Accounting Principals Flashcards
What does GAAP stand for?
Generally Accepted Accounting Principles
What does GAAP refer to?
Common set of accepted accounting principles, standards and procedures that companies and accountants must follow when they compile financial statements.
What is the standard format of company accounts?
Cover page
Information and contents page
Directors report
Accountants report
Statutory profit and loss account
Balance sheet
Notes to the accounts
Detailed profit and loss account
What does a balance sheet do?
Tells us how much a company is worth, how healthy is it and whether its shares reflect these factors. Shows businesses assets and liabilities at given date.
What are fixed assets?
Anything around for long time i.e. equipment belonging to company like computers.
What are current assets?
Monies owed to company i.e work in progress invoices
What is the difference between assets and liabilities?
This is equity/net assets/net worth or capital of company.
What is a Profit and Loss Account?
A Financial statement summarising the revenues, costs and expenses incurred during specific period. Provides clear picture of company’s financial performance and profitability over that period.
How is Operating Profit calculated?
Gross profit - operating expenses
What does EBIT mean?
Earnings before interest and tax
How do you calculate Net Profit?
EBIT - Interest Expense and Taxes
What is the typical structure of a Profit and Loss Account?
Revenue
Cost of Goods Sold
Operating Expenses
Operating Profit
Non-Operating Income and Expenses
Earnings before interest and taxes
Interest and Taxes
Net Profit
Earnings per share
Other Comprehensive Income
How is earnings per share calculated?
Net profit divided by number of outstanding shares.
What is a Cash Flow Statement?
Tells us how much money is running through a company at any time.
What are the 3 basic stages of a cash flow statement?
- Tells how much money coming from operating activities.
- Company will then add or subtract cashflows from non-business activities e.g. interest payments on loans.
- Cashflows from financing are taken into account.
What is the difference between GAAP and IFRS?
GAAP is rule based and IFRS is principles based.
What is the ‘Profits test’?
Net profit for business must be 3x the rent for 3 consecutive years.
Run through profit and loss account?
Revenues
Less cost of Goods sold
=Gross Profit
Less Operating Expenses
= EBITDA
Less Tax and Depreciation
=Net Profit
Go over a balance sheet structure?
(Fixed Assets plus Current Assets)Less Total Liabilities and shareholder’s equity
What does IFRS 16 do?
Results in increase on balance sheet due to leases being brought in as either asset or liability.
Describe a balance sheet?
-Only produced at end of financial year.
-Deals with assets and liabilities
-Shows how much company is worth
-Company is solvent if assets more than liabilties
Describe profit and loss account?
Summary of income expenditure
Sales less expenses = profit
Only get net profit when deduct tax
Tells us how much business is making
Better indication of profit is EBITDA
Describe cash flow?
-Tells us how much money is running through business at given time.
-Normally seen in business plan.
-Can be used to analyse future costs or expenses predicted for company.
What is the difference between the 3 main financial statements?
Balance Sheet - Shows financial position
P/L Account - Shows financial performance
Cashflow Statement - How much money running through company
What is ROCE and how is it calculated?
Return of Capital Employed.
Operating profit / Capital employed
Measure of how well business has generated a profit.
How is current ratio calculated?
Current assets/ current liabilities
What is the acid test?
(Current assets - inventory)/current liabilities
