L1 flash cards financial reporting (ss8)

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L1 flash cards financial reporting (ss8)

  1. 1. Components of the Income Statement• Revenue• Net Revenue• Expenses• Net Income• Gross Profit• Operating ProfitStudy Session 8, Reading 24
  2. 2. • Net Income can be calculated by the equations:Net Income = Income – ExpensesOrNet Income = Revenue + Other Income + Gains – ExpensesOrNet Income = (Revenue – Expenses in the Ordinary Activities ofBusiness) + (Other Income – Other Expenses) + (Gains – Losses)Study Session 8, Reading 25
  3. 3. • Multi-step format• Single step format.Study Session 8, Reading 25
  4. 4. • Revenue is recognized when it is earned and revenue isrecorded in financial records when the risk and reward ofownership is transferred.• Revenue recognition policies must be disclosed by companiesin the notes to the financial statementsStudy Session 8, Reading 25
  5. 5. • Revenue from the sale of goods can be recognized if:- significant risks and rewards of ownership have beentransferred- amount of revenue and cost incurred or to beincurred can be measured reliablyStudy Session 8, Reading 25
  6. 6. • percentage-of-completion method• completed contract methodStudy Session 8, Reading 25
  7. 7. • percentage-of-completion method - percentage of contractcompleted is estimated• completed contract method - no income is reported until thecontract is substantially completedStudy Session 8, Reading 25
  8. 8. Gross vs Net Reporting Gross revenue - the sales amount received from customers net revenue - sale proceeds less costsStudy Session 8, Reading 25
  9. 9. • Expenses are deducted from the revenue to calculate netprofit or loss.• Expenses include losses as well as expenses that arise duringthe course of ordinary activities.Study Session 8, Reading 25
  10. 10. • Specific Identification Method• FIFO• LIFO• Weighted Average CostStudy Session 8, Reading 25
  11. 11. • Straight line method• Accelerated method• Diminishing balance methodStudy Session 8, Reading 25
  12. 12. • Separate expenses and income items related to prior yearsthat are likely to continue in the future from those items that areless likely to continue.Study Session 8, Reading 25
  13. 13. • Extraordinary items and items related to discontinuedoperations should be shown separately in the incomestatement.Study Session 8, Reading 25
  14. 14. • Non-operating items are shown separately from operatingitems in the income statement.Study Session 8, Reading 25
  15. 15. • Basic EPS is calculated by dividing the reported earningavailable to common shareholders by weighted average numberof shares outstanding. It is calculated as:Study Session 8, Reading 25
  16. 16. Diluted EPS in Case of Outstanding Preferred SharesDiluted EPS in the Case of Outstanding Convertible DebtStudy Session 8, Reading 25
  17. 17. • The formula for calculating diluted EPS is:Study Session 8, Reading 25
  18. 18. • Obtained by stating each line item of the income statement asa percentage of sales.Study Session 8, Reading 25
  19. 19. • Different ratios used to measure profitability are:• Gross Profit Margin• Net Profit Margin• Operating Profit Margin• Pre-tax Profit Margin.Study Session 8, Reading 25
  20. 20. Calculation of MarginsNet Profit MarginGross Profit MarginStudy Session 8, Reading 25
  21. 21. Includes both:• Net Income (from the Statement of Financial Performance)• Other Comprehensive Income.Study Session 8, Reading 25
  22. 22. • Foreign Currency Translation Adjustments• Unrealized Gains or Losses on Derivative Contracts Accountedas Hedges• Unrealized Holding Gains and Losses on Available-for-SaleSecurities• Defined Benefit Post Retirement Plans costsStudy Session 8, Reading 25
  23. 23. The basic elements of the Balance Sheet are:• Assets• Liabilities• Equity• The equation of balance sheet is:Assets = Liabilities + EquityStudy Session 8, Reading 26
