Accounting Flashcards
What is GAAP?
Generally Accepted Accounting Principles
What is the benefit/purpose of GAAP?
To standardise and improve the consistency of accounting principles internationally
What are the 10 principles of GAAP?
Regularity R C S P N P C P M U
Consistency
Sincerity
Permanence
Non-compensation
Prudence
Continuity
Periodicity
Materiality
Utmost good faith
What are the International Accounting Standards?
The older accounting standards that were replaced by IFRS in 2001
What is IFRS?
International Financial Reporting Standards
Accounting rules for financial statements for publicly traded companies to make it easier to compare businesses globally.
Why were IFRS introduced to replace IAS?
Goal was to make it easier to compare businesses around the world
Wanted to increase transparency and trust in global reporting
What is IFRS 16?
Effective from 1 January 2019
Requires lessee to recognise assets and liabilities for all leases with a term of more than 12 months
IFRS 16 sets out principles for an IFRS reporter to recognise, measure, present and disclose leases
What is the objective of IFRS 16?
Report information that represents lease transactions
Leases need to be placed on balance sheets
What is depreciation?
The reduction in value of an asset over its useful life. Applied to fixed assets which generally experience a loss in their utility over multiple years
What are the two types of asset?
Fixed (long term) - e.g. land
Current (short term) - e.g. cash/stock
What is amortisation?
An accounting method used to spread the cost of an intangible asset over its useful life
What are the two types of liability?
Fixed (long term) - e.g. not due soon
Current (short term) - e.g. those due within a year
What is tenant covenant strength?
The ability of a tenant to comply with lease obligations
What is the efficiency ratio?
Evaluates how efficiently a company uses assets to generate sales
What is the profitability ratio?
Conveys how well a company can generate profit from its operations (profit DIVIDED by net sales)
What is the solvency ratio?
Compares a company’s debt with its assets, equity and earnings
Suggests whether a company is solvent and can pay lenders debts
What is the liquidity ratio?
A ratio that determines a company’s ability to pay its short term debt obligations
Current assets / current liabilities
How is the liquidity ratio interpreted?
If ratio = 1 they can exactly pay off all liabilities with assets but if lower then they can’t
What are the main commercial credit rating agencies?
Dunn and bradstreet
Moody’s
Standard and poor (S&P)
Fitch Ratings
How was the 3-month rent free period documented with solicitors?
1) Was documented through a side letter (rent concession letter)
2) I inputted the information onto a data change form
3) Actioned by the data team
4) No accounting charges for rent raised for the period (inbetween two quarters)
5) Accounting team allocated correctly on next payment
What is a credit rating?
A numerical assessment of an organisations creditworthiness, based on previous dealings
What are the two parts of a Dunn and Bradstreet rating?
2A - Financial Strength (Based on tangible net worth)
4 - Risk Indicator (Derived from D&B failure score e.g. payment history, employee number, length of operation)
What is a management account?
Internal process of accounting used to account for business transactions
What is a company account?
Documents prepared at the financial year end showing a company’s performance over the account period - Legal requirement under the Companies Act 2006
What does it mean if a company goes into administration?
Company becomes insolvent and is put under the management of licensed insolvency practitioners
What is EBITDA?
Earnings before interest, tax, depreciation and amortisation
- Measure of company profitability
Shows how much cash flow a company has available to pay for long-term debt
What is bankruptcy?
A legal proceeding whereby a person/business is unable to repay outstanding debt and liabilities
What are the 3 tests of insolvency?
Cash flow test - check if able to pay bills in near future
Balance sheet test - check if assets are greater than liabilities
Legal action test - check if legal action has been taken against business for debt of £750 or more - If it has they will be deemed insolvent
What is liquidation?
A process where assets are used to pay off debts via a liquidator
- Leftover money goes to shareholders and company is closed
HMRC is usually paid first, there will be a hierarchy of stakeholders owed
What is receivership?
A court appointed tool that can assist creditors to recover funds in default and help companies avoid bankruptcy
- Aims to return companies to profitability
- Independent receiver appointed by court - they manage companys business
What is the acid test ratio?
Liquidity ratio that measures ability of company to use its quick assets to extinguish its current liabilities immediately
What are the account KPIs related to the 7 day markers?
Day 7 - 80%
Day 14 - 85%
Day 21 - 90%
Day 28 - 95%
What is IFRS and what did it replace?
International Financial Reporting Standards
- Replaced international accounting standards in 2001
What are the goals of IFRS 16?
Ensure that leaseholders provide relevant info that represents their lease
Assess the effect that leases have on financial position, financial performance and cash flows of an entity
What is the result of IFRS 16?
