1
Q
What three main sections are in a balance sheet?
A
Assets
Equity
Liability
2
Q
What does equity refer to on the balance sheet?
A
Total capital amount that the shareholders have contributed and are due.
3
Q
Which two sides of the balance sheet must equal one another?
A
Assets = Equity + Liabilities
4
Q
What is a balance sheet more commonly known as?
A
Statement of the financial position
5
Q
What are the three major financial statements?
A
Statement of financial position/balance sheet
Income statement
Cash flow statement
6
Q
What 3 sources and uses of cash is a cash flow statement separated into?
A
Operating
Investing
Financing
7
Q
What other additional disclosures may a company have to release? (3)
A
Statement of comprehensive income
Statement in changes of equity
Other notes e.g. changes in accounting
8
Q
What is an independent verification of a companies accounts called?
A
Audit
9
Q
What are the five main components in a financial statement?
A
Assets
Liabilities
Equity
Revenue
Expenses
10
Q
What is the combination of accounting regulations often referred to?
A
GAAP
11
Q
What does GAAP stand for?
A
Generally Accepted Accounting Principles
12
Q
Which foundation is looking to harmonise GAAP worldwide?
A
International Financial Reporting Standards (IFRS) Foundation
13
Q
What two boards develop the IFRS standards?
A
International Accounting Standards Board (IASB)
International Sustainability Standards Board (ISSB)
14
Q
What is the ISSB?
A
International Sustainability Standards Board
15
Q
Why was was ISSB created?
A
Designed to introduce comparable metrics for environmental, social and governance (ESG) matters.
16
Q
How are standards issued by the IASB called?
A
International Financial Reporting Standards (IFRSs)
17
Q
What standards does the US use?
A
US GAAP
These are converging with IFRSs
18
Q
What is the issue with the US and EU using different standards?
A
The financial statements are not directly comparable without adjustments
19
Q
How do investments appear in accounts?
A
Cost of investment in balance statement
Dividends received in income statement
20
Q
In relation to accounts, what happens when a company has a significant investment in another company so that they control them?
A
Group accounts or consolidated financial statements must be filed
21
Q
What are the two issues that can occur when amalgamating companies when doing group reporting?
A
Goodwill and Non-controlling interests
22
Q
What is Goodwill?
A
If a cost of investment exceeds the net assets of the subsidiary this excess is called goodwill. This appears as an asset in the consolidated financial statements.
Essentially the premium that you pay when purchasing a company, its still an asset.
23
Q
What is non-controlling interests?
A
The minority shareholders in a situation where the parent company does not own all the shares of a subsidiary.
This means the assets are not fully owned by parent company
E.g. Parent company owns 75%, Non-controlling interest is 25%
24
Q
What period are current assets and liabilities?
A
Within 1 year
25
What is an intangible non-current asset?
Asset that generates economic benefit, no physical form.
E.g. software, patents, trademarks, goodwill (intellectual property)
26
What is a prepayment?
Where a company has prepaid an expense e.g. Rent
27
How are current assets ordered and listed in a financial statement?
In ascending order of liquidity (cash last)
Lower of cost or net realisable value (NRV)
28
What is the difference between depreciation and amortisation?
Depreciation is for tangible non-current (physical) assets
Amortisation is for intangible non-current assets (e.g. software)
29
What is the depreciable amount?
The difference between the cost and the final disposal value
30
What is the straight line depreciation formula?
(cost - disposal value) / useful economic life in years
31
What is the NBV?
Net book value, value of a depreciated asset
May not be market value
32
How is revaluation of assets reflected on financial statement?
In the revaluation reserve, forms part of equity
33
How is purchased goodwill accounted for differently to other intangible non-current assets?
It is capitalised and included in the statement of financial position
It is not amortised
34
What 3 sub-elements makes up equity?
Share captial
Capital reserves
Revenue reserves
35
What is share captial?
The nominal value of equity and preference shares the company has issued
36
What is the share premium account sometimes known as?
Additional paid in capital
37
What are capital reserves? (2)
Revaluation reserves (revaluation of non-current assets)
Share premium (issuance of shares above their nominal value)
38
How can and cannot capital reserves be distributed to shareholders?
As makes up capital base, cannot be distributed as dividends
Can be issued as bonus issue of ordinary shares
39
What are revenue reserves?
Accumulated retained earnings of the company
Sum of distributable profits that have not been paid as dividend
40
What is the equity calculation?
Equity = share capital + reserves
41
What is called-up share capital?
Shares issued that will be paid by investors at a later date
42
What is a provision in regards to a liability?
