Page numbers in italics refer to figures.
80/20 rule (Pareto principle) 115–116
2008 financial crisis
asset valuations 56–57, 83, 101–102
debt/equity ratios post crisis 199
executive remuneration 230
securitised mortgage loans 98
subsequent changes to financial presentation 104
A
accountability 13
accounting 10
accounting policies 37–38, 132–133
see also reporting standards
Accounting Standards Advisory Forum (ASAF) 29
accounts (financial statements)
Framework characteristics 32–37
requirement for 11
accounts receivable see receivables
accrual accounting 24
impact on financial accounts 92–94, 235–236
see also consolidated accounts; goodwill
ADC (average daily costs) 262–263
adjusted figures 52
ADS (average daily sales) 262–263
Altman, Edward 335
amortisation 88
see also depreciation
analysis, guidelines for 2, 169–181, 333–334
analysts, investment 183–184, 319
annual general meeting (AGM) 13, 49, 311, 316, 321
annual reports
dangers of taking at face value 203–204
requirement for 11
see also accounts (financial statements); balance sheet; cash flow statement; income statement
Argenti, John 336
asset gearing ratio 275, 287–288
current 57, 58–60, 97–99, 248–250
foreign-exchange considerations 79–81
non-current 57, 74–78, 228–229
ownership (leased) ratio 240
quick 254
types 61
working life 238
see also depreciation
Association of Certified Fraud Examiners (ACFE) 43
audit fees 42
auditor’s report 38, 41–43, 45
average daily costs (ADC) 262–263
average daily sales (ADS) 262–263
B
bad or doubtful debts 97–98, 251
capitalised expenses 76
cash balance 145, 247–248, 269
government grants 75
horizontal presentation 59
IAS1 format 61
share options 232
tax 73
vertical presentation 60
working capital 147
bank borrowings 73, 145, 253, 254, 295
see also loans
bankruptcies 40
bear market 290
Beaver, William 334
Belgium 12
Beneish, Messod 337
Black-Scholes-Merton (BSM) option-pricing model 127
board of directors 47–48, 232–233, 316–318, 321–323
books, sets of 135
bull market 290
business model 328
business review (BR) see strategic report
business segments 117
C
Cadbury Committee 46, 122, 124, 315
Cal Micro 326
capital asset pricing model (CAPM) 291, 307
capital expenditure turnover ratios 239–240
capital investment 160–162, 293–295
capital maintenance 129–130, 141, 184–185
capital provision in different countries 280
capitalisation, market 302–303
capitalisation of expenses 76
cash flow 155
cash 99
surpluses 163
see also cash flow; cash flow statement
cash equivalents 99, 145, 146, 253
and profit 109, 153–155, 273–274
see also cash flow statement
cash flow rate of return on assets (CFROA) 271
cash flow rate of return on investment (CFROI) 271
financial management insights 275–277
use in company analysis 164–165
see also funds flow statement
chairman’s statement 48–49, 317–318
charities 11
charts, use of 173
China
accounting standards 26
SEC listings for Chinese companies 94
shareholders 58
stock exchanges 15
CI (comprehensive income) 56, 64, 104–106
Citigroup 128
Co-operative Bank 230
common size presentation 174–176
common stock (US) 66
Companies Act (2006) 123
Companies House, Free Accounts Data Product 18, 311
company history 170
company types 12
general assessment guidelines 308–309
comparative figures 114
competitors 183
comprehensive income (CI) 56, 64, 104–106
Conceptual Framework for Financial Reporting, The 17
consolidated accounts 13–14, 81, 92–97
see also foreign exchange
contingent liabilities 70
controlling shareholders 20
convertible securities 68, 72, 82, 197, 280, 282
copyrights 87
corporate communications 7, 311–315
relationships with the City 318–319
corporate governance 45–48, 125, 315–323
Corporate Governance Code, UK 46–49, 123–124
corporate persona 12
corporate social responsibility (CSR) 313, 329
Court Line 140
Cox, Ross and Rubinstein binomial option-pricing model 127
creative accounting 332
inventory 263
sales revenue 114–115, 250, 325
credit-rating agencies 20
Credit Suisse 98
creditors see trade payables
cross-country comparisons 174–176, 180, 219, 228, 242
cumulative preference shares 67
current assets 57, 58–60, 97–99, 248–249
