Accounting

Question 1

What is the objective of creating accounts?

Answer 1

To provide information on the companies financial position for; tax & regulation purposes, monitor businesses performance & investment recommendations.

Question 2

Why is the accounting system centrally set

Answer 2

To make it easy to compare for performance, to provide fair tax & regulation system.

Question 3

What are the 5 basic accounting concepts?

Answer 3

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)

Question 4

What are the classifications of business activities

Answer 4

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.

Question 5

Define assets

Answer 5

The economic resources of a company - what the company owns either current assets or non-current assets

Question 6

Define current assets and non-current assets

Answer 6

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

Question 7

Define liabilities and non-current liabilities

Answer 7

Current liabilities: Amounts owed with one yr

Non-current liabilities: Long-term financial obligations, owed later than a yr

Question 8

What is owners equity?

Answer 8

The residual claim on the resources, the companies ‘net worth’. The difference between assets and liabilities.

Includes; capital, additional paid in cap, retained earnings

Question 9

What does it mean if owners equity is negative?

Answer 9

About to go bankrupt, red flag

Question 10

Define both types of income; revenue and gains

Answer 10

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)

Question 11

Define capital expenditures and operating expenses

Answer 11

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

Question 12

Define net income

Answer 12

The amount of money remaining (+ or -) after all costs and expenses have been deducted from total sales.

Also known as the bottom line.

Question 13

Define dividends

Answer 13

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.

Question 14

What does a Balance Sheet present

Answer 14

Presents a company’s financial position at a particular point in time.

Shows assets, liabilities and owners equity.

Assets = liabilities + owners equity

Question 15

What does the Profit and Loss statement show?

Answer 15

Presents the performance of a business for a specific PERIOD of time.

Revenue, expenses & profit/loss

Revenue - expenses

Question 16

What does the cash flow statement provide?

Answer 16

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

Question 17

What are the two most common accounting frameworks?

Answer 17

-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

Question 18

What is an accounts auditors responsibility?

Answer 18

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.

Question 19

Define double-entry accounting & the associated equation

Answer 19

Every recorded transactions affects at least two accounts in order to keep the equation in balance.

Assets = liabilities + owners equity

Question 20

Define the main accrual accounts

Answer 20

-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).

Question 21

What are the most common adjustments to financial accounts

Answer 21

-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.

Question 22

What is the accruals concept?

Answer 22

Fundamental concept in accounting
Income is recorded when earned, not when received & expenses are recorded when incurred, not when paid.

Question 23

What’s the difference between a balance sheet and profit and loss statement?

Answer 23

Balance sheet: snapshot of accounts at that point in time

Profit and Loss: summarises businesses finance across a set time period

Question 24

What is the account equation?

Answer 24

Assets = Equity + Liability

Question 25

What is capital allowance?

Answer 25

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

Question 26

What is a going concern?

Answer 26

A company that is financially stable enough to meet its obligations and continue its business for the foreseeable future.

Question 27

What is a financial statement?

Answer 27

Formal records of the financial activities and position of a business.

Question 28

What is a business plan?

Answer 28

A document setting out objectives and strategies for future growth

Question 29

What is GAAP accounting?

Answer 29

Standardised set of rules on how to account to create uniformity. UK & USA BASIS.

Regulated by FASB.

AMERICAN

Question 30

What are the 8 principles of GAAP?

Answer 30

1. Clarity over business transactions and owners
2. Monetary unit, accounts must be in standard currency
3. Time period, has to be a stated time period
   4.Cost principle, all assets recorded at their cost
4. Full disclosure principle, all info should be given for transparency in accounts
5. Going concern, that the company will continue
6. Matching principle, expense should be recognised in the same accounting period as the related revenues
7. Revenue recognition, revenue should be recognised when earned and NOT when cash received

Question 31

Do uk business have to comply with GAAP?

Answer 31

Yes under the Companies Act 2006

Question 32

How are property assets treated under GAAP?

Answer 32

As intangible assets recorded at fair value

Question 33

What is IAS

Answer 33

International Accounting Standard

Accounting standards set in 1973, now superseded by IFRS (international financial reporting standards)

Question 34

What is the difference between IAS and GAAP?

Answer 34

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

Question 35

Who has to report to IFRS in the UK?

Answer 35

Listed groups

Others can decide

Question 36

Why are accounts audited?

Answer 36

To provide credibility to a set of financial statements

Question 37

What are the techniques used in forecasting?

Answer 37

Qualitative (expert opinions) and Quantitative methods (statistical models)

including the Delphi Method, market research

Question 38

What is benchmarking?

Answer 38

A standard used to measure the change in an assets value over time

Question 39

What are the methods of financial bench marking?

Answer 39

-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

Question 40

What are the essential components of a business plan?

Answer 40

Executive summary
Company description
Market analysis
Competitive analysis
Description of management
Breakdown of products/services
Strategy
Predicted accounts

Question 41

What’s the VAT threshold for registering?

Answer 41

£90,000 turnover