Accountancy Principles Flashcards
What are the three types of financial statement you may come across relating to a company?
Income Statement (Profit and Loss)
Financial Statement (Balance Sheet)
Cashflow Statement
What is an asset?
A resource that a company owns or controls. Asset can be cash, investments, properties.
What is the difference between financial and management accounts?
Financial are to be audited and reported publicly.
Management are for internal purposes and are not audited.
What do you understand by the term Generally Accepted Accounting
Principles (GAAP)?
A set of accountancy reporting standards that govern the presentation of financial statements. They provide a common framework to promote consistency, transparency and ability to compare companies
What is a liability?
Something which a company or entity owes. For instance, borrowings, loans, overdraft, debtors
Which reporting framework do public limited companies have to comply with?
It depends on the jurisdiction of the country or region the PLC is in. In UK, it is the IFRS.
How would you assess the financial strength of an entity, e.g. for a
valuation?
Analyse profitability, cashflow, liquidity, asset quality,
Can you tell me about a common financial measure?
Profit Margin = Net Income / Annual Sales
What is the Acid Test?
Measures short term liquidity and ability to pay short term debts quickly.
(Cash + Cash equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities
What is ROCE or ROI?
Return on Capital Employed
Ability of company to generate profits from capital invested into operations.
ROI = Profit / Assets
What is Working Capital Ratio or Current Ratio?
Companies ability to cover its short term obligations with its current assets
Current Ratio = Assets / Liquidity
What is Gearing Ratio or Debt to Equity?
Companies debt compared to equity
Gearing Ratio = Total Debt / Equity
What is net assets per share
NAV of a common share of a company.
= total shareholders equity - preferred stock / number of common shares outstanding
Can you tell me the role of an auditor?
Independently examine financial statements, providing objective opinion on accuracy
When are audited accounts needed and why?
Typically its a statutory requirement to have audited accounts, they provide an independent and objective analysis on the financial health of a company.
How do PLC’s accounts differ?
Depending on location and jurisdiction they have more public disclosure, IFRS & GAAP standards, auditing requirements, annual reports.
Tell me something you understand from the Companies Act 2006.
Sets out the requirements for preparation and presentation of financial statements including GAAP or IFRS.
Tell me what it means to prepare accounts in accordance with IFRS.
Must adhere to guidelines set by the International Accounting Standards Board.
Consistency and Comparability
Fair Presentation
Use of International Standards
Principles based approach
Disclosure Requirements
Fair Value Measurement
What is the difference between UK GAAP and IFRS?
nUMBER OF PAGES!
Leases - IFRS indicates leases 12 + months must be considered asset or liability. FRS 102 finance lease or an operating lease.
Intangible Assets - IFRS = indefinite. But FRS 102 no longer than 10 years
Goodwill - IFRS = Not amortised. FRS 102 amortised on systematic bases, no long er than 10 years.
Property - FRS 102 decide whether to capitalise or expense borrowing costs. IFRS costs are always capitalised.
and under IFRS company can hold an investment on depreciated cost or fair value. FRS 102 indicates have to have it as fair value.
What is the basis of valuation under IFRS 13?
Fair Value.
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
What is fair value?
The price that would be received to sell an asset or transfer liability in an orderly transaction between market participants at the measurement date.
What has changed in relation to lease accounting / IFRS 16?
Changed how leases are reported in financial statements. Leases have to be recognised as an asset or liability if they are 12 months or longer. Recognised the right of use of the asset.
When did the change of lease accounting / IFRS come into effect?
January 2019
What is FRS 102?
Financial Reporting standard applicable in the UK and ROI