When a company has an obligation to make a payment at a later date, but the exact amount or timing has not been determined yet.
They calculate an estimate of the obligation
43
Does revenue include sales where payment has not yet been received?
Yes
44
Does COGS include wages?
Yes, of staff who make products
45
What is operating expenses sometimes known as?
SG&A (Selling, General and Administrative)
46
What does EBITDA stand for?
Earnings before interest, tax, depreciation and amortization
47
What is the EPS calculation?
(net income - dividends on preferred shares) / number of ordinary shares
48
What is the difference between capital and revenue expenditure?
Capital - money spent to buy non-current assets
Revenue - money pent that immediately impacts income statement, e.g. wages/rent
49
What does PPE stand for in accounting?
Plant, property and equipment
50
How can profit versus cash differ?
Profit includes all sales, even those that are not final e.g. made on credit.
Profit takes into account expenditure incurred, not cash paid.
51
How is free cash flow generally calculated?
net income - depreciation/amortization - capital expenditure
Capital expenditure used as figure to maintain business operation
52
What is the difference between enterprise and equity cash flow?
Enterprise cash flow is free cash flow before payments made to providers of finance (lenders/equity holders)
Equity cash flow is free cash flow to shareholders, after these payments but before dividends
53
What is ROCE?
Return on Capital Employed
Profit generated as a percentage of the finance put into the business
Capital is equity + long-term debt
54
What is ROCE sometimes known as?
ROA, Return on Assets
55
What is the formula for ROCE?
operating profit / capital employed (x100)
56
What is the calculation for capital employed?
Total equity plus non-current liabilities
57
What is the calculation for ROA/ROCE?
operating profit / total net assets
58
What is the calculation for ROE?
net income / shareholders equity * 100
59
How do you calculate gross and operating profit margins?
Gross profit margin (%) = (Gross profit / Revenues) x 100
Operating profit margin (%) = (Operating profit / Revenues) x 100
60
How do you calculate asset turnover?
Revenues / Total net assets
61
How would you calculate ROA/ROCE?
Operating profit margin x asset turnover = ROCE or ROA
62
What is financial gearing?
Measure of the risk arising from company debt
63
What is gearing sometimes known as?
Leverage
64
How is debt/equity calculated?
Debt = non-current liabilities
Equity = total equity
65
How is Net Debt calculated in Net Debt / Equity
Debt minus cash and short-term investments
66
What is interest cover?
Operating Profit / Interest Cost = Interest Cover
67
What is the current ratio?
current assets / current liabilities
higher the result the more likely a company can meet liabilities
68
What is the Quick Ratio known as?
Acid test
69
What is the Quick Ratio?
It excludes inventory from calculation of current assets in the current ratio
Inventory often not liquid
Quick ratio = (current assets – inventory) / current liabilities
70
What is the Earnings Per Share calculation?
(Net income - Dividends on preferred shares)
/
Average weighted number of ordinary shares outstanding in a period
71
How is net profit or loss attributable to ordinary shareholders calculated?
Net profit shown on the income statement, less any dividends on preference shares
72
What is P/E?
Price earnings ratio
73
How is P/E calculated?
Share price / EPS
74
What is diluted EPS?
EPS if all potential dilution approved occurs
e.g. convertible bonds / warrants / shelf
75
What is trailing P/E?
Backwards looking P/E ratio over the last 12 months
76
What is forwards P/E?
Estimation of earnings by analysts
77
How is enterprise value (EV) calculated?
Market capitalisation plus all of its outstanding debt, noncontrolling interests and preferred shares, minus all of the cash and cash equivalents.
78
What is enterprise value?
cost of purchasing an entire business.
79
What is the gross dividend yield?
Total dividends per share as a percentage of the current share price
80
What is the Gross Dividend Yield calculation?
Dividend / Current Share Price * 100
81
What is the Gross Dividend Cover calculation?
EPS / Dividends per share
82
What is Gross Dividend Cover ?
