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Interpreting Financial & Accounting Information (CGI) 2023 > Weak Areas > Flashcards

Weak Areas Flashcards

1
Q

What are the constituent elements of financial statements?

A 
1 Assets
2 Liabilities
3 Expenses
4 Income
5 Equity
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2
Q

What is an asset?

A

A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits

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3
Q

What is a liability?

A

A present obligation of the entity to transfer an economic resource as a result of past events. An obligation is a duty or responsibility that the entity has no practical ability to avoid.

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4
Q

What is an expense?

A

Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims

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5
Q

What is income?

A

Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.

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6
Q

What is equity?

A

The net assets of an enterprise after all other creditors have been paid off.

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7
Q

Why might IASs help reduce borrowing costs? (2 reasons)

A
  1. A single set of standards used by a multi-national company reduces audit costs
  2. Potentially easier to borrow on the international money market as lenders may have a better understanding of the accounting principles used.
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8
Q

IAS2 manages Inventories. What rules must be followed when valuing closing inventories?

A
  1. Valued at the Lower of cost price or net realisable value
  2. Costs may include:
    a. Inventory Price
    b. Local taxes
    c. Delivery
    d. Conversions costs
    e. Manufacturing Overhead
  3. LIFO is not to be used
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9
Q

What is the five-step model for recognition of revenue according to IFRS15?

A
  1. Identification of contracts with customers
  2. To identify the obligations contained within the contract
  3. To determine the transaction price
  4. Match the transaction price to the performance obligations contained within the contract
  5. When the performance obligation is satisfied revenue can be recognised
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10
Q

When may a company change its accounting policy?

A

a. Change in the Law
b. Change in Accounting Standards
c. The change in policy will result in a truer and fairer picture of the affairs of the business.

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11
Q

How are retained profits calculated within the statements of financial position?

A

Profit after tax for current period + profit after tax for the previous period - dividends paid.

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12
Q

How are fundamental qualitative characteristics introduced in the IASB Conceptual Framework?

A

“For information to be useful it must both be relevant and provide a faithful representation of what it
purports to represent. Relevance and faithful representation are the fundamental qualitative
characteristics of useful financial information, and the guiding concepts that apply throughout the
revised Conceptual Framework”

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13
Q

What items comprise a complete set of financial statements?

A 
statement of financial position
statement of profit and loss and other comprehensive income
statement of changes in equity
statement of cash flows
notes to the financial statements
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14
Q

What is the typical order of items in the Statement of Financial Position?

A

(usually given as current and previous reporting period in two columns)

ASSETS
     Non-current assets
Property Plant & Equipment
Goodwill
Other Intangible Assets
Investments
 Current Assets Inventories Trade receivables Cash and cash equivalents

TOTAL ASSETS

EQUITY & LIABILITIES
     Equity
Share capital
Retained earnings
Revaluation reserve
TOTAL EQUITY
     Non-current liabilities
Long-term borrowings
Deferred tax
Long-term provisions
TOTAL NON-CURRENT LIABILITIES
     Current liabilities
Trade and other payables
Short-term borrowings
Current portion of long-term borrowings
Current tax payable
Total current liabilities
Total liabilities
TOTAL EQUITY AND LIABILITIES
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15
Q

What is the typical order of items in the Statement of Profit or Loss and Other Comprehensive Income?

A

(usually given as current and previous reporting period in two columns)

INCOME FROM CONTINUING OPERATIONS
Revenue
Cost of sales
GROSS PROFIT

Distribution costs
Administrative expenses
PROFIT FROM OPERATIONS

Investment income
Finance costs
Other expenses
PROFIT BEFORE TAX

Income tax
PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS

DISCONTINUED OPERATIONS
Loss for the period from discontinued operations

OTHER COMPREHENSIVE INCOME
Gain/loss on revaluation

TOTAL COMPREHENSIVE INCOME

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16
Q

What is the typical order of items in the Statement of Changes in Equity?

A 
Split into four columns (for just the current reporting period) with the following titles:
1 Share capital
2 Retained earnings
3 Other reserves
4 Total equity

Balance at 01/01/20X1
Changes to accounting policy/error corrections
RESTATED BALANCE:

CHANGES IN EQUITY FOR YEAR 20X1
Issue of share capital
Profit for the year from continuing ops
Loss for year from discontinued ops
Other comprehensive income (e.g. revaluation)
Dividends

BALANCE AT 31/12/20X1:

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17
Q

What is the typical order of items in the Statement of Cash Flows using the DIRECT METHOD?

