Statement of Financial Position, Cash flow statement, Income Statement ,

Statement of changes in equity,Statement of comprehensive income

-Cost of Sales(How to calculate)
-How to calculate depreciation expenses
-Costing Inventories
-Retained earning
-Profit for the period
-Net cash
-Bonus share
-Rights issue
-Par value of share
-Market value of share
-Share premium
-Goodwill
-Type of group relationship
-Trade payables (Asset, Trade payables increase)
-Trade receivables(Cash increase, Trade receivables decrease)
-Accruals(Liability- When expenses is more than cash paid)
-Prepayments(Assets-When cash paid is more than expenses)
-Porvisions

Chapter 3 Accounting for Limited Companies(Details of driectors, Directors

report, Coporate Governance,Auditors report,financial statements, notes
to account)
Q; Key features of good coporate governance
-Fairness
Directors should not be able to benefit from access to inside information that is not
available to shareholders
-Disclosure
Adequate and timely disclosure
-Accountability
setting out duties of directors
And establishing a monitoring process

Q; Publication of financial statements is vital to a well functioning private

sector
Unless investors/shareholders receive timely/regular information about the
companies performance and position- They wil encounter problems in
evaluating their investment. As a result they would be reluctant to invest
in the business
Suppliers/Creditors need information about the financial health of the
business.They would be reluctant to engage in commercial relationships
when a company does not provie information. The fact that a company has
limited liability increases the risk involved in dealing with this type of company

Statement of comprehensive income(Income statement)

Inclues other gains and losses of the company that affect the shareholders equity
-Revaluation of non current assets
(Arise when a company revalues a fixed non current asset-usually property)
-Foreign currency gain/loss
-Pension liability increase/decrease
-Fair value of investment increase/decrease
Statement of Changes in Equity
Reveals the changes in reserves and share capital

Directors Report
Required by company law
-Directors required to prepare a report to shareholders
Content of the directors report is prescribed by law
Required Information includes
-Details of share ownership
-Details of directors financial interest
-Employment policies
-Charitable donations
-Political donation
-Assessment of business risk
-Current years performance and position
-Future prospects and social prospects

Strategic Report(Business Review)/Financial review/Chief Executive review

Financial Review
-Highlights the positive aspects and ignore the negative aspects of the financial
statements
-Use of charts and graphs
Businesss Review
-Narrative report with charts and tables
-Summaries(Strategy,Cutormer base, Territories)
-Financial performance-Analysis of income and expenses
-dividends
-Future outlook
Detail of Directors(Required by company law)
-Directors are the people assigned by the shareholders/running a company on
behalf of the shareholders
-Shareholders want information about the directors to make sure they have
appropriate background and experience to run the compay
-A
Remuneration Committee Report
-Shareholders and other interested parties are concerned to ensure the directors are
not paying themselves too much
--Detailed disclosures are required about how much each named director received
Auditors report
Shareholders required to elect a qualified and independent party/firm to act as
auditors
The main duty is to
Report whether in their opinion is the financial statement shows a true and
fair view of the financial performance,position and cashflow of the company
Auditors must carefully scrutinise the financial statements and the underlying
evidence on which statements are based
It will involve an examination of the accounting principles followed
The accounting estimates made
The robustness of the companys internal control system
Need an independent third party to monito the information in the annual report

Q; Why do Stock exchange listed companies require to disclose more

information about business than other companies
-As their shares are frequently traded, greater transparency concerning their
business operations should help investor to make more informed decisions
-Stock Exchange listed companies tend to be larger,have more stakeholders than
other companies.
Their impact on the society and the economy as a whole therefore tends to be
greater
This in turn creates an obligation for them to account more fully to their operations
and actions

Coporate Social Responsibility Report

-How A company has intergrated social and environment conerns within their
business operation
-Possible issues reported on
( Control of pollution, Energy efficiency, Charitable activity, fair trade goods, equal
opportunity employment)
Chapter 4:
Sources of finance
Short Tern
- Inventories, Trade Payables, Trade Receivables
-Bank Overdrafts, Debt factoring
-Trade Credit
-Overdraft
-Short Term loans
-Fixed deposit for 1 year less
-Advances
- Debt factoring
Medium Term
-Leasing
-Hire Purchase
-Credit Purchase
-Loans from financial institutions,government,commercial banks
Long Term
-Retained Earnings
-Share capital
-Preference shares
-Loan Capital
-Debenture/Bonds
-Term Loans
-Loan covenants
-Unsecured loans
-Eurobond loan capital
Q; Discuss whether a company should borrow funds or issue additional
shares
Advantages of Loan/Debts
-Lenders have no right to the companys future profits(they would if they had
bought shares in the company). A lender is only entitled to the repayment of the
agreed up principal of the loan and interest.
-Tends to be cheaper than Equity
- Interest on the debt can be deducted on the company's tax return, lowering
the actual cost of the loan to the company.
-Because the lender does not have a claim to equity in the business, debt does not
dilute the owner's ownership interest in the company.

