Building block 3: Understanding accounts in .NET Deploy Data Matrix ECC200 in .NET Building block 3: Understanding accounts

Building block 3: Understanding accounts generate, create datamatrix none with .net projects Scan GS1 BarCodes Table (cont.). Financing activities This category covers the net effect of any changes in long-term borrowings and any cash raised through the issue of new shares or any spend on repurchasing existing shares. Dividends paid are also included here because, unlike interest on debt, dividends do not reduce profit..

These three steps allow o datamatrix 2d barcode for .NET ne to build the bridge between profit and cash and so complete the third main accounting statement. By convention all cash inflows are shown with a positive sign while cash outflows are negative.

The bridge between profit and cash is then: Cash flow13 = profit + operating activities + investing activities + financing activities Dealing with assets that are not wholly owned So far this section has implicitly assumed that all assets are 100% owned. This provides a good starting point for understanding accounts but life is not that simple! The various conventions that are applied in order to produce accounts for companies that own shares in other companies are referred to as the principles of consolidation. A set of accounts that looks beyond the so-called parent company s holdings of shares in other companies through to the underlying assets and activities would be called a set of consolidated accounts.

These principles of consolidation represent the final element of accounting mystery that the uninitiated need to grasp in order to gain a basic understanding of accounts. One might imagine that if a company owned just a given percentage of another company then that percentage of all of the financial numbers would be shown in the consolidated accounts.14 I am afraid, however, that this is not what is usually done.

Accountants make a big distinction between activities that are controlled and activities that are not. Control typically comes with ownership. In many companies if you own just one share more than half of the issued shares then you can force through a vote and so legally have control.

In some companies, however, the articles of association set different rules concerning control such as requiring, say, a two thirds majority to change strategy. In such a situation, 60% ownership would not bring control..

13 14. Cash flow is the change i barcode data matrix for .NET n cash during the period. For example, if you own 20% of a company, why not show in your accounts 20% of the company s sales, costs, assets, liabilities, etc.

If this approach is adopted it is referred to as proportional consolidation.. The five financial building blocks The table below gives a b gs1 datamatrix barcode for .NET rief summary of the main principles of consolidation. It describes how a holding company will show in its consolidated accounts the results of a company in which it holds any given degree of ownership.

Basic principles of consolidation. Extent of ownership 100% Control but not full ownership Accounting treatment This is the simplest situation. All items are shown as they are. In the income statement, 100% of sales and costs are shown.

One deduction is made for the so-called minority shareholders share of net profit. Likewise 100% of the various balance sheet items are shown with one deduction representing the minority shareholders share of equity.15 The holding company s share of net income will be shown as a single line item called, typically, earnings from associates.

The balance sheet will show just the net investment again as a single line. This will equal the original investment in the company plus the share of any retained earnings since the share was purchased.16 All that will be shown is dividends received (contributing to the income statement) and the original investment at cost as part of the balance sheet s fixed assets section.

. Substantial ownership but not control Low ownership17 There is a lot of logic b .net vs 2010 datamatrix 2d barcode ehind these various principles of consolidation but they do mean that full and accurate interpretation of accounts requires some skill. In particular it is necessary to know what principles of consolidation have been applied and what ownership category each investment fits into.

The principles of consolidation can lead to situations where accounts can be open to some degree of manipulation as some items can become what is called off balance sheet or a small change in ownership can result in a large change in reported sales revenue. So for example, debt in a company of which a holding company holds a one third share will not appear on the holding company s balance sheet. If two other companies also own one third of this company then none of its debt will be reported.

. This does mean, for examp le, that a company may own just three quarters of a company but will have to show all of its debt on its balance sheet and all of its sales revenue as sales. So the sales revenue of a company that is, say, 40% owned will not be shown in the consolidated accounts of the holding company. All that will be shown is the 40% share in net income.

The retained earnings will be equal to the holding company s share of net profit less any dividends received. This refers to situations where the shareholding is less than 20%..

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