2 - Accounting Principles and Procedures Flashcards
This competency covers the basic principles of accounting and the interpretation of company accounts in order that reasoned advice can be given to clients
Accounting Principles and Procedures - Extract from Candidate Guide - Aug 2018 (updated Feb 2022)
What is a balance sheet ?
The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time, typically annually.
Profit and loss account
The profit and loss statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period
What is taxation ?
The amount of money or % that is owed to HMRC based on the company profit.
What is revenue?
Income generated by the sales of the product or services.
What is capital expenditure ?
Money spent by a business or organisation on acquiring or maintaining fixed assets such as land, buildings and equipment.
What is auditing ?
Term used to describe the examination and verification of a company’s financial records.
Performed to ensure that financial statements are prepared in accordance with the relevant accounting standards.
Prepared internally using GAAP or IFRS and developed to provide useful information to stakeholders, creditors, customers, suppliers
What is a ratio analysis ?
Method of gaining insight into a company’s liquidity, efficiency and profitability by studying its financial statements.
Common examples;
• Liquidity Ratios - Measure a company’s ability to pay off its short-term debts.
• Solvency Ratios - Compare a company’s debt levels with its assets, equity, and earnings.
• Profitability Ratios - These ratios convey how well a company can generate profits from its operations.
• Efficiency Ratios - Also called activity ratios, efficiency ratios evaluate how efficiently a company uses its assets to generate sales and maximize profits.
What is credit control ?
System used by businesses and central banks to make sure that credit is given only to borrowers who are likely to be able to repay it.
What is profitability ?
Measure of an organisation’s profit relative to its expenses.
What is insolvency?
When a business can no longer meet your financial obligations, ie not enough money coming in to match money going out.
What is VAT ?
The standard rate of VAT increased to 20% on 4 January 2011 (from 17.5%).
Some things are exempt from VAT, such as postage stamps, financial and property transactions.
The VAT rate businesses charge depends on their goods and services.
What is a balance sheet?
A balance sheet is a document that shows what the financial status is of a company at any given point. It will show all assets, liabilities and shareholder equity details. Assets are used to generate wealth and generally something owned by the company such as properties, cash, plant, equipment etc. The asset will have a market value which can appreciate or depreciate. The liability is what is owned against the asset. The difference between the two is the equity of the company.
Where might you find information on a company assets ?
On a balance sheet
What is a balance sheet?
It is a snapshot of a companies financial status showing the assets, liabilities, shareholders equity at any given point.
What is a balance sheet?
The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time.
What is a balance sheet?
A Financial statement of the Company’s assets, liabilities and equity at a point in time.
What does a balance sheet tell you?
It tells you how much the company owns (assets) and owes (liabilities).
What is a cashflow statement?
The cash flow statement (CFS) measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. The cash flow statement complements the balance sheet and income statement.
What is a cash flow statement?
An account of how much liquidity a company has. It will show how much cash comes and goes from a company. It is used to show short term viability of a company and its ability to pay off any liabilities. Three main components of cash flow are operations of the business, investment (changes in assets, equipment etc. - cash out) and financing (changes in debt, loans, dividends – cash in)
What is included in cash flow? Net cash flow, returns on investment, taxation, capital expenditure, equity payments, management of liquid resources, financing.
What is a cashflow statement?
A financial statement that shows all the cash inflow a company receives from operations and external investment. It also shows cash outflow that pays for business activities during a given period.
What is a profit and loss account?
A profit and loss account is one of the financial statements of a company and shows the company’s revenues and expenses during a particular period. It indicates how the revenues are transformed into the net income or net profit.
What is a statement of profit or loss?
A document which shows the amount of income generated against the expenses made during a specified period.
What is a profit and loss statement ?
The profit and loss statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.
What is a profit and loss statement?
This is an account of how much profit a loss has made over a period of time. It will show how much income is being generated by a company against any expenses which are subtracted.
What is included in a P&L statement? – turnover, profits, expenses, taxations, dividends.
What is the difference between a profit and loss sheet and a balance sheet ?
The Profit and Loss account is the statement of income and expenses which shows the net profit and loss for the particular period.
Balance sheet is the statement of assets, liabilities and capital which showing the actual financial position of an entity at a certain point in time.
What is the difference between a profit and loss statement and a balance sheet?
A profit and loss shows the income and expenditures of a company and resulting profit or loss.
The balance sheet shows what a company owns (assets) and what it owes ((liabilities) at any given point.
What is a profit and loss account?
A financial statement comparing the income (revenue) and outgoings (expenditure) with adjustments for any liabilities etc. to identify the profit or loss a company has made over a specific period.
What is included within a profit and loss account?
Income, expenditure, plus any adjustments for liabilities.
Are profit and loss accounts current?
No, they are retrospective.
What are management accounts?
Management accounts are prepared for internal use generally to record, plan and control a company’s activities and help with decision making processes such as purchasing new assets or employing staff etc.
What are company accounts?
Company accounts are legally required from all incorporated companies under the Companies Act 1989. They are prepared for external parties (HMRC, banks etc) to show the performance over a period and help prevent fraud, ensure that cashflow is managed, provide evidence for borrowing purposes etc.
What is Capital Expenditure?
Expenditures creating future benefits, it is incurred when a business spends money to buy fixed assets or to add to the value of an existing asset.