Disadvantages of Loan/Debts
-Interest must be paid unlike dividend. Failure to pay/Not paying will result the
company being wound up
-The company must repay the debt when it is due
Failure to pay off the debt will result in the company being wound up( Business
assets could get seized by the lender)

Advantages of Equity
-No interest /obligation on the capital raised (not required to pay)
-Share Capital does not have to be repaid
-The company does not have to pay dividends
-When business fails, there is no requirement to pay back investments(Limited
liability)

Disadvantages of Equity
-The price to pay for equity financing and all of its potential advantages is that you
need to share control of the company

Advantages of Debt Compared to Equity

Raising debt capital is less complicated because the company is not required
to comply with state and federal securities laws and regulations.

The company is not required to send periodic mailings to large numbers of

investors, hold periodic meetings of shareholders, and seek the vote of
shareholders before taking certain actions.

Disadvantages of Debt Compared to Equity

It may not be possible to borrow if the company is considered to be highly

geared
 Debt instruments often contain restrictions on the company's activities,
preventing management from pursuing alternative financing options and non-
core business opportunities.

The larger a company's debt-equity ratio, the more risky the company is
considered by lenders and investors. Accordingly, a business is limited as to
the amount of debt it can carry.

The company is usually required to pledge assets of the company to the

lender as collateral, and owners of the company are in some cases required
to personally guarantee repayment of the loan.

The main advantages of equity finance are:

Some business angels and venture capitalists can bring valuable skills,
contacts and experience to your business. They can also assist with strategy
and key decision making.

Investors are often prepared to provide follow-up funding as the business

grows.

The principal disadvantages of equity finance are:

Raising equity finance is demanding, costly and time consuming, and may
take management focus away from the core business activities.

Depending on the investor, you will lose a certain amount of your power to
make management decisions.

You will have to invest management time to provide regular information for
the investor to monitor.

There can be legal and regulatory issues to comply with when raising finance,
eg when promoting investments.
(Ordinary Shares, Share Capital, Share Premium, Retained Earning,
Expenses, Profit for the period, Revenue(Sales), Cost of Sales, Invetories,
Depreciation, Interest/tax, Liabilities, Assets, Cash, Trde Payables, trade
Receivables, Accrued Expenses, Prepaid payments,Revaluation Reserves,
Bonus Share, Rights Issue, Goodwill)
Chapter 5:
One Company exercises control over the activities of another. Control arises
because the first company (Parent )owns more than 50 percent of the ordinary
shares/voting power of the second company(Subsidiaries)
Reasons why the groups exist at all and the types of relationships that can exist
Consolidated Account
-Combined of relevant groups of companies
-Relevant companies include parent holding company and its subsidiaries
Small companies- Turnover(not more than 6.5), Balance Sheet valu(not more than
3.26),Employees average(notmore than 50)
Subsidiaries
-Company with controlling Interest(control) in other companies is the holding
company
-Company controlled by holding company are subsidiaries
Controlling Interest
When a company holds more than fifty percent of the voting
right/power(ordinaryshares)
Other means of control
-Holding majority of voting rights at board meetings
Simple Investments
-Less than twenty percent of voting rights
Associaties
-Twenty to fifty percent of voting rights
-No control
No consolidated in group account
Joint Venture
-50% percent voting rights
Not consolidated in group accounts

In some cases, The only assets of the parent company are the shares that it owns in
the subsidiary. The subsidiary owns the land, buildings, machinery,inventories,
Since parent control the subsidiaries, it effectively control the assets
How do subsidiaries/groups arise
The parent company sets up a new company to operate some part of the
business
The parent company buys a majority or all of shares of an existing
company(takeover)

Newly created companies

A company forms a new company
The new company would issue shared to the parent company in exchange for some
asset/ assests of the parent
Takeovers
A parent company by taking over over an existing company.
Acquires/buys more than 50 percent of the ordinary shares of the acquired
company/target
To enable it to exercise control
The bid in takeover will normally take the form of cash, or shares