  24. 24. • Provides information about the financial position of anenterprise• Helps analysts measure the liquidity and solvency position ofthe company.Study Session 8, Reading 26
  25. 25. Statement of Financial PositionStudy Session 8, Reading 26Current Year Previous YearASSETSTotal Current Assets(A)Total Non-Current Assets (B)Total Assets (A) + (B) = (C)EQUITIES AND LIABILITIESTotal Current Liabilities (D)Total Non-Current Liabilities (E)Total Liabilities (D) + (E) = (F)Total Equity (C ) – (F) = (G)Equity and Liabilities (F) + (G)
  26. 26. Study Session 8, Reading 26Current Year Previous YearASSETSTotal Current Assets (A)All Other Assets (B)Total Assets (A) + (B) = (C)LIABILITIES AND SHAREHOLDER’S EQUITYTotal Current Liabilities (D)Total Non-Current Liabilities (E)Total Liabilities (D) + (E) = (F)Total Shareholders’ Equity (C ) – (F) = (G)Total Liabilities and Shareholder’s Equity (F)+(G)
  27. 27. • Current assets - held for the purpose of trading or expected tobe sold• Non-current assets - purchased for a longer term perspective• Current Liabilities - liabilities that are expected to be settledwithin one year or one operating cycle• Non-current liabilities - liabilities other than current liabilitiesStudy Session 8, Reading 26
  28. 28. • Capital Contributed by Owners• Preferred Shares• Treasury Shares• Retained Earnings• Accumulated Other Comprehensive Income• Non-Controlling Interest or Minority InterestStudy Session 8, Reading 26
  29. 29. • The analysis of the balance sheet helps in assessing thesolvency and liquidity position of the company.• The Statement of Changes in Equity shows the details of theincrease or decrease in company’s equity over a reportingperiod.Study Session 8, Reading 26
  30. 30. • In vertical common size analysis, each balance sheet item isshown as a percentage of total assets.Study Session 8, Reading 26
  31. 31. • Used in comparing the financial position of a company overa period of time.• Used to compare the financial position of companies acrossthe same industry.• Facilitate the comparison between different size companies.Study Session 8, Reading 26
  32. 32. Liquidity RatiosCurrent Ratio = Current Assets Current LiabilitiesQuick Ratio/Acid Ratio = (Cash + Marketable securities +Receivables) Current LiabilitiesCash Ratio = (Cash + Marketable securities) Current liabilitiesStudy Session 8, Reading 26
  33. 33. Long-Term Debt-to-Equity Ratio = Total Long-Term Debt TotalEquityDebt-to-Equity Ratio = Total Debt Total EquityTotal Debt Ratio = Total Debt Total assetsFinancial Leverage = Total Assets Total EquityStudy Session 8, Reading 26
  34. 34. Two categories of assets in the balance sheet:• Current assets• Long term assetsLiabilities are split into:• long term liabilities• current liabilities.Study Session 8, Reading 26
  35. 35. The first step in preparing the cash flow statement isdetermining the cash flows from operating activities. There aretwo methods to complete this:• The direct and• Indirect methodsStudy Session 8, Reading 27
  36. 36. • Cash received from customers can be calculated as:= Opening Accounts Receivable + Sales (Credit) – ClosingAccounts Receivable= Revenue – Increase in Account ReceivableStudy Session 8, Reading 27
  37. 37. • Cash paid to suppliers or creditors figures can be calculated as:= Cost of Goods Sold + Increase in Inventory – Increase inAccounts Payable= Opening Creditors + Purchases (Credit) – Closing CreditorsStudy Session 8, Reading 27
  38. 38. • Amount paid as salary and wages is calculated as:= Opening Outstanding Salaries and Wages + Salary and WagesExpense – Closing Balance of Outstanding Salaries and Wages• Cash paid for other operating expenses is computed by:=Other Operating Expenses – Increase in Prepaid Expenses –Increase in Other Accrued LiabilitiesStudy Session 8, Reading 27
