Yleistä - fina

Question 1

What are the two most important financial figures?

Answer 1

Profit and Loss! -> Are we making or losing money and why?

Working capital -> By managing your working capital effectively, you’re helping to make sure that your business maintains adequate cash flow to fund its operations and cover costs for the short term.

Question 2

STATUTORY REPORTING FRAME?

Answer 2

Statutory reporting frame can be divided into these areas:
o Public company in the EU must report according to IFRS financial statements
o Parent company listed in Finland follows Finnish GAAP for the parent company and adherence to Stock Exchange requirements, etc.
o If listed in France for example also -> Paris Stock Exchange rules must be followed

The Group reporting is divided into:
o IFRS financial statements published annually (Financial Report)
o Other annual reports, e.g. on Corporate governance
o The Finnish GAAP financial statements of the parent company

Question 3

Income statement?

Answer 3

Income statement = shows how revenues and expenses build form the net income, which shows whether the company made profit or loss.

It describes the operations in a defined time period. Operations include sales, expenses, depreciations and financing.

Question 4

Balance sheet?

Answer 4

Balance sheet = is the snapshot of the financial status. It applies to a single point in time, dates as of end of the bookkeeping period. It has three parts: Assets, Equity and Liabilities.

Total Assets = Total Liabilities + Total Equity

Question 5

Cash flow?

Answer 5

Cash flow = explains the cash movements of the bookkeeping period. It describes the liquidity of the operations and the ability to meet payment obligations.

Cash flows come from Operating activities, Investing activities or Financing activities. -> OIF

Question 6

CAPITAL STRUCTURE?

Answer 6

How much of the capital is financed by equity and by debt? Sitä kuvaa Equity to debt ratio. Companies need to find a right balance between equity and debt. Finding the right balance means that the company can reduce the cost of capital and at the same time has sufficient amount of cash to run the business.

Company can be financed in two ways:
1. Money from shareholders and from net profits = Equity financing
2. Money borrowed from other parties such as bond holders, banks and other lenders = Debt financing

Capital structure consists of:
A. Equity = No need to be paid on a fixed date. May require higher return compared to debt financing. Dividends are paid to shareholders.
B. Debt = Interest on loan is usually tax deductible. Too much reliance on debt combined with cash flow problems can result in difficulty to repay the debt.

Question 7

LEASING – lease or buy?

Answer 7

Sulla on tulossa projekti, johon tarvii 5 rekkaa vuoden ajaksi. Kannattaako ostaa vai lease? We need to calculate whether buying the assets or leasing makes economically more sense and compare costs to received benefits.

Some might feel pressure to keep assets out of the balance sheet and make own interpretations to facilitate entering into operating lease contract (despite lease classification criteria) and make costly deals with lessors. There can be cases where buying would be cheaper than leasing!

Question 8

ASSETS – capitalise or expense?

Answer 8

Money collected from investors is used to acquire production facilities and other ASSETS. In other words, asset is an economic resource to whoever owns it and controls it.

Costs related to asset purchases are normally CAPITALISED.
o Cost is capitalised -> booked to BS -> mitä aiheuttaa? -> Increase in Assets in BS
o Capitalised cost is depreciated over the asset’s useful life that enables matching of costs and revenue.

There are cases when capitalising is not allowed and cost has to be EXPENSED.
o Cost is expensed -> booked to P/L

Special cases related to capitalisation
o Feasibility studies in investment projects
o Special spare parts
o Inventory costs
o Borrowing costs in investment projects
o Government grants

Question 9

Impairments?

Answer 9

Impairment = permanent reduction in the value of a company asset. Decrease in the balance sheet value of a production machine as an example.

Impairment testing is done once a year and impairment indicator reviewed quarterly.

