8 - accounting analysis

what are the three major statements in accounting

balance sheet

income statement

cash flow statement

another term for the balance sheet

statement of financial position

3 things in a balance sheet

assets —> what the company owns or is owed

liabilities —> what the company owes

equity —> what’s left for the owners after subtracting liabilities from assets

what is an income statement

shows the company’s income and expenses over a period of time (eg. a year)

determines if the company made a profit or loss in that period

what is a cashflow statement

shows the cash coming into and going out of a company

are profit and cash the same thing

no - a company can make a profit on paper but still struggle to pay its bills if it is owed cash by its customers

show how an income statement and balance sheet would interact using a diagram

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what is a statutory annual audit

an independent examination of a company’s financial statements where the law requires one

who does a statutory annual audit

an external auditor

what do they check in the audit

the financial statements + supporting evidence to decide whether the statements give a true + fair view

what does every country have in terms of accounting

a GAAP

what is a GAAP

generally accepted accounting principles

what is happening now with GAAPs around the world

being harmonised

who is harmonising these GAAPs

the IASB —> international accounting standards board

what two standards have been issued to harmonise the GAAPs

the international accounting standards

the international financial reporting standards (IFRSs)

who issued the international accounting standards

the IASB’s predecessor, but they have been retained by the IASB

who issued the IFRSs

the IASB

who are IFRSs not really applicable

small little priv companies since they don’t have to present accounts

which country still retains it’s own GAAP

the US

its called US GAAP

what two parts make up a group

parent company

subsidiary company

what is goodwill

the difference between what something is worth on paper and what u paid (so when u over pay for something)

why would someone overpay for something

branding/reputation

expertise + skill

what is in place to protect the interests of those who overpaid

’lock in periods’

what are lock in periods

where key members of staff have to stay for a set amount of time bc if u paid goodwill for their expertise and they leave it would be pointless

what is minority interest

the part of a subsidiary company that belongs to shareholders outside the parent company

another term for minority interest

non-controlling interest

what two parts make up minority interest

net assets and net income that belong to the non controlling interest in a group

two places where you will find minority interest

consolidated balance sheet

consolidated income statement

what is the accountant’s equation

NCA + CA = SHF + NCL + CL

NCA —> non current assets
CA —> current assets
SHF —> shareholders’ funds
NCL —> non-current liabilities
CL —> current liabilities

what are NCA and CA together

total assets

what are SHF and NCL and CL together

sources of finance

so what is the equation essentially saying

what the business has = how it paid for them

non current things are usually held for…

…more than a year

current things are usually held for…

…less than a year

two sides of a balance sheet

assets

equity + liabilities

and they should balance to 0

two parts of the assets side of the balance sheet

non current assets

current assets

3 parts to non current assets

property, plant + equipment (tangibles)

intangible assets

investments

4 parts to current assets (in order)

inventories (aka stock)

trade + other receivables (eg. debtors, short term investments)

prepayments

cash

how is this list of current assets sorted

from lowest to highest liquidity

what can happen to assets (2 things)

they can depreciate and amortise

what is depreciation

the loss of value of capital over time

what is straight line depreciation

it means the same amount is deducted every year

formula for straight line depreciation

cost = how much u paid for it

disposal value = final value

useful life = time taken to get to that value

so your answer will be how much value is lost per year basically

what is book value

the value recorded in the company’s accounts after however much depreciation has taken place by that year

what is freehold land

land the owner holds with ownership that doesn’t expire after a fixed lease period

why does freehold land not depreciate

land is considered to have an unlimited useful life

but can land loes value

yes but this is not the same thing as routine depreciation

would the buildings on the land depreciate

yes because they have a limited useful life

what is amortisation

similar to depreciation but for intangible assets

examples of things that could ammortise

patents

software

copyrights

certain licences

so what would be the amortisation per year if a company buys software for £12000 for example and expects to use it for 4 years with no disposal value

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3 parts to the equity + liabilities side of the balance sheet

capital + reserves (equity - aka shareholder funds)

non-current liabilities

current liabilities

5 parts to capital + reserves

share capital - ordinary shares

share capital - preference shares

share premium account

revaluation reserve

retained earnings

what are the two uses of the share premium account

scrip issues

write off startup costs

two parts to non current liabilities

bank loans

provisions

1 part to current liabilities

trade + other payables

on an income statement, how do we know whats positive and what’s negative

positve = normal

negative = brackets around it

how does an income statement start

positive, with revenue

what happens after revenue

take away cost of sales

so you remain with gross profit

what happens after gross profit

take away distribution costs

take away admin expenses

so you remain with operating profit

what’s another term for operating profit

PBIT or EBIT:

profit/earnings before interest + tax

what comes after operating profit

take away financial costs

add financial income

so you remain with profit before taxation

what do you do with profit for taxation

this is the ‘profit’ you submit for a tax return

so what happens after profit for taxation

take away tax

so you remain with net income

what is net income

final earnings

what can you do with net income if you want

divide it by number of ordinary shares, to get earnings per share

then what two things can you pay after tax (not on income statement tho)

preference dividends

minority interest

what is the difference between capital and revenue expenditure

capital is covered on balance sheet

revenue is covered on income statement

what requires cashflow statements

IAS 7 (international accounting standards)

4 parts of a statement of cashflows

operating activities —> cash from running the biz

investing activities —> cash spent on or received from investments

financing activities —> cash involving owners + lenders

final cash balance —> combination of all 3 sections

positive parts of operating activities

cash receipts from customers

cash generated from operations

negative parts of operating activities

cash paid to suppliers + employees

tax paid

interest paid

positive parts of investing activities

interest received

dividends received

proceeds on sale of investments

negative parts of investing activities

purchase of plant, property + equipment

positive parts of financing activities

proceeds on issue of shares

negative parts of financing activities

dividends paid

repayments of borrowings

so then what do you call the column that has all three combined together

‘net increase in cash and cash equivalents’

then what column comes below the one with all three combined

cash and cash equivalents at the beginning of the year

so what is the last row and what does it entail

‘cash and cash equivalents at the end of the year’

you add together the net increase one and the beginning of the year one

what are two measures of ‘free cash flow’

enterprise cash flow

equity cash flow

what is enterprise cash flow

free cash flow before considering any financing costs

what is equity cash flow

free cash flow to the equity shareholders, so after finance costs to lenders but before dividend payments

9 things that are contained within an annual report/auditor’s report

DoGS SNIFSS

directors’ remuneration

governance report

strategic report

stakeholder review

notes to the accounts

independent auditors’ report

financial review

sustainability report

shareholder information

directors’ remuneration

ensuring alignment with stakeholders, particularly shareholders

governance report

audit committee

responsible and effective management

strategic report

company current + future strategy

stakeholder report

how company is looking after stakeholder interests eg. SRI

what is SRI

socially responsible investing

notes to the accounts

supporting detail where necessary - stock splits, etc

independent auditor’s report

opinion on whether the financial statements are:

• properly prepared

• true and fair

two outcomes for an auditors report

unqualified (clean) —> found no issues

qualified (modified) —> found issues

financial review

CFO report on performance (accounting ratios, etc)

key risks facing the business

sustainability report

environmental impacts

community investment

shareholder information

summary of info likely to be of interest to shareholders:

• share price

• dividend history

• etc

what is ROCE

return on capital employed

ROCE formula

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what is capital employed

equity/SHF represented by issued share capital

and

debt/long-term liabilities of the company

profit margin formula

note whether the question asks you for gross or operating!!

what is ROA

return on assets

ROA formula

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