6 - Accounting Principles and Procedures Flashcards
210 - What is VAT? (2)
1) Value Added Tax
2) VAT is a CONSUMPTION TAX placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
211 - What is corporation tax? (2)
1) Corporation tax is paid BY BUSINESSES in the UK.
2) Calculated on their ANNUAL PROFIT in a similar way to income tax for individuals.
212 - What is an audit? (2)
1) PROCESS used to CHECK a person or companies COMPLIANCE with POLCY, PROCEDURES and REGULATIONS.
2) Audits are PERFORMED TO ASCERTAIN the VALIDITY and RELIABILITY of information; also, to provide an assessment of a system’s internal control.
213 - What is turnover? (2)
1) INCOME or REVENUE that a company receives from its normal business activities.
2) Usually from the SALE OF GOODS and SERVICES to customers.
214 - What are management accounts?
Accounts PREPARED BY a COMPANY for INTERNAL MANAGEMENT USE, or accounts prepared for a tender, such as a bank to evaluate how the business will repay funding. Management accounts will NOT be AUDITED EXTERNALLY.
215 - What is the difference between management and financial accounts? (2)
1) Financial accounting is meant for EXTERNAL STAKEHOLDERS.
2) Management accounting is presented INTERNALLY.
216 - Why does a business keep company accounts? (3)
1) TAX PURPOSES (required by law)
2) DEMONSTRATES the companies FINANCIAL STANDING (supports loan or borrowing applications).
3) To ensure CASH FLOW and PROFITABILITY in a company is being CORRECTLY MANAGED.
217 - What is an escrow account? (2)
1) A SEPARATE ACCOUNT owned by a THIRD PARTY, held on BEHALF of two other parties.
2) Can be used as a PROJECT BANK ACCOUNT.
218 - What is a project bank account? (3)
1) RINGFENCED bank account (the money is held in escrow).
2) Ensures contractors, key subcontractors and key members of the supply chain are PAID on the CONTACTUALLY AGREED DATES.
3) Usually, MECHANISMS are in place for the RELEASE OF FUNDS (such as payment certificates).
219 - What are overheads? (statement + 4 points)
The INDIRECT COSTS or FIXED EXPENSES of OPERATING a BUSINESS such as;
1) Rent / leasing costs
2) Utility bills
3) Staff salaries
4) Insurance
220 - Explain the principle of tax depreciation?
Tax depreciation is the DEPRECIATION EXPENSE CLAIMED by a taxpayer on a tax return to COMPENSATE for the LOSS IN the VALUE of the TANGIBLE ASSETS. Examples include property, plant and equipment.
221 - Name three types of accountancy ratios? (3)
1) LIQUIDITY RATIOS - The organisation’s ABILITY to turn ASSETS INTO CASH in order to pay debts.
2) PROFITABILITY RATIOS - Used to assess a business’ ability to GENERATE EARNINGS RELATIVE TO its revenue, operating costs, balance sheet assets, or shareholders equity over time, using data from a specific point in time.
3) GEARING RATIO - Measure the PROPORTION of a company’s BORROWED FUNDS to its EQUITY. The ratio INDICATES the FINANCIAL RISK to which a business is subjected, since excessive debt can lead to financial difficulties.
222 - What is financial leverage? (2)
1) Financial leverage is an INVESTMENT STRATEGY of USING BORROWED MONEY.
2) Specifically, the use of VARIOUS financial instruments or borrowed capital to INCREASE the potential RETURN of an investment.
223 - What are capital allowances?
The practice of allowing taxpayers to get TAX RELIEF on their TANGIBLE CAPITAL EXPENDITURE by allowing it to be deducted against their annual taxable income.
224 - What are the key financial statements / documents that companies produce? (3)
1) Profit and loss account
2) Balance sheet
3) Cash flow forecast
225 - Can you explain the difference between “gross” and “net” in accounting terms please?
Gross refers to the TOTAL amount of INCOME BEFORE DEDUCTIONS, while net is the TOTAL AFTER DEDUCTIONS or ADJUSTMENTS.