see also inventory; receivables
current liabilities 57, 59, 72–73, 253–254
see also trade payables
current liquidity ratio 257–260
current purchasing power (CPP) accounting 78
D
Daimler-Benz 15
Daimler-Chrysler merger 94
data comparability and consistency 169–173
debt/equity ratio 274–275, 281–282, 308
debt ratio 274–275, 281–282, 284, 308
debtors see receivables
deep discount bonds 83
defensive interval 263, 272–273
deferred revenue 203
defined benefit pensions 123
defined contribution pensions 122
Deloitte Touche Tohmatsu 7, 39
depreciation 76–77, 129–133, 184–185
funds flow statement 151
policy 238
tax allowable 134
Diageo 88
diminishing balance depreciation 131–132
directors
assessment of 319
costs 122
remuneration 47–48, 124, 128, 223, 229–233, 320–321
turnover 321
see also board of directors
discontinued operations 112
dividend cover 200–205, 276–277, 299
dividend per share (DPS) 298
statement of cash flows 155–156, 162
dotcom businesses 293
double entry book-keeping 10–11, 53
DPS (dividend per share) 298
Du Pont pyramid of ratios 205–206, 235
duality see double entry book-keeping
E
e-businesses 325
earnings per share (EPS) 107, 196–200, 220
earnings yield 300
EBITDA (earnings before interest, taxation, depreciation and amortisation) 52
economic value added (EVA) 213–214
efficiency
guidelines for analysis 244–246
ratios and measures 189–195, 224– 229, 233–237
employee stock options (ESO) see share options
employees
annual reporting details 122
profit perspective 183
use of annual reports 21
Enron 21, 39–40, 96, 312, 323, 332
enterprise management incentives
(EMI) see share options
environmental reporting 23, 313, 329
EPS (earnings per share) 107, 196–200, 220
equity 61, 62–63, 195–196, 279–280, 282
see also retained earnings; share capital
equity method of accounting 97
equity multiplier see asset gearing ratio
equity, statement of changes in (SOCE) 63–64, 66–67
Ernst & Young 39
ethical reporting 313
European Union (EU)
accounting standards 29
EVA (economic value added) 213–214
exceptional items 164
exchange rates see foreign exchange
executive remuneration see directors, remuneration
expenses, capitalisation of 76
cash flow 155
extraordinary items 164
F
F-scores 336
factoring 98
FCF (free cash flow) 218
finance directors 323
Financial Accounting Standards Board (FASB) 3
Financial Conduct Authority (FCA) 15
financial management
Financial Reporting Standards (FRS) 8
financial resource management 243–244
Financial Stability Oversight Council (FSOC) 40
financial statements (accounts)
Framework characteristics 32–37
requirement for 11
finished goods 249
first in first out (FIFO) 120
fixed assets see non-current assets
foreign exchange 79–81, 164, 243–244
France
company names 12
corporate governance 320
gearing 280
Free Accounts Data Product 18
free cash flow (FCF) 218
G
general assessment guidelines 308–309
generally accepted accounting principles (GAAP) 26
geographical segments 117
Germany
company names 12
company tax liability 22
corporate governance 319
gearing 280
going concern principle 24, 45
government
grants 75
treasury notes 127
Gowex 338
graphs, use of 173
Greenbury Code 123
gross profit 121
group accounts see consolidated accounts
H
hedge accounting 83
hindsight 52
HR management, efficiency measures 224–229
HSBC 7
human-asset accounting 23
I
impairment testing (asset values) 99–100
incentive stock options (ISO) see share options
income statement 24
administrative expenses 121
employee costs 122
share options 232
inconsistencies (in ratios) 172
index numbers 177
information sources
annual reports (additional information) 236, 312–315
company financial statistics 170
company websites 18, 173, 221, 311–312
first-hand experience 243
GAAP 26
share prices and indices 303, 304
see also strategic report
Institute of Chartered Accountants in England and Wales (ICAEW) 26
institutional investors 19–20, 204, 233, 318
intangible assets 23, 85–91, 99, 137
integrated reporting 314, 329–330
intellectual property rights (IPRS) 86
interest cover 138, 244, 274, 276–277, 284–285
statement of cash flows 162
International Accounting Standards Board (IASB) 3, 28
