to be entered the same way as revaluation
217
what is stage 5 of schedule of NCA?
calculate closing balance of top half of schedule showing closing cost of NCA
218
what is stage 6 of schedule of NCA?
insert depreciation provision for the start of the year
219
what is stage 7 of schedule of NCA?
disposals so must remove any depreciation involving any sold assets so subtract figure
220
what is stage 8 of schedule of NCA?
revaluation/impairment usually start again so remove all depreciation to that asset
221
what is stage 9 of schedule of NCA?
calculate depreciation charge for the year this will be added might need to include or remove assets for calculation
222
what is stage 10 of schedule of NCA?
calculate total depreciation by subtracting any disposals, revaluation and impairment and add charge for year
223
what is stage 11 of schedule of NCA?
NBV calculated cost at end of year minus depreciation at end of year
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What does IAS7 require?
all but small limited companies must prepare a statement of cash flow
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What does the statement of cashflow show?
shows how cash has been generated (cash inflow) and how cash has been spent (cash outflows)
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What does the cash flow statement focus on?
cash inflows and outflows (money movement)
liquidity of business as lack of cash/ poor liquidity that causes a business to fail
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What are some examples of money in?
sales
loans
debentures
shares
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what are some examples of money out?
dividends
purchases (cash)
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What are the 3 main sections of the cash flow statement?
Cash from operations after interest and tax paid
Investing activities of business (purchase of NCA)
Financing activities of the business (increase or decrease in loan/ share capital )
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What are some cash and cash equivalents?
Cash in hand
Money in the bank
Short term high liquidity investments (readily convertible to known cash amount)
Bank overdraft (repayable on demand, component of cash or equivalents)
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what concept does the cash flow statement use?
money measurement
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what items on the income statement need some judgement?
recognition of sales/ revenue
distinction between capital and revenue expenditure
depreciation methods and policies
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why is money measurement a good concept for cash flow statement?
hard to manipulate as cash can be seen as an accurate measure of business success or failure
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how does the cash flow statement link profit with changes in cash?
without profit the company cannot generate cash (unless sells NCA) and without cash it cannot pay bills as they fall due
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what makes the cashflow statement important in judging financial performances?
emphasis on:
liquidity and solvency
investment in assets
financing methods
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who are the users of the cash flow statements?
shareholders
loan/ debenture holders
payables
Managers and employees
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why will shareholders be interested in the cash flow statement?
it demonstrates the ability of the company to generate cash from operating activities and clearly identifies the liquidity of the business
Investment in NCA (increasing profits) leading to increased share price and dividends paid
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why are loan/ debenture holders interested in the cash flow statement?
lenders can see the cash available at the year end thus demonstrating the security of loans and debentures and the likelihood of them being paid
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why are payables interested in cash flow statement?
show liquidity
likelihood of being paid for goods or services provided
see if company is financing themselves through lending (paid before TP) or shareholders (paid after TP)
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what will payables be able to see in cash flow statement?
cash at year end which might be used for future development providing more business for suppliers
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why will mangers and employees be interested in cash flow statement?
highlights state of companies finances that wont be available from IS or SFP
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what is the point of the bank reconciliation statement?
to reconcile the balance as per the cash book with balance as per the bank statement
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What three areas must cash flow be analysed between?
operation
investing
financing
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What three areas must cash flow be analysed between?
operation
investing
financing
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what are operating activities?
the main revenue producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees
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what are investing activities?
acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents
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what are financing activities?
activities that alter the equity/ capital and borrowing structure of equity
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what is part one of the Reconciliation of operating profit, to Net cash flow from operating activity?
operating profit (profit before deduction of tax and interest)
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what is part 2 of the Reconciliation of operating profit, to Net cash flow from operating activity?
ADD back depreciation (not real cash expense)
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what is part 3 of the Reconciliation of operating profit, to Net cash flow from operating activity?
ADD loss on disposal/ Minus profit
as actual proceeds will be shown in investing section
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what is part 4 of the Reconciliation of operating profit, to Net cash flow from operating activity?
ADD decrease in inventory/ Minus increase in inventory
Decreased stock improves cash flow as less cash tied up so more cash available
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what is part 5 of the Reconciliation of operating profit, to Net cash flow from operating activity?
ADD decrease in trade and other receivables
MINUS increase in trade and other receivables
decrease shows debts collected quicker so improved cash flow
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what are other receivables/ payables?
accruals and repayments
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what is part 6 of the Reconciliation of operating profit, to Net cash flow from operating activity?
ADD increase in trade payables
MINUS decrease in trade payables
Increase suggests business is delaying payment to suppliers improving short time cash flow
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what is part 7 of the Reconciliation of operating profit, to Net cash flow from operating activity?
Equals cash (used in)/from operations
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what is part 8 of the Reconciliation of operating profit, to Net cash flow from operating activity? (After sub total)
DEDUCT finance costs/ interest paid in the year
Loans and overdraft actually paid (might need working out)
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what is part 9 of the Reconciliation of operating profit, to Net cash flow from operating activity?
DEDUCT taxation paid
Tax actually paid on income for the year (might need working out)
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What goes on the cash flows from investing activities section?
Purchase of NCA (MINUS)
Proceeds from sale of NCA (ADD)
Interest received (ADD)
Dividends received (ADD)
Net cash(used in)/ from investing activities
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What goes on the cash flows from financial activities section?
Proceeds from issue of share capital (ADD)
Repayment of share capital (MINUS)
Proceeds from long term borrowing (ADD)
Repayment of long term borrowing (MINUS)
Dividends paid (MINUS- amount paid in year)
Net cash (used in)/ from financing activities
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How will revaluation of non-current assets be treated in a cash flow statement?
Book entry so no cash movement it will not be entered
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What will the treatment of a bonus issue of shares be on the cash flow statement?
Don't cause any movement of cash so wont be shown in cash flow
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what concept is used in the cash flow statement?
Money measurement (only money transactions
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What must you consider when looking at positive cash flow from operating activities section?
sub total cash (used in)/from operations (cash from revenue)
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What can you make a comparison between on the cash flow statement?
profit and cash generated from operations and talk about major differences
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What can the net cash (used in)/from operations tell you?
if its a positive figure it shows that the company had been bale to meet its interest and tax obligations
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What does the investing section of the cash flow statement show?(generally)
amount of investment during the year should be a link between cost of investment and increase in loan/share capital