A

(usually given as only current reporting period in two columns - one for items, one for totals)

CASH FLOWS FROM OPERATING ACTIVITIES
Cash receipts from customers
Cash paid to suppliers
Cash paid to employees
Cash generated from operations
Interest paid
Income taxes paid
NET CASH FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (subsidiaries)
Purchase of PP&E
Proceeds from sale of equipment
Interest recieved
Dividends received
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of share capital
Proceeds from long-term loans
Payment of finance lease obligations
Dividends paid
NET CASH USED IN FINANCE ACTIVITIES

NET INCREASE IN CASH AND EQUIVALENTS
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND EQUIVALENTS AT END OF PERIOD

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18
Q

What is the typical order of items in the Statement of Cash Flows using the INDIRECT METHOD?

A

CASH FLOW FROM OPERATING ACTIVITIES (INDIRECT)
C2: Profit for the period
C2: Add depreciation charges
C2: Less gain on disposal of fixed assets

WORKING CAPITAL CHANGES
MOVEMENT IN CURRENT ASSETS
C1: Opening inventory
C1: Closing inventory
C2: Change in inventory
C1: Opening trade receivables
C1: Closing trade receivables
C2: Change in receivables

MOVEMENT IN CURRENT LIABILITIES
C1: Closing payables
C1: Opening payables
C2: Change in payables

C2: CASH GENERATED FRFOM OPS

C2: Tax expense
C2: Tax paid (opening + expense - closing)

C2: NET CASH FROM OPS

CASH FLOWS FROM INVESTING:
C2: Cash from purchase of fixed assets:
C2: Proceeds from disposal of fixed assets

C2: NET CASH FROM INVESTING

CASH FLOWS FROM FINANCING
C2: Issued share capital
C2: Dividends paid
C2: Repayment of loan

C2: NET CASH FROM FINANCING

C2: NET INCREASE IN CASH
C2: CASH AT START OF YEAR
C2: CASH AT END OF YEAR

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19
Q

How is equity accounting (for associated and joint ventures) achieved in the statement of financial position?

A

1) Account for investment in the associate in non-current assets
2) Add % post-acquisition profit gained in NCA
3) Add proportion of reserves gained to reserves (under equity)

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20
Q

How is goodwill calculated in the statement of financial position (for a subsidiary)?

A

Investment in sub - (total shares and pre-acq reserves x % interest)

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21
Q

How are reserves calculated in the consolidated SOFP?

A

Reserves A + Reserves B - pre-acquisition reserves - %NCI

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22
Q

How is NCI calculated in the consolidated SOFP?

A

Total subsidiary shares + total reserves (including pre-acq) x % NCI

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23
Q

What are the steps in calculating consolidated SOFP?

A

1) Calculate goodwill and add to NC assets
2) Add all assets and liabilities line by line
3) Calculate reserves, taking into account pre-acquisition and NCI share.
4) Calculate NCI (total shares+reserves x NCI %)

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24
Q

How is ROCE calculated?

A

operating profit/(average of share capital + reserves + non-current liabilities) x 100

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25
Q

How is return on shareholder’s equity calculated?

A

profit after tax / average shareholder equity

26
Q

How are inventory days calculated?

A

(Average inventory / cost of goods) x 365

27
Q

How are receivables days calculated?

A

(average receivables / credit sales) x 365

28
Q

How is total asset turnover calculated?

A

sales / average total assets

29
Q

How is gearing ratio calculated?

A

(Debt)/(Debt + Equity) x 100

30
Q

How is interest cover calculated?

A

profit from ops / finance cost

31
Q

How is Baumol’s EOQ model calculated?

A

Q = Sq.root(2UP/S)

Q = optimum cash balance
U = annual demand
P = fixed costs per transaction
S = annual cost for one unit
32
Q

In the Miller Orr Cash Management Model, how is return point calculated?

A

return point = lower limit + (spread/3)

33
Q

In the Miller Orr Cash Management Model, how is spread calculated?

A

S = 3[(3(transaction cost))variance)/(4(interest rate))]^1/3

34
Q

In the Miller Orr Cash Management Model, how is upper limit calculated?

A

upper limit = lower limit + spread

35
Q

What is a bill of exchange?

A

A negotiable instrument drawn up by one party to another, whereby the accepting party acknowledges the debt owed either immediately or at a future date, The hold of the bull can use the accepted debt to pay a third party or can discount it (to a bank to pay a debt).

36
Q

What are the two types of debt factoring?

A

With recourse / without recourse.

37
Q

When dealing with convertible debentures, how is conversion ratio calculated?

A

number of shares / value of debenture. e.g. £100 debenture converted to 50 shares would be 50/100 = £0.5 per share.

38
Q

What is the step-by-step process for appraisal of projects using NPV with a capital allowance?

