Accounting Flashcards
What are the three primary types of financial accounts?
Balance Sheet
Profit and Loss Account
Cash flow statement
What does a set of public limited company accounts include (statement, report, account, sheet, c report, r report, other)?
Chairman’s statement
Independent auditor’s report
Income statement (profit and loss account)
Statement of financial position (balance sheet)
Corporate governance report
Remuneration report
Other statutory information
What does a balance sheet (statement of financial position) show, and what are typical assets (4), and liabilities (4), when typically dated?
Statement of the business’s financial position showing its assets and liabilities at a given date, usually at the end of a financial year
* Assets: cash, property, debtors and other investments
* Liabilities: borrowings, overdrafts, loans and creditors
What does a profit and loss account (income statement) show/demonstate, when/where found?
– A summary comparing a business’s income (revenue) and outgoings (expenditure) statements (usually annual)
Demonstrate how the revenue is transformed into the net income - how the actual income the business receives transfers into profit for the year.
On statutory accounts
What does the cash flow statement show, what used for, prepared for what purposes, depth compared to P+L?
Statement showing actual receipts and expenditure (including vat)
Used for budgeting/business plans (reviewing cash flow can identify potential shortfalls in cash balance i.e. where you may not have enough cash in the business to pay suppliers etc.)
Shows whether a company generated cash
Management accounts (prepared for management purposes)
More detail than P+L
What are management accounts?
Prepared for internal use by the business and are not audited - help info internal decision for the company
Who are audited accounts prepared by?
Chartered or Certified Accountant
What IFRS stand for?
International Financial Reporting Standards
What does IFRS 16 require companies to do? What do you know about IFRS 16 (effective from, why introduced, difference in recording info, definitions)?
Full cost of the lease has to be accounted for on the balance sheet. Occupiers obligation to pay rent will have to be recognised as a liability
Effective after 1 January 2019.
Brought in as transparency measure.
All leases over £500/12 months now recorded on balance sheet, as NPV of the full lease cashflow.
- New definitions of financial metrics e.g. Gearing ratio and EBITDA
Is service charge counted as a liability under IFRS 16?
No, service charge payments are accounted for separately
What leases are exempt from IFRS 16?
Leases 12 months or shorter
What is a covenant strength?
Ability of a tenant to meet the covenants of the lease. Includes rents, service charge, repairing and insuring obligations and statutory obligations
What is the difference between current and non-current assets (balance sheet)?
Current = to be converted to cash within 1 year, e.g. a property sold soon.
Non-current = not likely to be converted to cash within 1 year e.g. trademarks, property, plant and equipment
What is the difference between Management Accounts and Audited (Company) Accounts, and what are Statutory Accounts?
Management – prepared for internal use by a business and are NOT audited
Statutory – mandatory for limited companies, generically formatted, requested by HMRC
What is UKGAAP? On what basis are assets valued on?
Generally Accepted Accounting Practice in the UK (UK GAAP) - body of accounting standards published by UK’s Financial Reporting Council (FRC).
The financial reporting framework in the UK is effective from 1 January 2015. (The Red Book was updated with valuations under UK GAAP effective from 1st January 2015).
Valuations for inclusion in financial statements are prepared in accordance with this.
Under UK GAAP an owner occupied property must be valued under EUV or DRC (has this been changed to Fair Value?)
Why is it important to assess the covenant strength (think about valuer responsibilities)?
Affects the perception of risk; particularly in relation to default on leases financial commitments. Knowing a prospective tenant’s covenant strength can help to mitigate risk and help a valuer to comment on suitability for lending.
What can you use to assess covenant strength (2)?
A Dun and Bradstreet report or an Experian report.
How do you communicate covenant strength to the client/with what limitations?
Include details of the result of the report it in the valuation report. We do not send the report to the client.
As surveyors we do not comment as to whether the covenant is good or bad in certain terms, but we comments on how the covenant might be perceived in the market that the asset operates in.
Where is the Net Profit found in the financial accounts?
On the profit and loss accounts (income statement)
What info does D&B gives you and what is the ranging score on D&B?
Provides a report on company reliability and financial stability.
It provides the size and financial strength (5A-H) and a number for risk of business failure (1-4).
Other letters used are N - Negative net worth, O - net worth undetermined, NB - new business and NQ - business no longer trading
What info does D&B report include?
- Company profile
- Business activities
- Company risk and failure score
- Delinquency score (ability on making payments)
- Paydex (how quickly payments are made)
- Rating (Financial strength and risk indicator)
Where does D&B gets its info from?
- Comapny House
- Trade payments from suppliers and vendors that report their experience
- Other public records
How would you test covenant strength yourself?
Net Profit= 3x annual passing rent for 3 years.
Net assets= 5 x rent.
What is an Asset?
Asset - things the business owns that you get a future benefit from e.g. physical assets like property and non-physical assets like brand and goodwill.
