Individual Company Performance and Company Accounts Flashcards
What is statement of financial position?
Financial statement that provides shareholders with information on the performance of a company
Was known as balance sheet
Assets are separated between non-current assets and current assets
Describe non-current assets
Long term assets used by the company to generate revenues, split between:
- Tangible assets - for use in the production and supply of goods and services (e.g., property, plant and equipment)
- Intangible assets - non physical assets such as patents, trademarks
Annual depreciation formula for non-current assets
(Original cost - expected residual value) / expected number of years of capable use
Describe current assets
- Bought with intention of resale or conversion into cash
- Usually within 12 months
- Listed in the statement of financial position at cost or net realisable value (NRV)
- 3 common ways companies can account for their stock:
- FIFO - first in first out
- LIFO - last in first out
- Weighted average cost
What are the shareholder funds?
- Represented by share capital and reserves
- Permanent capital of the company
- Represents the funds due to the company owners
What are the shareholder liabilities? Non-current and current?
- Non-current liabilities are company borrowings not repayable within next 12 months
- Current liabilities include loans repayable within 12 months, amounts owed to suppliers, trade creditors, bank overdraft and any tax
What is the income statement?
- Shows the performance of the company over the accounting period
- Formerly known as profit and loss account
- It is a summary of revenue transactions over the accounting period
- Some of the key terms include:
- Gross profit = revenue - cost of sales
- Operating profit = after deducting cost of sales as well as distribution costs and admin expenses from gross profit
- Revenue represents sales over the period (calculated on accruals basis)
- Net income = total profit after tax
What is the cash flow statement?
- This identifies how cash has been generated and how it has been spent
- Removes accruals - these are accounted for on a cash paid and received basis
- Adjusts for balance sheet items which decrease profit but don’t impact cash
- Adds back non-cash items
- Brings in changes in balance sheet items
Analysis of companies - profitability - operating margin formula
Operating profit / sales
x100
Net margin formula
Net profit after taxation / sales
x100
Return on equity (or shareholder’s funds) formula
Net profit after taxation / total equity
x100
Return on capital employed (ROCE) formula
Profit before interest and taxation / capital employed
x100
Effects of gearing on profits
- High gearing exaggerates ROE
- If profits fall, a highly geared company might not be able to raise loans
- Increases in interest rates will increase costs of highly geared companies
Effects of gearing on investors
- Increases in interest rates means costs will go up which will reduce ROE
- With losses, gearing levels deteriorate more
- Company may not be able to raise money which affects results
What is operating leverage?
- A measure of a company’s cost mix (fixed costs vs variable costs) on the rate of profitability
- Generally, if fixed costs are above 80% of total costs a company is considered as having a high operating leverage
