Management vs Audited accounts?
Management accounts are prepared for internal purposes only.
Audited accounts are prepared by a chartered accountant.
What is a balance sheet?
Statement of financial position- it is shows the assets and liabilities of a company at a certain period of time, usually at the end of a financial year (shows worth)
What is a Balance Sheet made up of?
Company owns (assets)
Company owes (liabilities - borrowings, overdrafts, loans and creditors).
What are the two type of assets in a Balance Sheet?
Fixed - around long time 12+ months (factories, land, trademarks, equipment - computers)
Current assets - shorter life span -12 months, stock & cash in bank. Include monies owed to a company (work in progress/invoices raised, cash in hand and cash balances in bank
What are the two types of liabilities in a Balance Sheet?
Long-term liability- money not due to be repaid in the next year
Current liability- money due within the year
What is a Creditor?
These are the people that the Company owes money to (they are not broken down in the accounts)
What are Net Assets
the value of the fixed assets MINUS the net current liabilities (these are made up of the current assets MINUS the creditors
What is share Capital
the nominal issued shares at the formation of the Company
What is Solvency?
the ability of a company to meet its long-term debts and other financial obligations.
How can you determine if a company is solvent?
- review balance sheet
- liquidity ratio (current assets/current liability) less 1 crash, more than 1 ok
- Acid test ratio (current assets, remove value of stock/current liability’s) best for companies short term viability!
How can you identify how much a company is worth?
- Balance sheet to determine NAV (Net Asset Value)
NAV = TOTAL ASSEST (fixed and current) - TOTAL LIABILITIES (long-term and current)
Structure of a balance sheet?
Assets, liabilities & ownership equity
Note: The only statement which applies to a single point in time of a business’ calendar year.
What is an Equity?
Difference between assets and the liabilities (Net worth, net capital)
Represents money that would be returned to company’s shareholders if all assets were liquidated and company’s debt was paid off
What is an Intangible asset?
Do NOT exist in physical form
include things like:
accounts receivable
pre-paid expenses
patents
goodwill. (copyright, trademark)
What is a tangible asset?
Are physical and include things like:
Cash
Inventory
vehicles
equipment
buildings
investments
What is a Cash Flow?
Annual receipts and expenditure to include VAT.
Shows how much money is running through a company
NOT included in annual accounts but is prepared for management purposes
What are the three stages of a Cash Flow?
- A cash flow tells us how much money is coming in from operating activities (rule of thumb - operating profit EXCLUDING depreciation & amortisation and some expectational items (taken out because they are accounting tricks, not REAL cashflow)
- Next the company will add or subtract cashflows from non-business activities (interest payments on loans, divineds payments to shareholders and tax)
- Finally cashflows from financing are taken into account - money raised from share sales, brought in as a result of loans)
= NET INCREASE OR DECREASE IN CASH!
What is a Profit and Loss Account?
summary of a business’s income and expenditure transactions, prepared usually on an annual basis (also known as an income statement)
What is the definition of ‘sales’?
Sales are defined as invoiced amounts to customers excluding VAT
Name some items usually included in the Profit and Loss account?
Income- sales, service and other income
Directors remuneration (fee) . Company directors will be advised as to tax efficiency I,e dividends rather than salary (A dividend is a distribution of profits by a corporation to its shareholders)
Expenses- these must be business related (note VAT) i.e wages, insurance, rent, stationary, subscriptions, electricity, training
Corporation Tax -the only tax stated in Company Accounts is Corporation Tax
What approach can you take to the to assess how much a company is earning through Profit and Loss Account?
P&L turnover-
VALUE of a company’s sales - the costs of sales = the gross profit.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation)
subtracting administrative expenses - the next number on your P&L - from gross profit.
A healthy EBITDA figure is a good indicator of whether a company has a future.
What are depreciation?
The falling value of fixed assets, things like factories and other machinery.
What are admortisation?
Refers to intangible assets, like research spending, trademarks and goodwill
How do you review the Profit and Loss account to reach the Operating profit?
- Once amortisation and depreciation factored in you arrive at OPERATING PROFIT or EBIT (earnings before interest and tax)
- take in to account financing activies (interest earned or paid, TAX)
- exceptional items (large non-occuring expenses)
The figure that is left, after a company has subtracted interest and exceptional items from operating profit, is the number that the taxman is interested in.