The companies ability to pay the dividend, earnings / dividend payment - per share
83
EPS
Profit available to ordinary shareholders/number of ordinary shares
84
What is diluted EPS
EPS that considers all potentially dilutive instruments in the number of ordinary shares
eg
- Convertible preference shares
- Convertible bonds
- Warrants
85
Historic P/E ratio
Market price per shares/ EPS
86
What is trailing P/E ratio
Ignore one-off events such as windfalls or exceptional items
87
What is prospective P/E ratio
Uses current financial year forecast
88
EV/EBITDA
EV/EBITDA
89
EV
market value of debt+ market value of equity
enterprise value is cost of buying whole company
90
EBITDA
EBIT (operating profit) + depreciation+ amortization
91
What is capital structure
Proportion of debt and equity
92
Gross dividend yield
Dividend per share/ market price per share *100
93
Gross dividend cover
earnings per share/ dividend per share
If less than 1 its an uncovered dividend meaning dividend is more than earnings so they prob used reserves to pay
94
debt/equity ratio
Interest bearing debt (inc pref shares and overdraft) / equity shareholder funds *100
Higher % means more highly geared
95
What is net debt to equity
Removes cash and short term investments which could be used to repay debt
96
What does high gearing mean
- More highly geared means less likely to borrow more
- More volatile profits
- exposes shareholder to reduced income as debt payments obligatory by dividends discretionary
97
What are the financial gearing ratios
Debt/equity ratio and interest cover
98
Interest cover ratio
Tells how easily company can pay interest expenses on outstanding debt
Profit before interest and tax (operating profit)/ interest expense
99
What are the liquidity ratios
Current and quick ratio. Tells how able is company to meet liabilities in next 12 months
100
Current ratio
Current assets (Inventory,receivables,cash)
/
Current liabilities
101
Quick ratio
(Current assets- inventory)/ current liabilities
or
(receivables+ cash)/ current liabilities
102
What are operating/profitability ratios
Return On Capital Employed (ROCE)
Return On Equity (ROE)
Profit Margin
103
What is return on assets
same as ROCE
104
List all equations for assets and liabilities (4)
Total assets= Equity+ Liability
Non current assets+ current assets= Capital + Reserves + Liabilities
Equity = Captial + Reserves
Capital Employed= Total assets - Current liabilities
105
Return on capital employed
operating profit/ capital employed *100
106
Return on equity
Net Income (PAT)/ Shareholders equity *100
107
Profit margin formula and what it tells you
What % of revenue becomes profit
= Profit/Revenue as %
Higher % means more efficient at turning revenue into profit
108
Gross profit margin
% of revenue company converts to profit after considering COST OF SALES
109
Operating profit margin
% of revenue company converts to profit after considering COST OF SALES AND OTHER OPERATING COSTS
110
Capital employed
Total assets - current liabilities
111
?
112
?
113
If a company has high interest cover on unsecured loan stock which it has recently issued, what is the consequence of this?
Improved market rating
114
:
115
If an investor holds one share in a company that subsequently undertakes a 4:1 bonus issue, they would have to multiply EPS by:
0.2
116
An uncovered dividend is one paid out of:
Retained earnings
117
?
118
A company has net assets of £30 million, long-term debts of £10 million and current liabilities of £5 million. The gross profit, operating profit and profit after tax are £5 million, £4 million and £2 million, respectively. What is the return on capital employed (ROCE)?
The ROCE is calculated as operating profit divided by total capital employed. Total capital employed includes shareholders' equity and non-current liabilities, but not current liabilities. Net assets, which equal the shareholders' equity by definition, are £30 million. We add the £10 million in long-term debt to find capital employed equals £40 million.
The ROCE is then calculated as operating profit of £4 million divided by capital employed of £40 million, which equals 10%.
119
?
120
A company undertakes a 2:3 scrip issue. To correctly restate the previously reported EPS figure, multiply it by:
36955
121
The shares of a plc stand at a 50% premium to net asset value per share. The company has 100m shares and the share price is 220p. What are the net assets?
If share price is at a 50% premium to net asset value, then net asset value must be 100 / 150 (or 2 / 3) of share the price.