Affects key accounting and financial ratios impacting a companies attractiveness and ability to raise finance
Might result in entities taking shorter leases to reduce debt on the balance sheet
Increase in assets, liabilities and net debt where leases are brought onto the balance sheet
What governs the format of company accounts?
The Companies Act 2006
What is included in company accounts as laid out in Companies Act 2006?
Cover page
Information and contents page
Directors report
Accountants report
Statutory profit and loss account
Balance sheet
Notes to the accountant
What is a balance sheet?
Outlines a company’s assets and liabilities - Shows a sign of their worth
What is a cash flow statement?
Statement providing data regarding all cash flows received from ongoing operations and investments - includes cash outflows that pay for operations/investments
What is a profit and loss account?
Summarises a company’s revenues, costs and expenses during a specific period (These are retrospective)
What is the difference between a company’s profit and loss accounts and their balance sheet?
The Balance Sheet reveals the entity’s financial position, whereas the Profit and Loss account discloses the entity’s financial performance.
A Balance Sheet gives an overview of the assets, equity, and liabilities of the company, but the Profit and Loss Account is a depiction of the entity’s revenue and expenses
What is the difference between GAAP and IFRS?
FRS102 - Most commonly used UK GAAP accounting standard (more cost effective that IFRS)
GAAP is more legally based
IFRS is more principal based
What are the 3 types of financial statements you might come across?
Balance sheets
Income statements
Cash flow statements
What are assets on the balance sheet?
Items the company owns and can provide economic benefit to them
What can be concluded from a balance sheet?
Whether a company is solvent and if it is likely they will still be in business in a year
What are 3 parts of balance sheet?
Assets
Liabilities
Owners equity
What is taxation?
Amount of money or % owed to HMRC eg on company profit
What is directors remuneration in a profit and loss account?
How directors are paid for their services - e.g. fees, salary or dividend
Why do surveyors need to be able to interpret company accounts?
To assess the covenant strength of tenants
When must a company be VAT registered?
If company turnover for last 12 months was over £85k or is expected go over 85k in next 30 days
What is VAT?
Value Added Tax - Consumption tax on goods and services
- Levied at each supply chain stage where value is added
- 20%, 5% (reduced rate for some goods), 0%
Why do companies keep accounts?
Regulatory
Keep track of incomings/outgoings
Compare performance and plan future growth
Why is cash flow statement believed to be the most intuitive of all financial statements?
Follows cash made by business in operations, investment and financing (sum of these is net cash flow)
What is the difference between depreciation and amortisation?
Amortisation focuses on intangible assets (e.g. patent/copyright)
Depreciation focuses on fixed assets
What is the gearing ratio?
Compares some form of owner equity (capital) to funds borrowed by the company (debt to equity ratio)
Can you give me an example of a liability?
Bank loan, unpaid bill, lease
What are net assets?
Value of a companys assets minus its liabilities
What is the difference between financial (company) and management accounts?
Management accounts internal
Financial accounts required by law and must follow format (year end)
Can you tell me what the role of an auditor is?
Inspects organisations financial accounts to ensure they are correct and comply with the law
When are audited accounts needed and why?
All companies require an audit except for small companies with :
- Turnover below £10.2m
- Total assets below £5.1m
- Under 50 employees
Required by law and provide assurance to shareholders
What are the rules for uploading company accounts to companies house?
The deadline for sending accounts to Companies House is 9 months after the end of your company’s financial year. However, your first set of accounts after incorporation will be due 21 months after the date of incorporation
What happens if you file company accounts late or incorrectly?
Incorrectly - registrar will reject them
Late- There is a range of fines depending on the lateness as dictated by the Companies Act 2006
What happens if you file your confirmation statements or Annual Returns late?
The registrar could take action to have your company struck off.
Side note: The confirmation statement is signed by the CFO (or designated director) which confirms a statement of truth that the accounts are accurate. If the company accounts are inaccurate, HMRC will investigate.
Do public limited companies need an audit? (companies listed on the stock exchange)
Yes - By independent auditors or accountants (section 143 of Companies Act 2013)
What is the basis of valuation under IFRS 13?
Fair value
What is fair value?
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 FRS 102?
Financial reporting standard applicable to UK and Ireland
- Applies to financial statements that are intended to give a true and fair view of a reporting entity’s financial position and profit or loss for a period (also applies to public benefit).
When did IFRS 16 changes come into effect?
1st Jan 2019
Why is good financial record keeping important to you?
Easier budgeting
Important for tax purposes
Prevents fraud/theft
Manage cash flow better
Tell me the ways you ensure that Client money is handled properly?
