Securities Analysis

Question 1

Current and Non-current assets can be further classed as:

Answer 1

Tangible and Intangible

Question 2

Depreciation applies to what type of asset?

Answer 2

Tangible Non-current assets

Question 3

Amortization applies to what type of asset?

Answer 3

Intangible Non-current assets

e.g Patents

Question 4

What types of tangible non-current assets do not depreciate and why?

Answer 4

Freehold land as it does not have a limited economic life.

Question 5

What is the difference between Authorised share capital and Issued Share Capital

Answer 5

1) Authorised Share Capital: This is the theoretical limit on the amount of share capital that is permitted to be issued,

2) Issued Share Capital: Is the actual amount of share capital in issue at a given time.

Question 6

What are the three sub-elements of Equity?

Answer 6

Share Capital

Capital Reserves

Revenue Reserves

Question 7

What are the three types of Capital Reserves?

Answer 7

Capital Redemption Reserves

Share Premium

Revaluation Reserves

Question 8

How are capital redemption reserve funded?

Answer 8

Through the buyback / redemption of existing shares, using funds from revenue reserves.

Question 9

How is share premium funded?

Answer 9

The excess from issuing any shares above their nominal value.

Question 10

How are the revaluation reserves funded?

Answer 10

The unrealised increase in value of tangible and intangible assets.

E.g the value of land / buildings increases but has not been realised through a sale.

Question 11

How can capital reserves be used?

Answer 11

They can be used to issue bonus shares. These reserves are a sign of financial strength as they indicate additional funds that are not derived from profits but from other financial activities.

Question 12

What are the two revenue reserves?

Answer 12

Retained Earnings and Minority Interests

Question 13

What is the formula for equity on the balance sheet?

Answer 13

Share Capital + Reserves

Question 14

What might be included in the footnotes of financial statements (5 things)

Answer 14

Management Commentary

Stock Benefits

Pension / Employee Benefit Plans

Account Policies

Income Taxes

Question 15

Why might the statement of profit / loss not match the actual cash position of the firm?

Answer 15

It is calculated on an accrued basis, and counts income / expenditure when it is registered, not when the cash is received / spent.

Question 16

Under IAS, what are the two acceptable ways of presenting the statement of profit and loss.

Answer 16

1) A comprehensive statement of income

2) Two seperate statements of profi and loss

Question 17

What is the formula for “Cost of Sales”?

Answer 17

Opening Stock + Purchases - Closing Stock

Question 18

What is the formula for Gross Profit?

Answer 18

Revenue - Cost of Sales

Question 19

What is the formula for opertaing profit? (PBIT)

Answer 19

Gross Profit - Operating Costs

Question 20

What is the difference between revenue expenditure and capital expenditure?

Answer 20

Revenue expenditure immedieately impacts the statement of profit or loss

Capital Expenditure is spending on non-current assets

Question 21

Charges like Depreciation and Amortization are added back where?

Answer 21

The statement of cash flows

Depreciation and amortization reduce reported profit but do not actually cause a loss, therefore they are added back into the statement of cash flows.

Question 22

What are the three types of cash flow on the statement of cash flows?

Answer 22

1) Operating Cash Flow

2) Enterprise / Investment Cash Flow

3) Financing Cash Flow

Question 23

What is operating cash flow?

Answer 23

Cash coming in / out due to everyday business activity

Question 24

What is investment / enterprise cash flow?

Answer 24

Cash from long term investments - e.g interest, dividends - also covers money spent on long term assets like buildings

Question 25

What is financing cash flow?

Answer 25

Money spent on paying dividends as well as money gained from issuing shares - minus cash spent repaying debt or buying back shares

Question 26

What are the two methods of reporting cash flow?

Answer 26

Direct vs Indirect

In simple terms, the direct method shows the actual cash transactions (money in from customers, money out to suppliers and employees), while the indirect method starts with the profit and adjusts it to reflect cash flow, mainly by removing non-cash expenses and considering changes in working capital.

Question 27

What do liquidity ratios seek to establish?

Answer 27

Whether or not a business can meets its operating requirements from its working capital in a timely manner.

In other words, does it have sufficient ability to raise cash when required, to pay off the liabilities as they fall due?

Question 28

What is the formula for current ratio, and what does it assess?

Answer 28

Current assets / Current liabilities

Seeks to establish is a company can pay their liabilities falling within 12 months with their assets recoverable within 12 months.

A ratio between 1.2 - 2 is desireable.

Question 29

What is operational gearing?

Answer 29

A comparison of fixed costs to variable costs

Question 30

What does it mean to have high opertaional gearing, and what is the risk?

Answer 30

Being highly operationally geared means fixed costs are higher in proportion to variable costs. When sales are strong then profits can grow quickly, however, as sales fall, the costs remain fixed and do not fall in step. This means the costs remain high and profits can fall.