International Accounting Standards Committee (IASC) 28
International Accounting Standards (IAS) 8, 30
International Financial Reporting Issues Committee (IFRIC) 29
International Financial Reporting Standards (IFRS) 8, 28–31
International Integrated Reporting Council (IRRC) 314
International Organization of Securities Commissions (IOSCO) 21
intra-group trading 14
inventory 97, 118–121, 202, 249–250, 264
investments
liquid 99
investor relations 18, 48, 311–312
investors see shareholders
IPRS (intellectual property rights) 86
J
Jenkins Report 51
joint ventures 95–97, 112, 283
K
key performance indicators (KPIs) 50, 125, 328
L
last in first out (LIFO) 120
league tables 210
leverage (gearing) 175, 274, 280–289
general assessment guidelines 308–309
liabilities
contingent 70
current and non-current 57, 59, 72–73, 253–254
fair value 56
types 61
limited recourse debt 83
liquid assets 145
liquid resources 99
listing requirements 15–16, 142–143
see also bank borrowings
loss 103
M
M-scores 337
management commentary (MC) see strategic report
management discussion and analysis (MD&A) 9, 314
see also strategic report
market value added (MVA) 213
Marks & Spencer 42, 47, 50, 323, 330
Mars 13
matching 108
MD&A (management discussion and analysis) 9, 314
see also strategic report
media reports 312
merger accounting 94
mergers see acquisitions
minimum lease payments (MLP) 140
minority interest see non-controlling interest (NCI)
money quantification 23
N
NAICS (North American Industry Classification System) 180
net asset value (NAV) per share 292
net operating assets (NOA) 193–194
net operating capital employed (NOCE) 194
nomination committee 317
non-controlling interests (NCI) 14, 93, 103
non-current assets 57, 74–78, 228–229
non-current liabilities 57, 72
non-executive directors 319–320
non-listed companies 8
normalised figures 52
Northern Rock 323
Norwalk Agreement 29
O
off-balance-sheet items 282–283
operating and financial review (OFR)
see strategic report
operating cash flow 158–159, 275
operating profit 129
operating profit margin 187–188
option contracts 85
ordinary shares 66
other comprehensive income (OCI) 104–105
overtrading 73, 109–110, 248, 276
P
participating preference shares 67
payout ratio (dividend) 299–300
peak borrowings 295
Penn Central 334
Piotroski, Joseph 336
pooling of interest 94
preference shares 67
preliminary announcements 143
present value accounting 100–102, 127
price/earnings ratio (P/E) 295–297, 309
price to book ratio 213, 292–293
product financing arrangements 121
profit
absence in value-added statement 216
cash relationship 109, 153–155, 273–274
definitions 103, 107–108, 134, 182
figure to use for ratios 190–191
gross 121
measuring 185
operating 129
retained 65
stakeholder perspectives 182–184
profit and loss account see income statement
profitability analysis
ratios and measures 186–195, 205–210
property, plant and equipment (PPE) 74
prudence see faithful representation
Public Company Accounting Oversight Board (PCAOB) 40
public (limited) companies (plc) 12–13
pyramid of ratios 205–206, 235
Q
qualified report, auditor’s 42–43
quick assets see liquid assets
R
ratios
see also individual ratios
raw materials 249
receivables 97–98, 109, 250–251, 265
redeemable preference shares 67
relevance (of financial information) 32–33
remuneration
directors 47–48, 124, 128, 223, 229– 233, 320–321
see also share options
remuneration committee 124, 317, 320
reporting period 111
see also accounting standards
reserves 68
restatements 113
retailing sector 211–212, 236, 268
retained cash flow per share 201
retained earnings 63, 65, 68, 71, 141, 298–299
retained earnings per share 201, 298–299
return on assets (ROA) 189–192, 207–208
return on capital employed (ROCE) 189–192
return on equity (ROE) 286–288
return on net assets (RONA) 220
return on net operating assets (RONOA) 193–195
return on operating assets (ROOA) 193–195
return on total assets (ROTA) 192–193, 208, 219, 220
return on total tangible assets (ROTTA) 193
revaluation reserves 71–72, 79
revenue reserves 68
reverse takeovers 94
rights issues 199
risk
information in balance sheet 84