There is separate tests for GOODWILL and FIXED ASSETS

Question 10

Indicators of impairment are divided into two -> external and internal sources:

Answer 10

EXTERNAL sources:
 Market value declines
 Negative changes in technology, markets, economy, or laws
 Increase in market interest rate
 Company stock price is below book value

INTERNAL sources:
 Obsolescence or physical damage
 Asset is part of a restructuring or held for disposal
 Worse economic performance than expected (of a specific asset)

Question 11

To what does impairment applies to?

Answer 11

o Land, buildings, machinery and equipment
o Intangible assets, goodwill
o Investments in subsidiaries’ associated and joint arrangements carried at cost

Question 12

Reversal of impairment?

Answer 12

Reversal of impairment = in case of opposite direction of indicators. An impairment loss recognised in prior periods for an asset (other than for goodwill) shall be reversed when, and only when, there has been a change in the estimates used to determine the asset’s (or cash generating unit’s) recoverable amount since the last impairment loss was recognised.

Question 13

WORKING CAPITAL?

Answer 13

Working capital = the amount of funds needed to run day-to-day operations of a business.

Working capital = inventories + accounts receivables – provisions – accounts payables

Question 14

INVENTORIES?

Answer 14

Inventories = refers to all the items, goods, merchandise, and materials held by a business for selling in the market to earn a profit. Example: If a newspaper vendor uses a vehicle to deliver newspapers to the customers, only the newspaper will be considered inventory.

Inventories are assets which are, generally:
o Held for sale in the normal course of business = Finished goods
o In the process of production for such a sale = Work in Progress
o As raw materials, suppliers and consumables, intended to be consumed in production or rendering services = Raw materials

Question 15

Inventory value?

Answer 15

Inventory’s total value changes over time, as new items are sold, some become obsolete, and other factors affect the price of the product manufactured.

A primary issue in accounting for inventories is the amount to be recognized as an asset and carried forward until the related revenues are recognized.

Total inventory value must appear on the balance sheet, as it stands at period end, after all value changes for the period.

Question 16

Inventory Write-Downs?

Answer 16

What happens if the selling value of product held in inventory has materially decreased?
 Write-down = deliberate reduction in the book value of an asset to reflect the effect of obsolescence. We make a write-down from the inventory value!
 Write-down is similar to an impairment. They are considered as losses and therefore understanding the value of your inventory is crucial.

What could I do to minimize the risk of inventory write-downs?
 Efficient inventory management
 Minimizing Days Inventory Outstanding (DIO)
 Renegotiating contracts (timing, delivered amounts of units jne.)

Question 17

ACCRUALS AND PAYABLES?

Answer 17

Payables = trade payables = are liabilities to pay for goods or services that
A) have been received and
B) have been INVOICED or FORMALLY AGREED

Accruals = are expenses that are booked when there is still some uncertainty regarding the exact amount to be paid and timing of the payment. The uncertainty is generally much less than for provisions.

Question 18

What is the main difference between a (trade) payable and an accrual?

Answer 18

For trade payable, the goods have been delivered and the price has been fixed or agreed.

For accruals, there is still some uncertainty regarding the exact amount to be paid and the timing of the payment.

Question 19

Provision?

Answer 19

Provision = is a present obligation resulting from past events. It is an amount set aside from profits in the accounts for a known liability, or obligation that took place in the past.

o When timing or amount of liability is uncertain we use provisions, instead of payables or accruals.
o In essence, provision is the amount that an entity would rationally pay to settle the OBLIGATION at the BALANCE SHEET date or to transfer it to a third party.
o Provisions are reversible, in case the obligation is no longer relevant.

Question 20

What are the reasons for which to recognize a provision:

Answer 20

o A present obligation has arisen as a result of previous event.
o The payment is probable (over 50%) and
o Costs can be estimated reliably

Question 21

Accounting a provision?

Answer 21

Accounting a provision:

The amount recognized as a provision should be the best estimate of the expenditure required to settle the present OBLIGATION at the BALANCE SHEET date.

Question 22

What are common provisions?

Answer 22

o Restructuring liabilities
o Warranty or refund
o Land contamination

Question 23

What needs to be remembered when estimating provisions?

