8.1 Accounting Analysis

Question 1

What is an independent auditor’s report?

Answer 1

Are the statements true and fair?

• auditors can qualify the accounts

Question 2

What does it mean if auditors qualify accounts?

Answer 2

That company is not giving fair and true representation of performance

Question 3

What are the notes to the accounts?

Answer 3

Directors making notes to accounts

• explanations

Question 4

What is shareholder information

Answer 4

• information shareholders may be interested in

eg. new share issues; has share cap increased?

Question 5

What are 4 reports to analyse corp. performance?

Answer 5

• strategic report
• stakeholder review
• financial review
• directors remuneration

Question 6

What does statement of financial position show?

Answer 6

• assets
  ^ what company owns
• capital
• reserves
• liabilities
  ^where money came from

Question 7

What are accounting standards?

Answer 7

• prescribes form and content of financial statements

Question 8

What is GAAP?

Answer 8

Generally accepted accounting principles?

Question 9

Is GAAP standardised globally?

Answer 9

No - in process of standardisation but can still be country specific

Question 10

Why may it be difficult to compare international companies?

Answer 10

Due to the range of accounting standards across the world, it can be difficult to compare companies internationally

Question 11

What is IASB?

Answer 11

international accounting standards board

• purpose: to achieve transparent and comparable financial statements to global accounting standards

Question 12

What are 2 set of standards under IASB?

Answer 12

• IFRS (international financial reporting standards)
• IAS (international accounting standards)

Question 13

What is an additional listing rule for companies listed on exchanges (eg. LSE)?

Answer 13

Must provide an interim report

Question 14

What is the other equation instead of assets = liabilities + equity

Answer 14

Non-current assets + Current assets = Capital + Reserves + Liabilities

Question 15

What is another term for equity?

Answer 15

Capital and reserves

Question 16

What are non-current assets?

Answer 16

intangible (goodwill etc)

tangible (PPE)

Investments helf for LT

Question 17

What are current assets?

Answer 17

Cash and cash equiv
inventories
trade receivables
Other current assets (eg. prepayments)

Question 18

What are capital and reserves?

Answer 18

• share capital
• share premium
• revaluation reserve (some assets appreciate over time, opposite of depreciation)
• retained earnings

Question 19

What are current liabilities?

Answer 19

Short term borrowings (<1yr)

• trade and other payables (trade payables, accruables)

Question 20

What are non-current liabilities?

Answer 20

long term borrowings/provisions (>1yr)

long term bank loans
bonds issued by company

Question 21

What is another name for non-current assets?

Answer 21

Fixed assets

Question 22

What are intangible non-current assets

Answer 22

Assets that are expected to generate future revenue but have no physical substance

• goodwill
• trademarks
• patents

Question 23

What are tangible non-current assets

Answer 23

Assets that are expected to generate future revenue and have physical substance

• PPE
  must be valued at net book value

Question 24

What is NBV?

Answer 24

Recognises depreciation of assets

Question 25

What are non-current asset investments?

Answer 25

generally shares in other companies that intend to be held for >1yr includes investment in associate companies

Question 26

What is an associate company?

Answer 26

An associate company is created when share ownership lies from 20% to 50%

Question 27

What is a subsidiary company?

Answer 27

subsidiary company is created when share ownership lies above 50%, where the subsidiary’s balance sheet is consolidated with that of the parent

Question 28

What are investments held for trading?

Answer 28

current assets - count as part of inventory, intend to be converted to cash

Question 29

What comes under inventory?

Answer 29

- raw materials - work in progress - finished stock - valued at lower of cost (how much cost to make) or net realisable value (how much we can sell it off for) (conservative value)

Question 30

what are trade receivables

Answer 30

- trade debtors - pre payments essentially ppl who owe us money

Question 31

What are reserves?

Answer 31

amount belonging to shareholders that is retained by company - revaluation reserve (revaluate assets from cost to market value) - retained earnings (profit loss reserve)

Question 32

What can share premium be used for?

Answer 32

- fund a bonus issue - write off cost of listing and issue

Question 33

What kind of asset appreciates over long term?

Answer 33

freehold land

Question 34

what kind of account is retained earnings?

Answer 34

A revenue reserves account

Question 35

What are share premium and revaluation ?

Answer 35

Capital reserve accounts

Question 36

What type of account is share capital?

Answer 36

A capital account

Question 37

what is an accrual?

Answer 37

Expenses not yet invoiced eg. bill (ST liability)

Question 38

what is a provision?

Answer 38

where we think the receivable is not coming in within next year eg. doubtful debt

Question 39

How do we calculate NBV?

Answer 39

Cost - accumulated depreciation

Question 40

How do we calculate depreciation w the straight line method?

Answer 40

annual depreciation = (original cost - expected residual value)/expected useful life

Question 41

what is residual value of an asset?

Answer 41

eg. resale value, scrap value

Question 42

What is the first line on IS?

Answer 42

revenues

Question 43

Second line of IS?

Answer 43

COGS (cost of sales)

Question 44

What does IAS 33 require?

Answer 44

earnings per share ratio and the diluted earnings per share to be shown at the foot of the income statement

Question 45

What are the main profit lines on an IS?

Answer 45

Gross profit (after COGS) Operating Profit (after SG&A, distribution) PBT (after financing costs and exceptional items) Net income (after tax) = retained earnings

Question 46

When are revenues recognised?

Answer 46

always at point of sale (even if money hasnt come in yet) - recognition can be apportioned over several accounting periods for LT contracts

Question 47

Another name for operating profit?

Answer 47

PBIT

Question 48

What is the diff. between capex and revenue expenditure?

Answer 48

Capex : - money spent to buy non-curent assets - reflected on BS (eg. purchase of PPE) Revex: - immediately impacts income statement (eg. wages, rent, professional fees)

Question 49

what are the 3 headings on the CFS?

Answer 49

- operating activities - investing activities - financing activities