Accounting Principles

Question 1

What accounting regulations are you aware of?

Answer 1

• Corporation Tax Act 2009 (To restate certain enactments relating to corporation tax including tax on profits, accounting periods, expenses etc)
• UK-adopted International Accounting Standards (41 standards including cashflows, financial statement, revenue etc)
• Companies Act 2006 (Simplify administration, improve rights of shareholders, update corporate law)
• Late Payment of Commercial Debts (Interest) Act 1998

Question 2

What is the current corporation tax rate?

Answer 2

25% - For 2023, as of 1st April 2023 (Jump up from 19% in 2022)

Question 3

What is the difference between revenue and profit?

Answer 3

Revenue is the income earned by a business from its operations

Profit is the amount of money left over after deducting all expenses from revenue

Profit = Revenue - Expenses

Question 4

What is the difference between Management Accounts and Financial Accounts?

Answer 4

Management Accounting - Provides information to people within an organisation (Is not required by law)

Financial Accounting - Provides information to those outside an organisation (Is required by law)

Question 5

What is the difference between ‘Profit & Loss Statements’ and ‘Balance Sheets’?

Answer 5

Profit and Loss Statements - (Set period of time) - Show the company sales, running costs and the profit and loss that it has made over the financial year. The income statement summarizes the total revenue, expenses and profit or loss incurred during this set period of time.

Balance Sheets - (one given point in time) - Show the value of everything the company owns, owes or is owed on the last day of the financial year. The balance sheet summarizes the financial position of a company for one specific point in time. It reports the value of all assets, liabilities and equity as at a given date.

Question 6

What is cash flow?

Answer 6

Cash Flow = Cash entering a company - Cash leaving a company

Used to analyse the financial health of a company or project

Often referred to as ‘company life blood’

Question 7

What are cash flow statements?

Answer 7

A financial statement that shows how changes in balance sheet accounts and income affect cash

Records the amount of cash and cash equivalents entering and leaving a company

Question 8

What can cash flows tell you?

Answer 8

• Viability of a business
• Size of overdrafts / borrowing required
• Early warning of a downturn in business
• Customers taking too long to pay
• Excess cash that may be better used
• Incentive to get money in quicker

Question 9

What is a budget?

Answer 9

A budget is a financial plan for a defined period (often one year) or a defined activity (project). It Includes:
- Planned sales volumes and revenues
- Resource quantities
- Costs and expenses
- Assets, liabilities and cash flows

Question 10

Why are budgets / budgeting used?

Answer 10

• Used by Companies, governments, families and other organizations to measure strategic plans of activities or events (projects)
• Provide financial focus to aid decision making and the co-ordination of activities
• Provide guidance and a benchmark from which to measure performance

Question 11

What is a financial forecast?

Answer 11

A fiscal management tool that presents estimated information based on past, current, and projected financial conditions.

Question 12

How do financial forecasts helps a business?

Answer 12

Help to identify future revenue and expenditure trends that may have an immediate or long-term influence.

Question 13

What is the importance of maintaining accurate financial records for a project?

Answer 13

• Enables the project team to track project costs and budgets
• Identify potential financial risks or issues
• Make informed decisions about resource allocation and cost
• For auditing purposes

Question 14

What is ratio analysis?

Answer 14

Fundamental analysis that links together the three financial statements (profit and loss statements, balance sheets, and cash flow statements) commonly produced.

Figures are comparable across sectors. Helps investors to understand a company’s attractiveness based on competitive position, financial strength and profitability.

Question 15

What is liquidity?

Answer 15

The efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price

Question 16

What is liquidity ratio?

Answer 16

The ratio of current assets to current liabilities.

This ratio indicates a company’s ability to pay its short-term bills.

Current Assets:Current Liabilities - The ideal ratio is 2:1 (if it’s 1:1 could imply a firm is not able to meet’s debts quickly)

Question 17

What is solvency?

Answer 17

The possession of assets in excess of liabilities; ability to pay one’s debts.

Question 18

What is solvency ratio?

Answer 18

Solvency ratios indicate financial stability because they measure a company’s debt relative to its assets and equity.

A company with too much debt may not have the flexibility to manage its cash flow if interest rates rise or if business conditions deteriorate.

Question 19

What is probability?

Answer 19

The degree to which a business or activity yields profit or financial gain

Question 20

What is probability ratio?

Answer 20

Profitability ratios indicate management’s ability to convert sales into profits and cash flow

Gross profit / net sales x 100.

Question 21

What is efficiency?

Answer 21

The use of certain ratios and measurements designed to assess the effectiveness of a company

Two common efficiency ratios are inventory turnover and receivables turnover

Question 22

What is inventory turnover? (Efficiency)

Answer 22

The ratio of cost of goods sold to inventory.

A high inventory turnover ratio means that the company is successful in converting its inventory into sales.

Question 23

What is receivables turnover? (Efficiency)

Answer 23

The ratio of net credit sales to accounts receivable.

It shows how long it takes customers to pay, on average. A high turnover ratio is desirable (indicates a company is paid quickly)

Question 24

What is acid test ratio?

Answer 24

A severe test of a firm’s capabilities to meet its debts.

Acid Test Ratio (Current Ratio - all stock : Current Liabilities)

This assumes that stock may be perishable, it may go out of date, or it may go out of fashion or become obsolete (Stock it cannot sell)

Question 25

What types of tax are there?

Answer 25

• Income tax (percentage of income)
• Value-added tax (indirect tax on the sale of goods)
• Corporate tax (percentage of a firm’s profits)
• Environmental taxes (taxes on carbon)

Question 26

What types of insolvency are there?

Answer 26

Company Voluntary Agreements (company proposes settlement of debts agreement with its creditors - must be approved by the court)

Administration (time to allow a rescue package or more assets to be put in place - administrator appointed)

Voluntary Liquidation
- Members Voluntary Liquidation (directors make a statutory declaration of solvency)
- Creditors Voluntary Liquidation (directors have not made such a declaration)

Compulsory Liquidation (when a court orders a company to be wound up)

Question 27

What financial check is available to companies to check the financial health of a potential stakeholder?

Answer 27

Dun & Bradstreet

Reviews commercial data of a company to determine financial stability and standing