payback 293
shareholders 66
see also hedging activities
risk-free interest rate 127
Rite Aid 40
ROA (return on assets) 189–192, 207–208
ROCE (return on capital employed) 189–192
ROE (return on equity) 286–288
Rolls-Royce 334
RONA (return on net assets) 220
RONOA (return on net operating assets) 193–195
ROOA (return on operating assets) 193–195
ROTA (return on total assets) 192–193, 208, 219, 220
ROTTA (return on total tangible assets) 193
Royal Bank of Scotland (RBS) 7
S
creative accounting warnings 114–115, 250, 325
Sarbanes-Oxley Act (SOX) (US) 39–40, 142, 315, 316
securitisation 98
service industry 90
share issues, effect on cash flow 162–163
share options 126–129, 198, 231–232
share (stock) incentive plans (SIPs) see share options
shareholder value analysis (SVA) 217–218
shareholders
governance role 46
institutional investors 19–20, 204, 233, 318
investment return 195–205, 301
profit perspective 183
see also investor relations
SIC (standard industrial classification) 180
significant interest 20
SOCE (statement of changes in equity) 63–64, 66–67
SOCI (statement of comprehensive income) 104, 133
software businesses 113
software for data analysis 173
see also liquidity
source and application statement see funds flow statement
Spain 12
special purpose entity (SPE) 92
staff see employees
statement of accounting policies 37–38
statement of assets and liabilities see statement of financial position (balance sheet)
statement of cash flows 157–164
financial management insights 275–277
use in company analysis 164–165
see also funds flow statement
statement of changes in equity (SOCE) 63–64, 66–67
statement of changes in financial position see funds flow statement
statement of compliance 15, 37
statement of comprehensive income (SOCI) 104, 133
statement of earnings/operations see income statement
statement of financial position (balance sheet) 10, 53–56
capitalised expenses 76
cash balance 145, 247–248, 269
government grants 75
horizontal presentation 59
IAS1 format 61
share options 232
tax 73
vertical presentation 60
working capital 147
statement of profit or loss and other comprehensive income see income statement
stewardship 13
stock see inventory
stock exchanges
indices 290
straight-line depreciation 131
strategic report 9–10, 49–52, 293, 314, 327–331
subordinated debt 83
subprime mortgages 98
see also acquisitions; consolidated accounts
sustainability 329
T
takeovers see acquisitions
tangible assets 74
taxation
accounts submission 11
depreciation 134
financial statement entries 73, 133
gross dividend calculation 300
sales taxes 112
technology investment 307
time value of money 127
total shareholders’ return (TSR) 301
trade payables 73, 109, 266, 268–269
trade receivables 97–98, 109, 250–251, 265
transport sector 237
treasury function 163, 243–244
treasury notes (government) 127
true and fair view see faithful representation
turnover see sales revenue
UK
balance sheet peculiarities 55, 58, 61, 91
company names 12
corporate governance 46–49, 123– 124, 315, 320–323
directors’ remuneration 230–231
directors’ report 124
Financial Conduct Authority (FCA) 15
gearing 280
interim reports 142
listing requirements 15, 24, 45
narrative reporting requirements 314–315
XBRL filing of information 311
UK Corporate Governance Code 46–49, 123–124
underlying figures 52
unit of production depreciation 132
unlisted companies 306
US
accounting standards 8, 26–27, 29
company names 12
gearing 280
interim reports 142
listing requirements 15
Public Company Accounting Oversight Board (PCAOB) 40, 316
reporting standards 9
Sarbanes-Oxley Act 39–40, 142, 315, 316
Securities and Exchange Commission (SEC) 15
XBRL filing of information 311
V
valuation
financial instruments 83
goodwill 88
liabilities 56
value-added measures 213–214, 226–228
value-based management (VBM) 217
variable interest entity (VIE) 92
variations (in ratios) 172
verifiability 36
W
Walmart 329
warranties (product) 69
websites, company 18, 173, 221
weighted average cost method (inventory) 120
work in progress 249
working capital 146–147, 156, 248–249, 260–262
X
Xerox 312
XL Leisure Group 43
Z
zero-coupon bonds 83