Answer 23

o Forecast reasonable changes in applying existing technology
o Ignore possible gains of sale of assets. It is not possible to decrease the provision cost with the possible sale gain
o Consider changes in legislation only if virtually certain to be enacted i.e. the new legislation need to be approved by authorities
o The provisions are updated regularly and changes of costs need to be taken into account.

Question 24

To what restructuring events usually relate to?

Answer 24

o Closure or reorganization: accrue only after a detailed formal plan is adopted and announced publicly. A board is not enough.
o Future operating loss: provisions not to be recognized for future operating losses, even in a restructuring
o Restructuring provision on acquisition: accrue provision only if there is an obligation at acquisition date

Question 25

Give three examples of restructuring events?

Answer 25

o Closure of business locations
o Changes in management structure
o Fundamental reorganization of a company

Restructuring provisions should only include direct expenditures caused by the restructuring, NOT costs that ere associated with the ongoing activities of the entity.

Question 26

Revenue?

Answer 26

Revenue = revenue arises from products and services sold. It defines what can be accounted as sales into profit and loss.

Question 27

When is revenue recognized?

Answer 27

Revenue is recognised when ALL of the below conditions are met, no matter when cash is received! (Cash can be received in an earlier or a later period than the period in which the revenue is recognized).

1. Persuasive evidence of an arrangement exists -> sales transaction has happened
2. Delivery has occurred (or services have been rendered) and the RISKS HAVE BEEN TRANSFERRER to the buyer -> customer accepted the goods and has the control
3. The sales price has been sent
4. Collectability is reasonably assured and we can reasonably expect to receive payment

Question 28

What could be done to improve the timing of revenue?

Answer 28

1. Agree terms that transfer the risk to the customer at an earlier stage of the transport.
2. Include clause in the customer agreement that stipulates the risk transfer/ownership/actions to be taken if the customer does not collect the goods from the warehouse within certain period of time
3. By actively monitoring the old stocks and trying to get the customer to collect goods from the warehouse in time

Question 29

What is the purpose of hedge accounting?

Answer 29

Hedge accounting attempts to reduce the volatility created by the repeated adjustment of, for instance, sales value by currency movements.

Currency exchange rates can significantly increase or decrease the profitability of the operations and thus create volatility
o Reacting to short term changes in a volatile situation is exhausting
o Companies typically require short term stability in order to have time to adapt operations to new prevailing currency situations

Typically hedging instruments used in hedge accounting are FORWARD CONTRACTS and CURRENCY OPTIONS.

Question 30

VAT?

Answer 30

VAT = Value added tax = General, broadly based consumption tax assessed on the value added to goods and services. It is a general tax that applies to all commercial activities involving the production and distribution of goods and provision of services.

o It is a consumption tax, because it is borne ultimately by the final consumer.
o It is an indirect tax, because it is paid to the revenue authrorities by the seller of the goods, but the tax is economically borne by the final consumer.
o It is charged as a % of the price. Tax rates vary between EU countries.

VAT distinguish between two types of transactions: Supply of goods & Supply of services. -> Can be: domestic, intra-community, export/import. Intra-community on between two EU countries.

Question 31

Insider information?

Answer 31

Insider information = is information of precise nature that has not yet been published and that can affect the value of shares or listed bonds.

Insider information is:
o CONFIDENTAL information that has not been disclosed to the market
o SIGNIFICANT enough to possibly be able to affect the share price, and
o PRECISE ENOUGH, meaning that the likelihood of a matter of occur or for example a transaction to be carried ou be “more likely than not”.

Question 32

Insider?

Answer 32

Insider = Everyone who has unpublished information that is likely to affect the company’s share price. Anyone at the company can become an insider!

Why is inside information regulated by law?
o The goal of the laws is to ensure that people with access to inside information cannot use it for their own benefit. -> Muuten tietäjät voisi ostaa/myydä firman osakkeita otollisilla hetkillä ja saada epäreilua hyötyä.
o Companies are forced to disclose inside information.