Q: Why do parent companies not own all the assets directly , instead of
them being owned by the subsidiaries.
-To gain limited liability for each individual subsidiary, Should one subsidiary get into
financial difficulties, this will not impact on fellow subsidiaries.
If there is financial failure of one subsiary, neither of the assets of other subsidiaries
could be legally demanded. The group can ring fence each part of the business by
having separate companies.Own limited liability
-To create/continue apparent independence of each business within the group. A
sense of independence may be created that could in turn increase levels of
commitment among staff.Customers may prefer to deal with what they recognize as
a independent business rather than with a division of a larger business
Chapter6-Financial Statement Analysis
Financial Ratios
Profitability- How well the performance of management in creating/generating
shareholders wealth
-Purpose of Creating wealth for the owners
- Therefore provide some indication /of degree of success in achieving the
Purpose
Efficiency- Efficiency with which (the resources has been used within the business)-
How well a company uses its assets and liabilities internally
Liquidity- Asses if there is sufficient Liquid resources Availableto meet the (Short
term)obligations of the company
-Relationship between liquid resources/cash /cash equivalents/and amounts due for
payment in near future
Gearing-How much the company depends on its borrowings and How risky the
borrowings are-Highlight the extent to which the company uses borrowing and The
risks involved in such borriwng
-Relationship in terms of financing a business- Made by owners and made my
creditors(loans)
-level of gearing has a effect on the level of risk associated with the business
Investment-Asses returns on shareholders investment

Importance of financial ratios

Question 4
A financial ratio expresses the (mathematical relationship) between two or more (statement of
financial position)
Discuss whether or not ratio analysis is useful in understanding how a business has performed.

Yes, provided the underlying information has been accurately and consistently prepared, that the
basic deficiencies of such underlying information are understood, that the ratios themselves are
prepared on a consistent basis, and that they are then used as a guide to what might have
happened.

Ratios give some indication of what and where certain events may have occurred, but the clues
that they provide need to be followed up. It is not sufficient to argue, e.g. that trade receivables
settlement period is now 100 days compared with (say) 50 last year. This apparent fact provides
some valuable information but it is then important to investigate and to explain why the trade
receivables collection period has doubled in such a short time period.
So, it is important to use ratios to interpret what has happened and not to assume that a list of
ratios is sufficient an explanation in itself
Profitability
- Measure performance of management in creating/generating
Shareholders wealth
Return on Equity
Compares the amount of profit for the period (less preference dividend)available to
the owners with their average investment in the business of that period (Average of
the figures for ordinary sharegolders fund at the beginning and at the end of the
year is used)
ExampleROE is much higher for business X than business Y indicating ( A more
efficient use of Xs assets in generating wealth). For every 1 invested in X investors
obtain a return of x compared to only y in the case of Y.
The ratio in year 200Z is very poor by any standards; A bank deposit account will
normally yield a better return
Aim:A business seeks to generate a high value ratio as possible
This is provided that it is not achieved I the expense of jeopardizing the future
returns by taking on more risky activities

Return on Capital Employed(fundamental measure of business

performance/primary measure of profitability)
Measure of business performance plus returns performance in returning to all
suppliers/creditors of long term finance. Expresses the relationship between
Operating profit (before tax and interest)generated for the period and the long term
capital(include long term liabilities) invested in the business
Example:The difference between X and Y is accounted by higher capital
employed/intensity ie ROCE OF manufacturing business has been consistently lower
than that of service over the period.
Aim: Higher ratio is desired. High capital employed for manufacturing results in
lower consistent roce ratio

Average figures for capital employed should be used.