220p x 2 / 3 = 146.7p=£1.467
£1.467 x 100m shares = £146.7m
122
ROA
Operating profit/ Total net assets * 100
123
Asset turnover
Revenues/ Total net assets
124
Reports to analyze corporate performance
strategic report
stakeholder review
financial review
directors remuneration
125
LSE listing req
IFRS and International Accounting Standards (IAS)
Many exchanges require additional disclosures like a 6 monthly interim report
126
Describe non-current asset investments
Investments in associate companies
associate company created when share ownership 20-50%
subsidiary company created where share ownership lies above 50%
127
What are non current assets
Assets intended to be sed by business for more than a year
128
List intangible non current assets
Goodwill
Trademarks
Patents
Capitalised development costs
129
List tangible non current assets
Property plant and equipment
Valued at net book value (NBV)
130
Net book value formula
NBV= cost- accumulated depreciation
131
What happens to freehold land over time
appreciates
132
annual depreciation formula
(original cost- expected residual value) / expected useful life
133
What are current assets
Assets held for conversion into cash:
Inventory
trade receivables
cash
134
Describe inventory
raw materials
work in progress
finished goods
valued at lower of cost and net realizable value
135
describe trade receivables
amount the company is owed on statement date
trade debtors
PREPAYMENTS
136
What does equity consist of
Share capital and share premium account
Reserves
137
What is meant by reserves and give 2 types
Amount belonging to shareholders that is retained by company
Revaluation reserve- created when company revalues assets from cost to market value
Retained earnings (profit and loss reserve)
138
Describe current liabilities and give examples
Amount owed by company and due for payment within 1 year
- Trade payables
- accruals
- expenses not yet invoiced
139
Describe non current liabilities and give examples
Amount owed by company and due for payment after 1 year
- Long term bank loans
- Bonds issued by company
- PROVISIONS eg doubtful debt
140
Difference between capital and revenue expenditure
capital expenditure spent to buy non-current assets and reflected on balance sheet (purchase of PPE)
revenue expenditure immediately impacts income statement (wages, rent etc)
141
What is FCF
Cash available after all expenses and reinvestments needed to maintain operating capacity of business have been made
142
How to get from operating profit to FCF
- Add back non cash expenses such as depreciation
- Subtract any increase in current assets or decrease in current liabilities
- Add any increase in current liabilities or decrease in current assets
143
What is enterprise cash flow
free cash flow to firm before considering payments to any debt and equity holders
Irrespective of capital strcuture
144
What is equity cash flow
Free cash flow to equity. Measure of how much cash can be paid to equity shareholders of company after all expenses, reinvestment and debt repayment
145
What is a subsidiary
Any company you have more than 50% control in
146
How to consolidate accounts if subsidiary not entirely owned
100% of assets, liabilities, revenues and expenses of sub added
Minority interest in shareholders funds on balance sheet
Minority interest in income statement after income tax expense
147
When would a company disclose a minority interest in the statement of financial position?
A subsidiary company is not fully owned by the group
148
?
149
A company has an operating profit of £12 million. If raw materials increased by £4 million, receivables decreased by £2 million and accounts payable increased by £2 million, the operating cash flow would be:
£12 million
150
?
151
?
152
?
153
Why is deferred taxation not on cash flow statement
Taxation heading in the cash flow statement shows physical cash paid in respect of corporation tax during the accounting period - not the deferred taxation which is an accounting adjustment. Cash inflows and outflows in relation to fixed assets are recorded
154
Where is interest shown
Income statement
155
Where in the financial statements would you find tax payable?
Statement of financial position
Payables, including tax payable, can be found in the statement of financial position within Liabilities.
TAX PAID is found in the statement of cash flows.
156
The current ratio is typically used to measure which one of the following within a company?
Liquidity
157
?
158
?
159
?
160
A company has completed a 1:5 stock-split. Following the stock-split the most likely impact on the company's Debt to equity ratio will be:
It will remain unchanged
Although the number of shares issued will increase, with a stock-split the overall value will remain unchanged. As the value of equity is unchanged then the debt to equity ratio will also remain unchanged.
161
?
162
163
What are capital reserves
capital reserves include revaluation reserves and the share premium account.
The revaluation reserve arises from the upward revaluation of non-current assets, and the share
premium reserve arises when the company issues shares at a price above their nominal value.
Capital reserves are not distributable to the company’s shareholders in the form of dividends, as
they form part of the company’s capital base, although they can be converted into a bonus issue of
ordinary shares.
164
What are revenue reserves
the major revenue reserve is the accumulated retained earnings of the
company. This represents the accumulation of the company’s distributable profits that have not
been paid to the company’s shareholders as dividends, but have been retained in the business.
The retained earnings should not be confused with the amount of cash the company holds or with
the income statement that shows how the retained, or undistributed, profit in a single accounting
period was arrived at.
165
Look at additional info on pg 266 and 267
CISI (CMP) Securities
flashcards
Decks in class (14)
# Cards
-
Chapter 1 The Financial Services Sector D33
-
Chapter 3 Markets D20
-
Chapter 5 Secondary Markets D199
-
Chapter 6 Capital Adjustments D148
-
Chapter 7 Clearing and Settlement D176
-
Chapter 4 Primary Markets D177
-
Mock exam200
-
Chapter 2: Asset Classes D476
-
Chapter 9: Investment Management D47
-
Chapter 8: Accounting Analysis D165
-
RE: Incorrect Answers89
-
Things I got wrong51
-
Revision Deck: Securities45
-
Fitch49