When should a company be registered for VAT ?
If the company a VAT taxable turnover to be greater than £85,000 in the last 12 months or in the proceeding 30 day period.
What is the threshold for being registered to VAT ?
£85,000
How much does VAT rise?
2.5% (17.5% increased to 20%)
Give me an example of different VAT rates ?
Standard rate=20%
Reduced rate=5%
Zero rate=0%
Can you give me some example of standard rate VAT items ?
The majority of things.
Can you give me some example of reduced rate VAT items ?
Renovating or altering an empty house or flat reduced rate
Supplying and installing certain mobility aids for elderly people reduced rate
Supplying and installing certain energy saving materials and equipment reduced rate
Can you give me some example of zero rate VAT items ?
Supplying or installing goods for a disabled person in their home zero
Making alterations to suit a disabled person zero
What is domestic reverse charge ?
The domestic reverse charge is a VAT procedure that was implemented in the UK on March 1st 2021 for construction services. Under the domestic reverse charge procedure, the buyer (contractor) accounts for the VAT rather than the supplier (subcontractor). this is try and account for missing VAT payments
Who does Domestic Reverse charge apply to ?
Main Contractors and Subcontractors.
When did the domestic reverse charge come into affect ?
1st March 2021.
What is VAT ?
Value Added Tax
What is the VAT reverse charge ?
The customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier if they are VAT registered and part of the Construction Industry Scheme (CIS) - see flowcharts for further info
What does EBITDA stand for ?
EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and its margins reflect a firm’s short-term operational efficiency. EBITDA is useful when comparing companies with different capital investment, debt, and tax profiles.
Give me some examples of how you forecast your individual fee income.
- Consideration of pipeline
- Framework contracts
- Upcoming projects
- Scheduled appointments
What is accounting?
It is the process of keeping financial accounts of something.
What are company accounts?
Legal requirement submitted to HMRC. It is a record of the companies financial performance
What are management accounts?
These are produced for internal usage for particular requirements such as calculating acquisitions. It can be in any format for the purposes of what it is needed for.
How do you deliver healthy cashflow?
- Ensure cash coming in is greater than that going out
- Working within my competence
- Financial forecasting
- Good client care
What does a Dun and Bradstreet report show?
It compiles business information to measure the creditworthiness of a company. They are the business equivalent of a credit report check. It will colour code the companies financial status from green, red or orange/yellow to show their risk.
What are the limitations of a Dun and Bradstreet Report?
It is limited only to the latest submitted documents on companies house.
Why do companies keep accounts?
For regulatory purposes, to keep track/record of outgoings and in goings and compare performances and to plan future growth.
How are fee proposals prepared?
A fee proposal is prepared using an estimate of the time required to carry out a job multiplied by the cost of your hire on an hourly rate. A percentage will then be added for company overheads.
What is goodwill?
An intangible asset that arises when a buyer acquires an existing business. It represents assets that are not separately identifiable.
What is bankruptcy?
The legal process where people or companies who cannot repay debts may seek relief from the government of their debt. It is court ordered. It stays on your financial record for up to 10 years
What is receivership?
The process in which a ‘receiver’ is appointed by a creditor to liquidate company assets to allow creditors to recoup their money.
What is retention and why do we keep this?
Retention is the withholding of a percentage of a contract sum to ensure the contractor properly completes the activities required within the rectification period.
What is solvency?
The possession of assets in excess of liabilities; ability to pay one’s debts.
What is meant by the terms Gross and Net?
In salary terms, Gross is the total salary and net is salary minus tax and all other deductions.
What is meant by depreciation in relation to an asset?
Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are furniture and IT equipment.
What is a Dun and Bradstreet Report ?
The Dun and Bradstreet report is one of the most popular credit reports for businesses. Dun and Bradstreet (D&B) is a credit reporting agency that collects public and private information to produce a comprehensive credit profile. D&B also provides business credit scores called PAYDEX® scores that range from 1 to 100
What are the main types of ratio analysis used to assess a company’s financial strength?
Liquidity the ability of the company to pay its way (solvency). More companies fail due to cash flow than any other reason.
Current Ratio = Liquid assets / Liabilities Investment/shareholders information to enable decisions to be made on the extent of the risk and the earning potential of a business investment.
Return on Investment (ROI) = (Gain Cost) / Cost€¢ Gearing information on the relationship between the exposure of the business to loans as opposed to share capital.
Net Gearing = Net Debt / Equity Profitability how effective the company is at generating profits given sales and/or its capital assets.
Gross Margin = Gross profit / Net Sales Financial the rate at which the company sells its stock and the efficiency with which it uses its assets.
Asset Turnover = Net Sales / Total Assets
Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?
- For assessing the financial strength of contractors and those tendering for contracts
- For assessing competition
- To assist with business operations
- When setting up a new firm
What is insider trading?
The trading of a public company’s stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company.
What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a scheme created by HM Revenue & Customs (HMRC) for tax from contractors and subcontractors. The scheme is designed to minimize tax evasion within the construction industry. Contractors deduct tax from payments to subcontractors. All contractors and subcontractors must register with the scheme before work starts.
What does a Dun and Bradstreet report show?
It compiles business information to measure the creditworthiness of a company. They are the business equivalent of a credit report check. It will colour code the companies financial status from green, red or orange/yellow to show their risk.
What is a dun and bradstreet report ?
