Abc_Corporte_Collaspe

The ABC of a corporate collapse Glossary of terms Term Accounting standards ASIC - The Australian Securities and Investments Commission Asset Cash reserves Child care benefit rebate Conflict of interest Corporate governance Creditors Current asset Current liability Definition The guidance provided by the professional bodies to assist members in the preparation and presentation of financial statements. Under Corporations Law publicly issued financial statements must be prepared in accordance with Australian Accounting Standards. An independent government body overseeing all corporate activity in Australia. ASIC seeks to protect investors and consumers by ensuring company directors conduct themselves ethically and in accordance with corporations law. A resource controlled by the entity from which future economic benefits (e.g. generation of future cash flow, exchanged for an asset, used in settling a debt) are expected to flow. Cash on hand or on deposit that is readily accessible by the entity. A sum of money payable from the federal government to subsidise the cost of child care in registered in approved child care centres. A conflict between public responsibility and self interest. The procedures designed to ensure a company is managed in the interests of its shareholders Outside parties to whom a debt is owed. An asset whose future benefit is expected to be used up within the next 12 months or within the normal operating cycle e.g. cash, receivables, inventory. A liability due for settlement within the next 12 months or within the normal operating cycle e.g. payables, mortgage payments due within the next year. A liquidity ratio that compares current assets with current liabilities as an indication of the entity’s ability to meet short term debt. The lower this ratio the more likely it is that the entity may not have the resources to meet its short-term debts when they fall due. A gearing ratio that compares total liabilities to total equity as an indication of the entity’s relative reliance on debt to finance assets. The higher this ratio the greater the entity’s reliance on debt and therefore the greater the exposure to risk. The systematic allocation of the depreciable amount of an asset over its useful life. Depreciation is an expense charged against profit. Distributions of company profits to shareholders. Costs arising in the course of ordinary activities e.g. cost of sales, wages, rent, advertising. Expenses usually take the form of an outflow or depletion of assets such as cash, inventory or property, plant and equipment. Current ratio Debt to equity ratio Depreciation Dividends Expenses Term Definition The price at which property could be exchanged in an arm’s length transaction between a buyer and seller who are both knowledgeable and willing. Fair value is determined without any reduction for sale or disposal costs. The best evidence of fair value is by reference to current market prices in an active market for similar properties in the same location and in the same condition. Cash inflows and outlfows associated with the raising and repaying of debt and equity e.g. proceeds from share issues and loans, repayment of loan principal. An intangible asset recognised when the purchase price of an acquired business exceeds the fair value of the net assets in that acquired business. Goodwill reflects the purchaser’s expectation of future cash flow from the acquired business. The agreed value at the time an asset is first recognised by the entity, typically its purchase price at the acquisition date. An expense recognised when an asset is written down to its recoverable amount. An identifiable non-monetary asset without physical substance e.g. child care licence, patents and trademarks. Goodwill is an intangible asset but treated as a special case compared to other intangibles. Cash inflows and outlfows associated with the acquisition and disposal of non-current assets and other businesses e.g. acquisition of child care centres, proceeds from disposal of property, plant and equipment. A component of equity valued according to the proceeds of all prior share issues. An agreement whereby the owner of an asset conveys to another party the right to use that asset for an agreed period of time in return for a payment or series of payments. The use of borrowed funds (i.e. debt) to finance an investment. The debt to equity ratio is a measure of leverage. A present obligation to an outside entity requiring settlement by, for example, the payment of cash or the provision of a service. The ease with which an asset can be converted into cash. An entity needs liquid assets to meet debts when they fall due. The price at which a company’s securities are first listed on a public exchange e.g. the ASX. A loan taken out to invest in shares where the security provided by the borrower is their existing shares. The ‘margin’ is the agreed loan-to-value ratio (LVR) i.e. the maximum allowable ratio of the borrowed amount in relation to the total investment. A margin call is triggered when the loan-to-value ratio (LVR) is exceeded. The borrower is required to either lodge additional security or, more likely, repay the loan so that the LVR is restored. This may require the borrower to realise some of their investment to raise the necessary funds which may be problematic since the decline in the investment’s value is what triggered the margin call in the first place. Where cash outflows exceed cash inflows. A situation where the liabilities in a company exceed the assets. This would normally result in the company being wound-up. Also known as net income, the excess of revenue over the expenses for the same period. An asset whose future benefit is expected to be used up beyond the next 12 months or beyond the normal operating cycle e.g. property, plant and equipment. A liability due for settlement beyond the next 12 months or beyond the normal operating cycle e.g. mortgage loan payments due beyond the next year. Fair value Financing / funding cash flows Goodwill Historical cost Impairment Intangible asset Investment activities Issued capital Lease Leverage Liability Liquidity Listing price Margin loan Margin call Negative cash flow Negative equity Net profit Non current asset Non current liability Term Operating cash flows Ordinary activities Owners equity Profitability Raise capital Receivership Definition Cash inflows and outflows primarily derived from the principal revenue-generating activities of the entity e.g. receipts from customers, payments to suppliers and employees. Those activities associated with generating the primary source of revenue. The residual interest in the assets of the entity after deducting all its liabilites i.e. the shareholders’ claim against the company’s assets. The rate at which profit is generated. Measured by comparing profit against some other base such as equity, total assets or revenue. Generating cash inflow through the issue of shares. Where an independent person is appointed by a secured creditor or creditors (or by the courts) to take control of some or all of the company’s assets. The aim of the receiver is to raise sufficient funds to meet the secured debts by liquidating assets as necessary. The process of incorporating in the financial statements an item that satisfies the criteria of an asset, liability, revenue or expense. In this context, the fair value of an asset i.e. the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. A transaction which involves a transfer of resources, services or obligations between entities (including persons) not considered independent of one another. Accounting standards are very clear on the need for full disclosure of the nature of any such transactions and relationships. The accumulation of all profits (and losses) net of any dividend distributions since the entity commenced. A profitability ratio that compares profit against total shareholders’ equity. It provides an indication of the entity’s success in providing a return to its investors. When calculating the ROE of ABC Learning for the 2006 financial year, the Profit attributable to members of the parent equity figure from the Income Statement is divided by Total equity figure from the Balance sheet. Income arising in the course of ordinary activities e.g. sales, fees, interest, royalties. The process of meeting principal and interest obligations associated with debt. Also known as a statement of comprehensive income, income statement or profit and loss statement, a financial statement that summarises the entity’s revenue and expenses (gains and losses) over a specified period to derive the net profit or loss. A financial statement that sumarises cash inflows and outflows categorised according to operating, investing and financing activities and derives the net change in cash held by the entity. Also known as a balance sheet, a financial statement that summarises an entity’s assets, liabilities, and owners’ equity at a specific date. An exchange of goods or services. Transactions may be for cash or on credit. When a transaction is recorded (i.e. recognised) it will impact on the information presented in financial statements. An accounting process which reduces the dollar amount at which an asset is disclosed in the balance sheet. Depreciation and impairment are both examples of a write down. Impairment of goodwill, for instance, will occur if the value of an acquired business decreases. Recognition Recoverable amount Related party transactions Retained profits Return on equity Revenue Service debt Statement of financial performance Statement of cash flows Statement of financial position Transaction