Accounting Flashcards
s
What are the three types of financial statement you may come across relating to a company?
The 3 financial statements provide an ongoing record of a company’s financial condition and are used by creditors, market analysts and investors to evaluate a company’s financial soundness and growth potential..
1) P & L shows if company is profitable. Revenues – Expenses = P/L? Shows where savings could be made in costs and expenses.
2) Balance sheet shows what company is worth. Also what it owns and owes. Show how effective management are at using resources.
3) Cash-flow statement - shows flow of money in and out of the business.
Tell me about the balance sheet statement.
“A balance sheet is a snapshot of a business’s financial position at one moment in time. It gives us information as to what are the assets and liabilities of the business. It provides a basis for computing rates of return and evaluating the company’s capital structure.
Assets – liabilities = equity
Fixed Assets (e.g. buildings, cars)
Current Assets (e.g. stock, debtors)
- Current liabilities (e.g. creditors, loans)
= Net assets/ Working Capital (C.A. – C.L.)
Financed By: (Amount of money invested, e.g. shareholders equity and long-term loans)
Retained earnings (previous profit reinvested)
= Capital Employed.
Importance of Balance Sheet
- The Value of the business’s fixed assets.
- Working capital indicates if there is enough cash available
- Financed By tells if they can take out more loans.”
Tell me about the cash flow statement.
A cash flow statement is a financial statement that provides combined data regarding all cash inflows (from ongoing operations and external investment sources) and cash outflows (pay for business activities and investments) during a given period.
The cash flow statement draws a picture of all the transactions that go through the business.
The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways—through operations, investment, and financing.
These three different sections of the cash flow statement can help investors determine the value of a company’s stock or the company as a whole.
Section 1) Operations- includes transactions from all operational business activities.
Section 2) Investment gains and losses
Sections 3) Financing - Overview of cash used from debt and equity.
= Net cash flow.
Tell me about the profit and loss statement.
Calculates the profit that the business makes in a year.
Done on a spread sheet.
The International Accounting Standards sets the format that a profit and loss account must follow.
1) Trading account: works out the business’s greoss profit by subtracting te cost of making or buying the products from the money made by selling them.
2) Profit & loss account: works out the net profit by subtracting the costs of the business from the gross profit. Net profit is money made after expenses have been paid.
Sales
(Cost of Sales)
= Gross profit
(Expenses)
Net profit.
Importance of P& L
1) Low gross profit says prices are too low
2) Low gross profit says paying too much for materials
3) Low net profit says business expenses are too high
4) Size of net profits indicates how much can be paid out for dividends & reinvestment.
What is an asset / liability?
Assets are the items your company owns that can provide future economic benefit. Liabilities are what you owe other parties. In short, assets put money in your pocket, and liabilities take money out!
Property should only be recognised in an entity’s financial statements if it meets the definition of an asset and satisfies the following criteria for recognition:
• It is probable that any future economic benefits associated with the item will flow to the entity; and
• The cost of the asset can be measured reliably.
Can you give me an example of fixed assets/ current assets/ current liabilities?
Fixed Assets (e.g. buildings, cars) Current Assets (e.g. stock, debtors) - Current liabilities (e.g. creditors, loans
What is the difference between financial and management accounts?
Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company.
How do companies know which reporting framework to comply with?
The new UK & Ireland GAAP standard is FRS 102.
This is a simplified IFRS standard developed by the International Accounting Standards Board (IASB) for non-publicly accountable entities.
IFRS’s International Accounting Standards’ (IAS’s) are published by IASB. The IASB is a predecessor of the International Accounting Standards Committee (IASC) and the Accounting Council (AC).
The focus of the new IAS’s has been to reduce complexity and cost for companies, while introducing a coherent and succinct set of standards
Which reporting framework do public limited companies have to comply with?
Public limited companies and private limited companies prepare annual financial statements in accordance with Parts 6/17 of the Companies Act 2014. All financial statements filed with the CRO must be prepared in accordance with the Companies Act 2014.
How would you assess the financial strength of an entity, e.g. for a valuation?
Look at the three financial statements and calculating certain ratios.
A company’s worth is based on its market value.
To determine market value, a company’s financial ratios are compared to its competitors and industry benchmarks.
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
A set of common rules that a company must follow for financial reporting so that external parties (investors / creditors) can evaluate financial reports from different companies and know that they are based on common principles.
GAAP is country dependant.
1) Local GAAP (e.g. USA has their own)
or else
2) IFRS (more than 100 countries have adopted this including the EU and Ireland).
Can you tell me about a common financial measure?
IFRS Accounting Standards International Financial Reporting Standards
What is the acid test?
Also known as the quick ratio. It is used to indicate a company’s ability to pay off its current liabilities. It is the current assets - inventories / current liabilities.
What is the ROCE?
Return on capital employed. It shows the company’s profitability and capital efficiency. Operating earnings/ capital employed.
What is the working capital ratio?
Also known as the current ratio/ liquidity ratio. It shows how liquid the company is.
Current Assets / Current Liabilities
What is the gearing ratio ?
This ratio compares some form of owner equity (or capital) to funds borrowed by the company.
Debt/ Equity.
What is the net assets per share ratio? What does it tell?
Net assets (total assets on the balance sheet less total liabilities) divided by the number of equity shares in issue.
An increase in net assets per share by means of a share buyback, for example, may lead to an increase in the market value of a company’s shares.
Why are audited accounts needed?
Audited accounts are imortant to add credibility to the reported financial position and performance of a business. Audited accounts give the shareholders confidence that the accounts are true and fair. It can also help to improve a company’s internal controls and systems.
Can you tell me what the role of an auditor is?
An auditor is a person that is accredited with the right to assess, evaluate and validate the accuracy of commercial accounts of the organisation. The auditor also guarantees the organisation’s compliance with tax regulations.
Auditors evaluate the financial actions of the company that employs them and make certain of the smooth running of the organisation.
Internal auditing e.g. by accounts and GDPR
External auditing e.g. by PSRA