Money is kept in a separate account with ‘client’ in the name - Identifiable
Clients must have access to their money immediately and this account must always be in credit (unless otherwise agreed)
‘3 Way reconciliation’ must be completed once a month where clients money is held in a general client account
Details of the accounts must be provided to the client and agreement must be made in writing if the firm is to retain interest
Accounting systems and client data are securely controlled and protected
What is a 3 way reconciliation?
Workman’s internal ledger is reconciled against the clients ledger, both of which are then reconciled against the bank statement for the month. All of the expected income and outgoings should match.
What RICS guidance or schemes do you adhere to in relation to Client money?
RICS Client Money Handling, 2019 (professional statement)
RICS Client Money Protection Scheme, 2019
How is gross profit calculated?
Turnover (value of a company’s sales) minus the cost of sales
What can be interpreted from gross profit?
Provides an idea of company performance year-on-year when comparing with previous gross profit
What is a better indicator of profit than gross profit?
EBITDA - Calculated by subtracting administrative expenses from gross profit
What is the difference between assets and liabilities known as?
Equity
The net assets
Net worth
Capital of the company
What is revenue?
Income generated by the sale of products or services
What is capital expenditure?
Money spent by business in acquiring/maintaining fixed assets
Are profit & loss accounts current?
No - Retrospective
What is the Limitations Act 1980?
Outlines a time limit which a creditor can chase a debtor for outstanding debts - Only applies when there is no contact between parties for specific period (Usually 6 YEARS)
What is a financial bond?
Fixed income instrument that represents a loan made by an investor, to a borrower
Consequences of insolvency?
Business may go into liquidation and stop trading
Business may go into administration and be sold
What is statutory profit?
The profit that a company is required to report by law in their financial statements according to UK GAAP
What must your company accounts (statutory accounts) contain?
a ‘balance sheet’, which shows the value of everything the company owns, owes and is owed on the last day of the financial year
a ‘profit and loss account’, which shows the company’s sales, running costs and the profit or loss it has made over the financial year
notes about the accounts
a director’s report
Who must your statutory accounts be sent to?
all shareholders
people who can go to the company’s general meetings
Companies House
HM Revenue and Customs (HMRC) as part of your Company Tax Return
What is the difference between depreciation and amortisation?
Amortisation focuses on intangible assets, whereas depreciation focuses on fixed assets
What is an example of a fixed asset?
Plant equipment, land, property - essentially anything that has low liquidity eg hard to quickly turn into cash
What is an example of a current asset?
Stock, cash in the bank - essentially anything that can quickly be turned into cash
What is the difference between GAAP and IFRS?
All U.K companies have to comply with GAAP as per the Companies Act 2006. However, only publicly traded companies have to comply with IFRS.
what is a micro entity?
A company with 2 of the following:
- a turnover of £632,000 or less
- £316,000 or less on its balance sheet
- 10 employees or less
As a micro entity you can:
- prepare simpler accounts that meet statutory minimum requirements
- send only your balance sheet with less information to Companies House
What is the difference between a cash flow statement and a profit & loss statement?
Records revenue and expenses on a month by month/YoY basis which shows if the business is making or losing money. This works on an accruals basis ie recording revenue and expenses when they occurred rather than when the money actually came in or left the account.
A cash flow statement tells you whether you can pay your bills. As a measure of liquidity, a cash flow statement tracks cash inflows and cash outflows on a day-to-day basis and tells you your cash balance at any point in time.
What is the difference between CPI and RPI?
The RPI index contains aspects such as council tax and rates which are excluded from CPI
Is VAT included in a balance sheet or a profit & loss account?
All income and expenses are net of VAT on the profit and loss statement, but VAT is included on the balance sheet when owed
Explain your understanding of the VAT domestic reverse charge for building and construction services.
Applies from 2021 - A VAT-registered business that supplies certain construction services to another VAT-registered business for onward sale is required to issue a VAT invoice stating that the service is subject to the domestic reverse charge.
Difference between turnover and sales?
Turnover does not include bank interest, turnover from sale of assets, VAT or discounts
It is just the income from sale of goods and services
What are the 5 principles of UK GAAP and can you explain them?
- Accruals Principle - Recognise income when it’s earned, regardless of when you receive it and recognise expenses when you incur them, regardless of when you pay them.
- Matching Principle - Spreading the cost of capital expenditure eg plant and machinery over it’s useful life using depreciation.
- Historic Cost principle - Value of capital purchases eg purchasing a building
- Conservatism Principle - Your organisation should make an explicit provision in its accounts for any antipicated expenditure
5.
