Flashcards in Using of financial information such as audited report and accounts Deck (18)
What is the WACC (Weighted Average Cost of Capital)?
The cost of capital is the expected return to equity owners (or shareholders) and to debtholders; so, WACC tells us the return that both stakeholders can expect
WACC can act as a benchmark for investment and is commonly used as discount rate in DCF analyses
Cost of debt - need to consider taxes and interest
Incorporates all sources of a company’s capital—including common stock, preferred stock, bonds, and any other long-term debt
Can be used as a hurdle rate against which companies and investors can gauge ROIC performance
What is account auditing?
Plays key role in ensuring company’s accounts = accurate and finances = distributed in fairest / most efficient manner
Can be internal process = mitigate risk and identify where cost savings can be made
OR can be independent specialists = conduct external audits on company accounts
E.g. likes of Deloitte, EY, KPMG, PwC
Why are accounts useful?
Helps track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions
What are the THREE key financial statements?
Income statement = information about the profit and loss
Balance sheet = picture on the financial position of your business on a particular date
Cash flow statement = bridge between income statement and balance sheet and reports the cash generated and spent during a specific period of time.
What are audit reports and how are they useful?
Auditor's report = document containing auditor's opinion of whether a company's financial statements comply with Generally Accepted Accounting Principles (GAAP)
UK GAAP = body of accounting standards published by the UKs Financial Reporting Council (FRC)
Audit report = important because banks, creditors, and regulators require an audit of a company's financial statements
What do the THREE paragraphs in a report usually cover?
The first paragraph states the responsibilities of the auditor and directors
The second paragraph contains the scope, stating that a set of standard accounting practices was the guide
The third paragraph contains the auditor's opinion
What are the FOUR types of audit reports?
1. Clean or Unqualified Report
2. Qualified Opinion
3. Adverse Opinion
4. Disclaimer of Opinion
What is a clean or unqualified audit report?
A clean audit report means a company followed accounting standards while an unqualified report
means there might be errors
What is an adverse opinion audit report?
An adverse report means that the financial statements might have had discrepancies, misrepresentations, and didn't adhere to GAAP
Adverse opinion = worst possible outcome for
company and can have a lasting impact and legal ramifications if not corrected
What is an qualified opinion audit report?
Whilst company didn't follow proper accounting standards, the company didn't do anything wrong, e.g. mistake in calculating operating expenses / profit
Auditors will state specific issues present so that company can fix them
What is a disclaimer of opinion audit?
For some reason, auditor couldn't complete the audit / chose not to provide opinion
Examples include when auditor can't be impartial / wasn't allowed access to certain financial information.
What property taxes are there?
stamp duty land tax (SDLT);
value added tax (VAT);
capital gains tax (CGT);
tax on rental
How does taxation differ on different properties?
Difference between commercial and residential property taxation
Difference between type of property investment and whether direct and/or indirect ownership (i.e. REITS / PAIFS) taxation
Difference in choice of ownership structure = significant area affecting taxation; ownership via company structure = popular in UK due to corporation tax rate being < income tax rates
What taxes are applicable to which types of property during purchase and sale?
When buying property, buyers = required to pay SDLT =different rates depending on property value
Sale of commercial property = generally exempt from VAT. However, commercial property owners can 'opt to tax' and charge VAT at standard rate 20%, therefore all supplies on property, including rent, would attract VAT
During due diligence on property purchase, vital that the tax history = fully researched as may be a tax relief called capital allowances that can help reduce future tax bills
When selling property, further tax = CGT. Rate of tax applied differs depending on ownership structure with companies being able to pay corporation tax
When financing commercial property, possible to claim tax relief for loan finance costs relating to commercial property. This is no longer applicable to residential buy-to-let properties but it is for commercial property.
What vehicles are available for tax-efficient investing?
Property Authorised Investment Funds (PAIFs)
Real Estate Investment Trusts (REITs)
How do PAIFs enable tax-efficient investing?
Tax-exempt investors, including individuals holding their investment in an ISA / SIPP = benefit from the PAIF structure
This is because both property income and interest income can be paid gross of tax
How do REITs enable tax-efficient investing?
Broadly a closed-ended publicly-traded company
Provides investors with tax-efficient investment exposure to property assets
To meet REIT status various conditions need to be adhered to
REITs do not pay UK direct taxes on their income and capital gains from their qualifying property rental business, provided certain conditions are satisfied
Shareholders = generally taxed on distributions they receive from REIT as if they were profits of a property rental business
REITs = required to distribute at least 90% of profits arising from their qualifying property rental business