Unit 2 - 8. Accounting Analysis

Question 1

Basic Principles of Accounting Analysis

Unit 2 - 8. Accounting Analysis

Answer 1

Purpose: provide information relating to the financial and economic activities of a business in the form of a set of accounts.

Accounting period typically spans 12 months.

Accounting Regulation
- Form and content are prescribed by law and the mandatory accounting standards set by the accountancy profession.

US uses US GAAP
Rest of world uses IASB’s IFRS

Group vs. company accounts
If a company invests in another company, the accounting treatment of this is important.

parent/subsidy can be together in a single entity, or split, depending on the controlling stake.

Question 2

The statement of financial position

Unit 2 - 8. Accounting Analysis

Answer 2

Balance sheet, snapshot of a company’s financial position at a particular moment.

Split into assets and liabilities/equity
Accounting equation: assets = liabilities + equity

Current = due/usable in less than 1 year

Assets

• current
• non current
• tangible
• intangible

Assets are subject to depreciation and amortization

Equity

• share capital
• capital reserve
• revenue reserves (retained earnings)
• non-controlling interests

Liabilities

• non-current
• current

Question 3

The income statement

Unit 2 - 8. Accounting Analysis

Answer 3

Summarises company’s revenue/expenses and profits earned over the accounting period.

• Revenue
• Costs of goods sold
• Gross profit
• SG and A
• Operating profit
• Fiance cost/income
• Profit before tax
• Corporation tax
• Net income

EPS = earnings per share
Dividend (ordinary or preference)

Two types of expenditure
capital expenditure = into non-current assets
revenue expenditure = impacts income statement, wages, cogs

Question 4

The statement of cash flows

Unit 2 - 8. Accounting Analysis

Answer 4

CF from operating activities: cash that is generated from the trading activity of the company, excluding financing costs

CF from investing activities: details the investment income (dividends and interest) received in the form of cash and the cash paid to purchase new non-current assets and any cash received from the sale of non-current assets.

CF from financing activities: includes cash spent in the year on paying dividends, borrowing on a long term basis or the cash raised from issuing shares, less the cash spent repaying debt or buying back shares.

Profit vs cash (Accrual accounting)
Non cash expenses

Free cash flow
enterprise FCF = cash flow to whole firm
equity FCF = cash flow after paying finance costs

Question 5

Additional parts of a report

Unit 2 - 8. Accounting Analysis

Answer 5

Additional information in a company report which can be used to help analyze the company.

• strategic report
• stakeholder review
• financial review
• governance report
• directors remuneration
• independent auditors report
• accounts and notes
• shareholder information

Question 6

Financial statement analysis

Unit 2 - 8. Accounting Analysis

Answer 6

ROCE = operating profit/capital employed (equity plus long term debt)

ROA = operating profit/total net assets

ROE = net income/shareholders equity

profit margins (gross, operating, net profit)

asset turnover (no. of times) = revenues/total net assets

debt to equity = debt/equity

net debt to equity = (debt less cash and short term investments)/equity

interest cover = operating profit/interest costs

current ratio = current assets/current liabilities

quick ratio (acid test) = (current assets - inventory)/current liabilities

EPS = earnings / no. of ordinary shares

PE ratio = current market price per share/ EPS
Trailing or forward

EV to EBIT
EV to EBITDA

dividend yield = dividend/current share price

dividend cover = EPS/dividends per share