A
  1. Set out the time horizon of the project, adding an extra year for tax paid in arrears
  2. Calculate the capital allowance for the investment, on a reducing basis, and apply it to the next year (arrears)
  3. Calculate the tax payable on the remainder (i.e. investment minus allowance multiplied by tax).
  4. Carry the remaining cost to be taxed over to the next year (i.e. cost - CA) and repeat for all years.
  5. Write out the cash flows, and deduct tax payable each year, adding an additional year for tax in arrears.
  6. Don’t tax the sale of equipment as this will happen in the final year, and tax should only be paid once.
  7. Apply a discount factor to the final net cash flows to calculate NPV.
39
Q

What are the conditions for an efficient market?

A

a. Share prices react quickly to new information
b. Low transaction costs
c. Few restriction on investments
d. No single investor or group of investors can influence the market
e. The value of a security is a true reflection of the value of a company
f. Information about the economy, the company and the market is widely available

40
Q

Which characteristic was reintroduced by IASB 2018 Conceptual Framework?

A

Prudence

41
Q

What assumptions are made by Sharpe and Lintner’s Capital Asset Pricing Model? (CAPM)

A
  • investors are rational and posses full market knowledge
  • investors expect greater return for greater risk
  • investor portfolios remove unsystematic risk
  • borrowing and lending rates are equal
  • there are no transaction costs
  • markets are perfect and imperfections correct themselves eventually
  • RFR = government bond rate
  • no taxation or inflation.
42
Q

What is meant by “substance” of transactions?

A

The economic benefits or losses or any implications relating to a transaction - i.e transactions must reflect their economic substance rather than their legal form

43
Q

Give four examples where the substance of transactions is significant.

A

1 Sale and leaseback arrangements - sale might not be genuine if legal ownership does not change
2 Consignment stock - consignor ships goods to the seller, but the consignor still owns the stock
3 Invoice factoring - a business sells trade receivables but the risk may not be transferred
4 Sale and repurchase agreements - the sale of an asset is made with the intention to buy back later at a higher cost.

44
Q

How is Return on Capital Employed calculated?

A

ROCE = (PBT/EQUITY + LIABILITIES) X 100

45
Q

How is net profit percentage calculated?

A

(net profit / revenue) x 100

46
Q

How is interest cover calculated?

A

profit before finance costs / finance costs

47
Q

What level of financial gearing is considered “high”?

A

50%

48
Q

What are the two man subcategories of equity finance?

A 
Internally generated (retained earnings)
Externally generated (share capital)
49
Q

How is cost of equity calculated?

A

P = [D(1+g)] / [Ke-g]

Where
P = market price of a share
D = dividend
g = dividend growth rate
Ke = cost of equity
50
Q

How is cost of debt calculated?

A

Kd = [I(1-t)/Sd

Where
Kd = cost of debt
I = annual interest
t = tax rate
Sd = market price of debt
51
Q

What is the Fisher equation and what does it calculate?

A

Shows relationship between nominal and real interest rates:

Real discount rate = [(1+nominal rate)/(1+inflation rate)-1]x100

52
Q

How is price to earnings ratio calculated?

A

P/E Ratio = market price share / EPS

53
Q

How is EPS calculated?

A

EPS = net profit / outstanding shares

54
Q

How is Gordon’s dividend growth mode calculated?

A

Growth rate = annual rate of return from investing x proportion of annual earnings retained

55
Q

How are finance leases accounted for n the SOFP?

A

Finance Lease agreement which is shown on the Statement of Financial Position.

  1. Appears as an asset and is subject to depreciation
  2. Future payments are shown as a liability
  3. The finance cost and depreciation is shown as an expense
56
Q

How are operating leases accounted for in the statements?

A

Operating Leases are treated in the same way as a rental. The agreement is shown as an expense in
the Statement of Profit and Loss but is not reported in the Statement of Financial Position.

57
Q

What are the main drivers affecting shareholder value?

A
  • tax rate
  • profit margin
  • growth in sales
  • investment in non-current assets
  • cost of borrowing
58
Q

What are some strategies for increasing shareholder value?

A
  • minimise tax payments
  • increase profit margin
  • reduce borrowing costs
59
Q

What is economic value added (EVA)?

A

Alternative to shareholder value analysis Based on the premise that profit should be included deduction of operating profit and finance costs.

60
Q

How is EVA calculated?

A

EVA = operation profit - [Opening capital x WACC]

61
Q

What are the advantages of EVA?

A
  • based on reported accounting profit and will therefore be acceptable to managers and shareholders
  • easily calculable
  • accounts for cost of capital
62
Q

What are the disadvantages of EVA?

A
  • ignores time value of money
  • does not account for goodwill and other intangibles
  • profit can be calculated subjectively

Interpreting Financial & Accounting Information (CGI) 2023 (161 decks)

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