  39. 39. • Cash interest paid can be calculated as:= Interest Expense (+ Decrease in Interest Payable) or ( – Increasein Interest Payable)= Beginning Interest Payable + Interest Expense – Ending InterestPayable• Cash paid for income taxes can be calculated as:= Income Tax Expense (+ Increase in Income Tax Payable) or (-Decrease in Income Tax Payable)Study Session 8, Reading 27
  40. 40. • Dividends paid can be calculated by:Beginning Retained Earnings + Net Income – Ending Retainede=Earnings, or from Dividends Declared and any Change inDividends Payable.• Net Cash Flow from Creditors= New Borrowing – RepaidPrincipalStudy Session 8, Reading 27
  41. 41. Under both IFRS and US GAAP, cash flow activities are dividedinto three categories:• Operating Activities• Investing Activities• Financial ActivitiesStudy Session 8, Reading 27
  42. 42. • There is no flow of cash in non-cash transactions. Hence, thesetransactions are not represented in the Cash Flow Statement.• As these transactions affect a company’s capital and assetstructure, significant non-cash transactions are disclosed in aseparate note or a supplementary schedule to the cash flowstatement.Study Session 8, Reading 27
  43. 43. • Under IFRS, companies are given choice to report transactionsrelating to dividend and interest as:Study Session 8, Reading 27Interest Paid Operating or FinancingActivityInterest Received Operating or FinancingActivityDividends Paid Operating or FinancingActivityDividends Received Operating or FinancingActivity
  44. 44. • Direct method - operating cash inflows by sources and operatingcash outflows by uses are disclosed.• Indirect method - net income is reconciled to operating cashflows.Study Session 8, Reading 27
  45. 45. Cash Balance (Opening Balance Sheet) xxxxAdd: Cash inflows from operating, investingand financing activities xxxxLess: Cash outflows from operating, investingand financial activities __xxxx___Cash Balance (Closing Balance Sheet) __xxxx__Study Session 8, Reading 27
  46. 46. Step 1: Aggregate all revenues and expenses.Step 2: All non cash items are removed from the aggregatedrevenue and expenses. The remaining items are broken intorelevant cash flow items.Step 3: Accrual amounts are converted to cash flow amounts byadjusting for working capital changes.Study Session 8, Reading 27
  47. 47. Study Session 8, Reading 27Cash flow statement analysis includes• Evaluation of the sources and uses of cash• Common size analysis• Calculation of cash flow ratios• Free cash flow measures
  48. 48. There are two approaches to converting a cash flow statementto a common size cash flow statement:1) Total cash inflows/total cash outflows method2) Percentage of net revenue methodStudy Session 8, Reading 27
  49. 49. Free Cash Flow To The Firm (FCFF)• FCFF can be calculated as:FCFF = NI + NCC + Int (1-Tax Rate) – FCInv – WCInv• FCFF can also be calculated from cash flow from operatingactivities(CFO):FCFF =CFO + Int(1-Tax Rate) – FCInvStudy Session 8, Reading 27
  50. 50. • FCEE can be calculated as:FCEE = CFO – FCInv + Net Borrowing• In case of debt repayments being more than borrowings, FCEE iscalculated as:FCEE = CFO – FCInv – Net Debt RepaymentStudy Session 8, Reading 27
  51. 51. Cash flow to revenue = CFO Net RevenueCash return on assets = CFO Average total assetsCash return of equity = CFO Average shareholders’ equityCash to Income = CFO Operating IncomeCash flow per share = (CFO – Preferred dividend) Number ofcommon shares outstandingStudy Session 8, Reading 27
  52. 52. Debt coverage = CFO Total debtInterest coverage = (CFO+ Interest paid + Taxes paid) Interest paidDebt payment = CFO Cash paid for long term debt repaymentReinvestment = CFO Cash paid for long-term assetsInvesting and = CFO Cash outflows for investing and financingFinancing activitiesDividend payment = CFO Dividends paidStudy Session 8, Reading 27

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