Accounting Flashcards
What is the objective of creating accounts?
To provide information on the companies financial position for; tax & regulation purposes, monitor businesses performance & investment recommendations.
Why is the accounting system centrally set
To make it easy to compare for performance, to provide fair tax & regulation system.
What are the 5 basic accounting concepts?
Business identity, going concern (considered the entity will continue to operate), monetary period (only money is recorded), accounting period (monthly, quarterly or annually) and accrual (income recorded when earned & expenses incurred)
What are the classifications of business activities
Operational: day to day business function (sale of goods/purchase/paying rent)
Investing: Aqusition and disposal of long-term assets.
Financing: Activities of obtaining/ repaying capital. Main sources of funds are owners & creditors.
Define assets
The economic resources of a company - what the company owns either current assets or non-current assets
Define current assets and non-current assets
Current assets: cash & other assets that are expected to be converted to cash within a yr.
Non-current assets: Purchased for long-term use. Not likely to be converted into cash in less than a yr
Define liabilities and non-current liabilities
Current liabilities: Amounts owed with one yr
Non-current liabilities: Long-term financial obligations, owed later than a yr
What is owners equity?
The residual claim on the resources, the companies ‘net worth’. The difference between assets and liabilities.
Includes; capital, additional paid in cap, retained earnings
What does it mean if owners equity is negative?
About to go bankrupt, red flag
Define both types of income; revenue and gains
Revenue; Income that arises in the course of ordinary activities of entity & accounts for sales, fees, interest, dividends, royalties & rent.
Gains; Other items that meet def of income but are not rev because they do not form part of normal operations of the business or they are non monetary (positive prop revaluations)
Define capital expenditures and operating expenses
Capital expenses: costs directly relation to improvements of the property. Cash outflow
Operating expenses: Those related to the maintenance of the property. These reduce profits as they come out of incoming producing
Define net income
The amount of money remaining (+ or -) after all costs and expenses have been deducted from total sales.
Also known as the bottom line.
Define dividends
The amount that is distributed to the owners of the business if retained earnings are positive and there is enough cash to do so.
Real Estate Investment Trusts (REITs) must pay out at least 90% of their property rental income to SH to maintain their tax exemption.
What does a Balance Sheet present
Presents a company’s financial position at a particular point in time.
Shows assets, liabilities and owners equity.
Assets = liabilities + owners equity
What does the Profit and Loss statement show?
Presents the performance of a business for a specific PERIOD of time.
Revenue, expenses & profit/loss
Revenue - expenses
What does the cash flow statement provide?
Provides information about the changes in cash & cash equivalents of an entity for a reporting period (net cash flow).
Showed separately for each business activity.
CF from operations, CF from investing, CF from financing
What are the two most common accounting frameworks?
-The US Generally Accepted Principles (US GAAP) - Applicable to US companies & its subsidiaries - no specific def for invest prop thus prop held as PPE.
-International Financial Reporting Standards (IFRS) - Internationally adopted and the required standard by EU companies - properties recognised at cost & depreciated over time
What is an accounts auditors responsibility?
Checking if the financial statements comply with adopted accounting principles & examine the company’s accounting control systems.
Confirms reported values and identifies any material errors in the financial statements.
Define double-entry accounting & the associated equation
Every recorded transactions affects at least two accounts in order to keep the equation in balance.
Assets = liabilities + owners equity
Define the main accrual accounts
-Unearned revenue; when business receives cash before providing goods/services.
-Accrued Revenue; When the business provides goods/services before receiving cash.
-Prepaid Expenses; When the business pays with cash ahead of time for the anticipated expense (cash decrease)
-Accrued Expenses; When the business owes cash for expenses it has incurred (expenses increase).
What are the most common adjustments to financial accounts
-Net asset value: Same as owners equity but NAV assumes fair value = adjustment
-Net operating income: Measures net cash generated by an income producing prop. NOI = recurring rental/other income minus all non-recoverable operating expenses.
-Funds from operations: If a prop is carried at cost FFO is used. Allows for analysation of CF obtained from prop ownership.
-Earnings: Revaluation of prop = if revaluation gains are subtracted and revaluation losses subtracted.
What is the accruals concept?
Fundamental concept in accounting
Income is recorded when earned, not when received & expenses are recorded when incurred, not when paid.
What’s the difference between a balance sheet and profit and loss statement?
Balance sheet: snapshot of accounts at that point in time
Profit and Loss: summarises businesses finance across a set time period
What is the account equation?
Assets = Equity + Liability
What is capital allowance?
A form of tax relief for businesses. Allows all or some of the value to be deducted of an item (plant & machinery) from profits prior to paying tax.
I.e - equipment, machinery, business vehicles
What is a going concern?
A company that is financially stable enough to meet its obligations and continue its business for the foreseeable future.
What is a financial statement?
Formal records of the financial activities and position of a business.
What is a business plan?
A document setting out objectives and strategies for future growth
What is GAAP accounting?
Standardised set of rules on how to account to create uniformity. UK & USA BASIS.
Regulated by FASB.
AMERICAN
What are the 8 principles of GAAP?
- Clarity over business transactions and owners
- Monetary unit, accounts must be in standard currency
- Time period, has to be a stated time period
4.Cost principle, all assets recorded at their cost - Full disclosure principle, all info should be given for transparency in accounts
- Going concern, that the company will continue
- Matching principle, expense should be recognised in the same accounting period as the related revenues
- Revenue recognition, revenue should be recognised when earned and NOT when cash received
Do uk business have to comply with GAAP?
Yes under the Companies Act 2006
How are property assets treated under GAAP?
As intangible assets recorded at fair value
What is IAS
International Accounting Standard
Accounting standards set in 1973, now superseded by IFRS (international financial reporting standards)
What is the difference between IAS and GAAP?
IAS is a principle approach
GAAP is rule based
Ie GAAP recognises assets at fair value and ISA recognises them only if they have future economic benefit
Who has to report to IFRS in the UK?
Listed groups
Others can decide
Why are accounts audited?
To provide credibility to a set of financial statements
What are the techniques used in forecasting?
Qualitative (expert opinions) and Quantitative methods (statistical models)
including the Delphi Method, market research
What is benchmarking?
A standard used to measure the change in an assets value over time
What are the methods of financial bench marking?
-Performance - gathering and comparing quantitive data.
-Practice - qualities data gathered about an activity
-Internal - one years accounts against another’s
-External - comparing one company against another often similar
What are the essential components of a business plan?
Executive summary
Company description
Market analysis
Competitive analysis
Description of management
Breakdown of products/services
Strategy
Predicted accounts
What’s the VAT threshold for registering?
£90,000 turnover
