Accounting Principles Flashcards
What is the difference between a profit and loss account a balance sheet and a cash flow statement?
Balance Sheet – Is a snapshot showing a businesses financial position at a point in time. It shows the businesses assets, liabilities and equity at a given date, usually at the end of the financial year. It is prepared after a P&L
Profit and Loss Account – Is an account, which summarises the businesses income and expenditure over a period of time. It is a detailed account showing how revenue is transferred into net income and how actual income received turns into profit.
Cash flow statement – Shows the actual cash flow for the business over a period of time – usually monthly for the year ahead.
What is IFRS 13 and what does it say?
International Financial Reporting Standards 13 defines FAIR VALUE and sets out a framework for
measuring fair value
States that when measuring fair value, a valuer uses the assumptions that market participants
would use when pricing the asset or liability under current market conditions, including
assumptions about risk.
In your submissions, you mentioned that you recognise the covenant strengths, how would you
assess this?
Bank, previous landlord reference, could request the last 3 years of audited accounts.
Or use the profit test which requires the net profit of the tenants business to be 3x the rent for
3 consecutive years.
Dun and Bradstreet Report – Provides scores and rating to help identify organisation that are likely to fail or pay late, they look at if they are paying suppliers in time
Are you qualified to give a view on covenant strength?
No I can only provide a market view based on a market perception of that tenant
You use IFRS 16 tell me about it?
Have to identify the lease under both the asset and liability
What is an asset/liability?
Asset = something you you own that can provide future economic benefit
Liability = Something you you owe. (financial debt or obligation i.e loans, mortgages)
How do public limited company accounts differ?
Their accounts are made public
How do you work out net profit?
Net asset value = (total assets less total liabilities)
What are the contents of a limited company’s accounts?
Turnover less all operating
What do companies need to provide every year in accordance with the Companies Act 2006?
prepare accounts for the company for each of its financial years, which give a “true and fair view”.
Tell me what you know about taxation?
Corporation Tax =
Business have to pay on profits – levied on a company’s income or capital by the government
Like income tax for companies
As soon as business makes profit they MUST pay corporation tax
Personal Tax=
Personal income tax is a direct tax paid by individuals to the government on their personal income coming from monthly salaries and wages.
VAT =
Tax on goods and services. Levied to the price at the time of production
As a general rule, the sale or lease of a commercial property is exempt from VAT, which means neither a purchaser nor a tenant would have to pay VAT. That exemption extends to the exchange of interests in, rights over or licences to occupy commercial properties.
Briefly tell me about insolvency?
A situation where a firm OR individual has a negative net worth and their liabilities outweigh their assets.
Creditors may ask companies to restructure and if not declare bankruptcy.
What are the main types of ratio analysis used to assess a company’s financial strength?
Liquidity – the ability of the company to pay its way (solvency). More companies fail due to cash flow than any other reason.
Investment/shareholders – information to enable decisions to be made on the extent of the risk and the earning potential of a business investment.
Gearing – information on the relationship between the exposure of the business to loans as opposed to share capital.
Profitability – how effective the company is at generating profits given sales and/or its capital assets.
Financial – the rate at which the company sells its stock and the efficiency with which it uses its assets.
What is the difference between management and financial accounts?
Management accounts are for the internal use of the management team. Financial accounts are the company accounts required by law.
Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?
- For your own business accounts.
- For assessing the covenant strength of potential tenants and landlords.
- For assessing the financial strength of contractors and those tendering for contracts.
- For profits-method valuations (for leisure properties).
- For assessing competition.