Operating profit margin(Most appropriate measure of operational
performance( Differences arising from how the business is financed will not
influence this measure))
Related the operating profit for the period to the sales revenue
Example, In 2015, for every $1 of sales revenue, an average of 10.8p was left as
operating profit after paying the cost of expenses. By 2016 however, this had fallen
to only 1.8p for every $1.
Aim; Higher ratio is desired. Reason for a poor performance, poor ROE, ROCE ratio is
partially not wholly due to high level of expenses relative to sales revenue.
The Gross profit margin ratio will provide us with information as to how the sharp
decline in the ratio occurred
Gross profit margin(Measure of profitability in buying and selling of goods before
any other expenses)
Relates the gross profit of the business to the sales revenue generated under a
same period.
Example: The decline in ratio means that gross profit was lower relative to sales
revenue in 2016 than it had been in 2015.
This could mean that: the cost of sales were higher relative to sales revenue in 2016
than 2015. Sales price were lower/ purchase price had increase
It is possible that the purchase price and sales price had been reduced but the sale
price having a greater rate of decrease
For each $1 of sales revenue, 22.1p was left to cover other operating expenses in
2015, that in 2015 which was only on 15.3p
Efficiency
Average inventory turnover period( that is if the inventories account for a
substantial/significant proportion of the total asset- retailers,
manafacturers)
Measures the average period for which the inventories are held
Aim:A business would prefer short inventories turnover period to a long one;
because holding inventories has costs-ie depreciation)
Example: on average , the inventories held are being turned over every 56.6 days.
So a carpet bought by the business on a particular day would on average be sold
about eight weeks later
Most appropriate measure of operational performance( Differences arising from how
the business is financed will not influence this measure)
Average settlement period for trade receivables
Indicates how long on average credit customers take to pay the amounts they owe
to the business
Aim:u A business will keep It at a minimum.
Example:Less cash was tied up in trade receivables for each of $1 sales revenue in
2016 than in 2015.
Note: The business figure might be badly distorted by a few large customers who
are very slow or very fast payers
Average settlement period for trade payables
Aim:measures how long on average the business takes to pay thos who have
supplied on credit
Note: can be distorted by the payment period for one or two large suppliers
Example: There was an increase between 2015 and 2016 in the average length of
time that elapsed between buying goods and services and paying for them
Liquidity
Current Ratio(Ideal ratio usually 2times/ 2:1)
Compares the liquid assets of the business with the current liabilities
Aim: Liquidity is vital the the survival of a business, a higher current ratio is
preferable to a lower one.
The more liquid the business, the better. More liquid means sufficient liquid
resources
Example:If a business has a very high current ratio, it may be that excessive funds
are tied up in cash or other liquid assets and are not being used as productively/
Deliberate policy on part of management
If a company has low current ratio, company is having liquidity problems(paying its
suppliers)/Company is actively managing its working capital
A manafacturing business would normally have relatively high current ratio because
it holds inventories of finished goods , raw materials, and work in progress
A supermarket chain will relatively have a low ratio as it will hold only fast moving
inventories of finished goods and its sales
Decline from 2015 to 2016
Acid Test Ratio(represents a more strict test of liquidity)(That is if
inventories cannot be converted to cash quickly-case for excluding this
particular asset in this ratio)
ie. The inventories turnover period is high
Aim: Ratio of more than 1 means sufficient resources to cover short term debt. Less
than one may suggest trouble paying off short tem debts
The acid test ratios is less than one . We can see that liquid current assets do not
cover the current liabilitis, so the business may be experiencing some liquidity
problems
The 2016 ratio is significantly below that for 2015
Gearing
highkights- the extent to which a company depends on borrowings/loan and the
risks including
Gearing ratio
measures the contribution of long term lenders to the long term capital of the
business
Examples:The is and increase in level of gearing over the year
Higher ratio means more higly geared company, The greater the risk that little will
be available as dividend to ordinary shareholders, unable to pay of short term debts
(maybe preference shareholders as well)
Interest cover ratio
measure the amount of operating profit available to cover the interest payable
Aim: The lower the level of operating profit coverage, the greater the risk to lenders
that interest payments will not be met(default)
Ideally cover interest ratio 3-4times
The higher the multiple the less likely the company will run into difficulty
Example:Level of operating profit is considerable higher than the level of interest
payable. A large fall in operating profit would occur before it fails to cover the
interest payable
Asset Cover ratio
Asset cover ratio of less than 2 -Considered to be bigh risk
Higher cover ratio- sufficient current asset + non current to repay loans in the event
of winding up
Dividend payout ratio
measure the proportion of earnings that is paid out to the shareholders in the form
of dividends
ExampleThere is an increase in the ratio over the two years

Dividend Cover ratio

measures the amount of Earnings available to be cover the/ distributed as dividend
payable
Example:The ratio for year 2015 is 4.1 times. This means that the earnings available
for dividend cover the actual divided payable just by over four times
Dividend yield
Relates the cash return from a share to its market value
Helps investors assess the cash return on their investment in the business

Earning per share(Fundamental measure of share performance)

relates the earnings generated by the business -available to the shareholders during
a period- to the number of shares in issue
Example: The trend in earnings per share is used to help asses the investment
potential of a business share

P/E ratio(measure of market confidence in the future of business)

relates the market value of the share to the earnings per share
P/E Ratio is 9.1 times
Example;indicates the market value of the share is 9.1 times the current level of
earnings
Aim: The higher the pe ratio the greater the confidence in the future earning power
of the business, the more investors are prepared to pay in relation to the current
earning power

Advantages
Disadvantages(B
old for
disadvantages in
terms of
accuracy)

Acid Test Ratio Short term lenders and suppliers may become more anxious
by decline in liquidity.
Lead them to press for payment- Further decrease in
liquidity. Causing further problems
Low liquidity implies higher financial risk -may lead to
higher interest payables and eventually bankruptcy
Current Ratio Varies between industries
Gearing Ratio Increaased gearing ratio means increase in risk to
shareholders-Interest paid regardless-Lender/Creditors rank
above shareholders in winding up
Different loan issues may have different priority over
other interest payments/depending on the
agreement