Accounting Topic 2 (What info do we get from the annual report?)

Question 1

Company:

Answer 1

• Separate legal entity
• Owned by SHs (invest = equity) = elect directors board = Run company
• Agency problem

Question 2

Directors of a company

Answer 2

• may own some shares
• Incentivised = options to buy shares at cheaper price

Question 3

Agency problem

Answer 3

• Conflict between goals of owners (SHs) and executives (directors)
  Corporate governance helps balance this problem

Question 4

Financial reporting

Answer 4

• Reporting to OUTSIDE world (access to limited info)
• financial statements to provide info on company’s: perf, position (changes in), cash generation

Question 5

objective of financial reporting

Answer 5

• Provide info about financial position, performance and cash flows of entity
  Useful to users in making economic decisions

Question 6

Directors 3 responsibilities relating to financial statement prep

Answer 6

1. Select appropriate accounting policies
2. Prepare financial statements (present to SHs at AGM) / then published
3. Make reasonable estimates -> external audit provide opinions

Question 7

statement of financial position

Answer 7

AS AT
assets
liabilities
equity

Question 8

Statement of profit or loss and other comprehensive income (Statement of comprehensive income)

Answer 8

FOR THE YEAR ENDED
a. Comprehensive income: sum of that net income plus the value of yet unrealized profits (or losses) in the same period
Income and expenses, gains and losses

Question 9

4 statements

Answer 9

1. SOFP
2. Statement of profit or loss and other comprehensive income
3. Statement of cash flows
4. Statement of changes in equity

Question 10

Statement of changes in equity

Answer 10

-> FOR THE YEAR ENDED
1. Contributions in (equity)
2. Distributions out (dividends)

Question 11

Standards

Answer 11

IASB: International Accounting Standards Board -> sets the IFRS
IFRS: International Financial reporting standards

Adopted previous International Accounting Standards (IAS)
· Standards tell us how any transaction should be reported in the financial statements

GAAP - complying with this provides financial statements that give a “true and fair view”
IFRS & US GAAP are different

Question 12

statement of cash flows

Answer 12

classification of activities
1. operating activities
2. investing activities
3. financing activities

Question 13

operating activities

Answer 13

deliver or produce goods for sale & provide services
1. Receive cash from customers
- profit may = -ve cash flows due to accruals (signal quality)

2. Pay cash to suppliers (operating expenses)

Question 14

investing activities

Answer 14

buy or sell long term assets and other investments
- Property, plant and equipment (PP&E)
Other companies securities (not cash equivalents)

Question 15

financing activities

Answer 15

obtain or repay capital (funding the business)
1. Borrow from creditors and repay the principal -> baseline sum in financial transactions—the initial amount invested or borrowed
2. Issue or repurchase stock
3. Pay dividends
- Don’t tend to buy dividends but buy back shares from the SHs = capital gains

Question 16

methods of presenting operating cash flows

Answer 16

1. indirect
2. direct

Question 17

indirect method

Answer 17

companies tend to use!
1. Begins with net income
2. adjust to operating cash flows

-Show clearly the reason for difference between net income and operating cash flow
- Mirrors forecasting approach (begin with forecast of income then derives cash flows)

Question 18

direct method

Answer 18

1. Shows each cash inflow and outflow related to receipts and disbursements
2. Provide info on specific sources of operating cash receipts and payments

Does not net!

Question 19

evaluating cash flow statement

Answer 19

1. Major sources and uses of cash flows are between operating investing & financing activities
2. Primary determinants of operating cash flows
3. Primary determinants of investing cash flows
4. Primary determinants of financing cash flows

Question 20

questions to ask of a company

Answer 20

1. Has cash increased?
2. Major sources/uses of cash flow
3. Is operating cf positive and sufficient to cover capital expenditures
4. Major determinants of operating cash flow
5. Which is higher operating cash flow or net operating income and why
6. Consistent cash flows from operating activities
7. Can the company pay dividends
8. “free cash flows”

Question 21

free cash flows

Answer 21

cash generated after accounting for cash outflows to support operations (whatever is left)
- company to grow = free cash flow
- Grow organically or by assets or buying other companies