Accounting principals and procedures Flashcards
What are the three types of financial statement you may come across relating to a company?
Balance sheet - A balance sheet shows a company’s assets, liabilities and equity at a specific point in time. It can be used to assess its financial position or health, and be compared with previous balance sheets to identify trends.
Cash Flow Statement - Shows cash moving into and out of a company for a specific period, and is generally broken down into cash relating to operations, to investment and to financing. The statement will show the net cash-flow position, which helps assess liquidity and shows changes in assets, liabilities and equity.
Profit and Loss Statement - Shows the income and expenditure of the company over a specific period, culminating in the net profit or loss made. The profit and loss statement can be used to calculate the company’s profit margin; that is, how efficiently the company is converting revenue into profit.
What is an asset / liability?
Asset - any resource that a business owns or controls. It’s anything that could be sold for money.
Liability - A liability is something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services.
Give me an example of an asset / liability?
Asset - Equipment
Liability - Business loan
What is the difference between financial and management accounts?
Financial accounting looks at the past and is for an external audience, whereas management accounting is based on current and future trends and is for internal use.
How would you assess the financial strength of an entity, e.g. for a valuation?
Analyse the companies three financial statements.
Balance Sheet - By looking at the balance sheet, you can get an idea of how much money the company has, as well as its assets and liabilities. This can help you gauge whether it has enough cash on hand to meet its financial obligations.
One other key area you’d want to look at is the cash flow statement. The cash flow statement shows how much money comes into and goes out of a company over a specific time period.
Another key measure of a company’s financial status is the income statement. The income statement shows how much revenue a company has earned over a specific period of time. It measures a company’s profitability in terms of how much profit or loss it has made.
Can you tell me what the role of an auditor is?
The auditor’s objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes the auditor’s opinion.
When are audited accounts needed and why?
A company must carry out a statutory audit once a year for every year they are not exempt. If in one year the company becomes a small company and would be ordinarily exempt from audits, they will still need to continue to complete an audit. If in the following year the company remains as a small company, then they may apply for exemption by using the exemption statement on their balance sheet.
How do public limited company accounts differ to private?
public companies have 6 months in which to file their annual accounts as opposed to private companies which have 9 months.
Tell me something you understand from the Companies Act 2006.
The Companies Act became law in 2006 and was established for a variety of reasons:
To simplify the administration of companies.
To improve the rights of company shareholders.
To update and simplify corporate law.
To join the systems of Great Britain and Northern Ireland together.
Why is good financial record keeping important to you?
Following careful record keeping procedures can also help you with tax returns and prevent fraud or theft. Using a good record keeping system will help you to:
track expenses, debts and creditors
apply for additional funding
save time and accountancy costs
pay tax, accurately and on time, avoiding penalties
apply for and receive the correct amount of benefits or credits
Tell me three ways you ensure that clients’ money is handled properly.
I don’t personally have involvement with handling clients money, however:
Hold all client money in an exclusively controlled client money account
Ensure that the account only contains client money paid into it, including any sums paid in to replace money withdrawn in error (plus accrued interest)
Not hold office money in a client money account unless it is a receipt of mixed monies where the office money is awaiting transfer
Ensure that the account name includes the word ‘client’ and the name of the firm, in addition to discrete client money accounts including an identifier such as the client or property name
Confirm the bank operating conditions in writing, including confirmation that the bank will not set-off or counterclaim against the client money account for any sum owed to it by another account held by the firm
What RICS guidance or Schemes are you aware of relating to clients money?
Client money handling
RICS professional standard, UK
1st edition, October 2019
