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Summary International Financial Accounting (IFA) | IB year 3 | Major finance and control | HvA €4,59
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Summary International Financial Accounting (IFA) | IB year 3 | Major finance and control | HvA
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Summary of International financial accounting (IFA) for the major finance and control at Hva. Includes ratio analysis, consolidation balance and profit&loss, IAS 2,16,36,37,38 23, IFRS15 en 16. These are all the topics discussed during the course, with explanations and examples. Summary is easily r...

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  • 7 januari 2021
  • 24 maart 2021
  • 24
  • 2020/2021
  • Samenvatting

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Voorbeeld van de inhoud

International Financial Accounting
RATIO ANALYSIS

1. Liquidity – the ability of the firm to pay its short-term liabilities
2. Financial risk –information on the relationship between the exposure of the business loans
3. Profitability – how effective the firm is at generating profits given sales and/or its capital assets
4. Assets Management or Efficiency – how effectively the company uses the assets, like employees
5. Financial or Market strength – information to enable decision making on the level of the risk and the
earning potential of an investment

LIQUIDITY RATIOS

Acid test ratio (quick ratio) = (current assets – inventory) / current liabilities  1:1

Current ratio = current assets / current liabilities  2.0 or 1.5 are good ratios

 results from is in times = 1.6/1 = 1.6 times

- want to reduce current assets to increase current ratio, can do by dropping leas trough issuing more
shares so you have money to buy instead of lease

FINANCIAL RISK

Gearing ratio = debt/Capital employed* x 100 = debt to equity ratio = debt/equity x 100

*Capital employed = debt + equity

 The higher the ratio the riskier the business is (ideal 40 to 50%)

Debt= interest bearing liabilities = liabilities you pay interest over  under non-current liabilities

All debts are liabilities, but not all liabilities can be debt

Interest coverage ratio = PBIT (profit before interest tax) / Interest

ideal 3.0 : 1.0

 The higher the ratio  lower risk
 The lower the ratio  higher the company’s debt and greater the risk of bankruptcy of default

PROFITABILITY

Gross profit = revenue – cost of sales

Operating profit = revenue – variable and operating expenses (cost of sales – operating expenses)

Net profit = revenue – total expenses revenue (cost of sales – operating expenses – interest and taxes)

,When cost of sales are too high, could be resolved by finding another supplier, this would increase gross profit
Gross profit margin = gross profit / sales x 100
 The higher the better

Operating profit margin = operating profit (EBIT) / sales x 100
 The higher the better

Net profit margin = Net profit / Sales x 100
 The higher the better

Return on Capital employed (ROCE) = PBIT / Capital employed x 100
 the higher the better

operating profit = EBIT (earnings before interest and tax) = PBIT = profit before interest and tax
Finance cost  interest = add to profit before tax and “interest”

ASSETS MANAGEMENT – PROFOTABILITY

Asset Turnover = Sales / total assets
 explained how efficiently the company is using its assets to generate the revenue / profit (higher better)

if it is low could be because of underpricing.

Net turnover x Operating profit margin = ROCE

Average inventory period = COGS / average inventory (same as just dividing by 2)

COGS (cost of goods sold) =opening inventory + purchases – closing inventory

Inventory period = inventory / cost of sales x 365
 shorter inventory period is better  measures the average number of days’ inventory is held
 inventory turnover measures how many times on average inventory is “sold” during a period

Receivable period = accounts receivable / sales x 365
 shorter the better  ideal is 30 days
 shows how long it takes the business to recover debts

Payable period = accounts payable (AIP) / cost of sales x 365
 the longer the better, because you want to pay at the latest you can

AIP = trade payable


FINANCIAL OR MARKET STRENGTH RATIOS

Earnings per share = profit after tax / number of shares
Price earnings (PE) ratio = market price / earnings per share
 the higher the better
 shows that future performance is going to be positive
 there is a change in the future the stock will grow faster
 higher PE reflects the high confidence of the market

,Look at perspective of potential investor  would like to be PE to be lower because he has to pay more and the
stock is risky if PE is higher


Dividend yield = ordinary share dividend / market price x 100

- Low yield: means company retained large portion of profit to reinvest
- High yield: means risky company or slow growing  better for investor because wants higher dividend

High gross profit margin  means that you do not want to increase your selling price, but you have a better
position with the supplier and good margining which lead to low cost of sales

Operating profit margin  operating expenses are higher and that is why the operating profit is lower than the
gross profit. However, still better than the market

Low liquidity  because of High liabilities, Low assets

Main problem shortage of cash  can be solved by getting more loans to have more cash and still their gearing
ratio will be below the market

,CONSOLIDATION

When one company acquire another running company  net assets of that company are acquired, this is known
as take over

 Normally control comes with more than 50% shares
 The first company has enough voting power to appoint, reappoint, change all the directors of the second
company (50% and voting power)

It’s parent company’s responsibility to make consolidated accounts

 The consolidated statement of financial position should show all assets and liabilities of the parent and
subsidiary
 The intra –groups transactions are excluded  for example, accounts receivables and payables
frommthird parties are shown, but what happens between parent and subsidiary will be not sown


THE MECHANICS OF CONSOLIDATION

W1 – establish the group structure (who acquired who, how much percentage (deel/geheel), what date)

W2 – net assets of subsidiary at acquisition, reporting and post-acquisition: once parent company takes over the
subsidiary company, from that date the subsidiary company can’t issue new shares, which means share capital and
share premium will stay the same, so acquisition will stay some as reporting. (this is a limitation in our course)

Details At acquisition date At reporting date Post-acquisition
Share Capital xxx xxx -
Share premium xxx xxx -
Retained earnings xxx xxx xxx
Fair value adjustment xxx xxx -
Unrealized profit (PUP) - (xxx) (xxx)
Accumulated depreciation - (xxx) (xxx)
Net Assets xxx* xxx xxx**

*Goes to working of goodwill (W3) as “fair value of net assets at acquisition” as “minus”.

**Goes to working of “NCI” (w4) as “NCI % of post-acquisition value”

**Goes to working of “consolidated retained eastings” (w5) as “parents % of net assets post acquisition”.

Revenue = retained earning

Unrealized profit
Profit margin = profit of sale = 20/100 = 20%
Mark up = percentage of profit on top of the cost = 20/120

When subsidiary sells to parent  pup in w2
When parent sells to subsidiary  pup in w5

Profit cannot be counted if it is sold between parent and subsidiary

, Start with cost of investment

Fair value of NCI at acquisition
= share capital at acq x share
price at acq x NCI%




NCI% x w2 post acq
NCI% x impairment loss




% parent x w2 post acq

% parent x impairment loss

pup if parent  sub




Consolidated statement of financial positions (both = parent + subsidiary)

P,p,e (both + fair value adjusted – depreciation ) Equity share capital (parent only!)
Inventory (both – pup) Group retained earnings (w5)
Receivables (both – CIT – intra company transactions) NCI (w4)
Bank (both) Payables (both – intra company transactions)
Cash in transit (CIT) Other loans
Goodwill (w3)
Total assets Total liabilities

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