Accounting Principals

Question 1

What does GAAP stand for?

Answer 1

Generally Accepted Accounting Principles

Question 2

What does GAAP refer to?

Answer 2

Common set of accepted accounting principles, standards and procedures that companies and accountants must follow when they compile financial statements.

Question 3

What is the standard format of company accounts?

Answer 3

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

Question 4

What does a balance sheet do?

Answer 4

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.

Question 5

What are fixed assets?

Answer 5

Anything around for long time i.e. equipment belonging to company like computers.

Question 6

What are current assets?

Answer 6

Monies owed to company i.e work in progress invoices

Question 7

What is the difference between assets and liabilities?

Answer 7

This is equity/net assets/net worth or capital of company.

Question 8

What is a Profit and Loss Account?

Answer 8

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.

Question 9

How is Operating Profit calculated?

Answer 9

Gross profit - operating expenses

Question 10

What does EBIT mean?

Answer 10

Earnings before interest and tax

Question 11

How do you calculate Net Profit?

Answer 11

EBIT - Interest Expense and Taxes

Question 12

What is the typical structure of a Profit and Loss Account?

Answer 12

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

Question 13

How is earnings per share calculated?

Answer 13

Net profit divided by number of outstanding shares.

Question 14

What is a Cash Flow Statement?

Answer 14

Tells us how much money is running through a company at any time.

Question 15

What are the 3 basic stages of a cash flow statement?

Answer 15

1. Tells how much money coming from operating activities.
2. Company will then add or subtract cashflows from non-business activities e.g. interest payments on loans.
3. Cashflows from financing are taken into account.

Question 16

What is the difference between GAAP and IFRS?

Answer 16

GAAP is rule based and IFRS is principles based.

Question 17

What is the ‘Profits test’?

Answer 17

Net profit for business must be 3x the rent for 3 consecutive years.

Question 18

Run through profit and loss account?

Answer 18

Revenues
Less cost of Goods sold
=Gross Profit
Less Operating Expenses
= EBITDA
Less Tax and Depreciation
=Net Profit

Question 19

Go over a balance sheet structure?

Answer 19

(Fixed Assets plus Current Assets)Less Total Liabilities and shareholder’s equity

Question 20

What does IFRS 16 do?

Answer 20

Results in increase on balance sheet due to leases being brought in as either asset or liability.

Question 21

Describe a balance sheet?

Answer 21

-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

Question 22

Describe profit and loss account?

Answer 22

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

Question 23

Describe cash flow?

Answer 23

-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.

Question 24

What is the difference between the 3 main financial statements?

Answer 24

Balance Sheet - Shows financial position
P/L Account - Shows financial performance
Cashflow Statement - How much money running through company

Question 25

What is ROCE and how is it calculated?

Answer 25

Return of Capital Employed.

Operating profit / Capital employed

Measure of how well business has generated a profit.

Question 26

How is current ratio calculated?

Answer 26

Current assets/ current liabilities

Question 27

What is the acid test?

Answer 27

(Current assets - inventory)/current liabilities