Accounting Principles Flashcards
What are the 3 different types of financial statement?
- Balance Sheet
- Income Statement (Profit and Loss Statement)
- Cash Flow Stateme
What does a balance sheet set out?
Sets out a firm’s financial position including asset’s and liabilities at a given date, e.g cash and accounts receivable, property, plant and equipment
what does a set of company accounts normally contain?
- Chairmans statement
- independent auditors report
- income statement (profit and loss)
- Statement of financial position (balance sheet)
- Corporate Governance Report
- Remuneration report
- other statutory info
What is IFRS 16 and why does it matter to property?
IFRS 16 came into effect in 2019 and it changed the way that leases are recorded on the balance sheet. Previously the cost for renting property would have been recorded on the income statement, affecting profit. Now a lease is recorded as a depreciating liability on the balance sheet.
How short does a lease have to be for IFRS 16 not to apply?
A. If a lease is shorter than 12 months.
What is the difference between a management and statutory account?
Management accounts are prepared for internal use and are not audited whereas statutory accounts are prepared by a chartered accountant or certified accountant.
What does a Dun and Bradstreet report show?
It shows their assessment of a company’s financial strength. I use the ratings to then determine how the investment market might perceive the covenant strength. However I cannot judge the company’s financial position as I am not qualified to do so.
What does an income statement (profit and loss statement) set out?
Sets out a firm’s revenue, expenses and net income e.g sales figures, operating expenses and admin fees
What is a D&B credit score made up of?
Financial Strength - Indication of size of the subjects tangible net worth. D&B ratings 5A to HH ratings.
Risk Indicator - range of 1-4 (1=low risk & 4 = high risk)
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
GAAP are standards that encompass the details, complexities and legalities of business and corporate accounting
The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its approved accounting methods and practices
What accounting framework do UK companies have to comply with?
UK companies must comply with either International Financial Reporting Standards (IFRS) or UK GAAP
What is covenant strength and how do you assess it?
Covenant strength in real estate refers to a tenant’s ability to comply with and observe the covenants outlined in their lease.
To assess covenant strength you can use:
- The Profits Test
- Financial reporting services e.g Dun and Bradstreet Report
What is the Profits Test?
The profits test is whether the net profit of the business has been 3 times the annual rent of the property for 3 consecutive years
What is the role of an auditor?
To provide a professional and independent opinion of a businesses financial statements
When are audited accounts needed and why?
UK companies have to have their accounts audited once a year unless they are exempt.
The purpose of an audit is to form a view on whether the information presented in the financial report reflects the financial position of the company
