Accounting Principles Flashcards
What is GAAP
Generally Accepted Accounting Principles
What is the benefit/purpose of GAAP
To improve the clarity of the communication of financial information
What are the 10 principles of GAAP
- regularity
- consistency
- sincerity
- permanence
- non-compensation
- prudence
- continuity
- periodicity
- materiality
- upmost good faith
what are the International Accounting standards?
the older accounting standards that were replaced by IFRS in 2001
what is IFRS
International Financial Reporting Standards
Why were IFRS introduced to replace IAS?
- Goal was to make it easier to compare businesses Globally
What is IFRS16?
- Effective 1 Jan 2019
- Requires Lessee to recognise assets and liabilities for all leases with a term of more than 12 months
What is the result of IFRS accounting reporting?
- results in increase in assets, liabilities and net debt. where leases are brought onto the balance sheet
- can affect key accounting and financial ratios
- Provides transparency on companies lease assets and liabilities
What governs the format of company accounts
The Companies Act 2006
What is included in company accounts, as laid out in the Companies Act 2006
- Cover page
- information and contents
- Directors report
- accounts report
- Profit and loss account
- balance sheet
What is a profit and loss account
- A summary of the business income and expenditure on an annual basis
- gives overall profit/loss figure
- Looks back at a period of time
what is taxation
the amount of money or percentage that is owed to HMRC based on company profit
What is directors remuneration in a profit and loss account
How directors are paid for their services - fees, salary, dividends
How is gross profit calculated
Turnover minus cost of sales
What is depreciation
- A reduction in the value of an asset over time
- EG a car due to wear and tear
What is amortisation
- A reduction in value of an intangible asset over time
- EG a football player
What is the difference between depreciation and amortisation?
- amortisation focuses on intangible assets
- depreciation focuses on fixed assets
What is a balance sheet
- A snapshot of a companies assets and liabilities at a particular moment in time.
what are assets? provide 2 examples
- Items the company owns which provide economic benefits.
- fixed assets - real estate
- current assets - stock
what are liabilities?
- what a company owes to others
- fixed liabilities - debt not due in the next year
- current liabilities - debt repayments due in the next 12 months
what key pieces of information can be concluded from a balance sheet
- if a company is solvent
- how likely it is that the company will still be active in a year
what is a liquidity ratio
- ratio to determine a companies ability to pay its short term debt obligations
- eg CASH / current liabilities
How is liquidity ratio interpreted?
- Figure of 1 means company can exactly pay of its current liabilities
- Ration less than 1 means it is unable to pay off its current liabilities
What is Net Asset Value?
- Total assets minus total liabilities
- Simple was to establish how much a company is worth
what are the three parts of a balance sheet?
- assets
- liabilities
- ownership equity
what is the difference between assets and liabilities known as?
equity/ net asset value/ net worth/ capital
what is a cash flow statement
Financial statement that summarises movement of cash in and out of a company
Why is cash flow statement believed to be the most intuitive of all financial statements?
shows movement of money in and out of a company, and how well a company is managing its cash and growth
what is a credit rating?
Shows ability of an organisation to fulfil financial commitments. Assesment is based of their on their previous dealings
what are the main commercial credit rating agencies
- Dunn & Bradstreet
- FAME
What would you see in a D&B report
- Name of company and company number
- company info eg address name of key directors
- credit score rating
- profit before tax
What are the D&B score ratings?
- Financial Strength Indicator (based on tangible net worth from 5A to 1A and then down to H)
- Risk Indicator (1-5, 1 being the lowest risk)
what is capital expenditure?
money spent by a business or organisation on acquiring or maintaining fixed assets like buildings and equipment
What is financial audit?
an objective examination of the financial statements to ensure they are fair and accurate.
what are profitability ratios?
shows how well a company can generate profit from its operations
What are solvency ratios?
- Compare company debt levels against its assets equity and earnings
- Suggest whether a company can pay its liabilities
what are efficiency ratios?
Evaluate how efficiently a company uses assets to generate sales
what is VAT
- Value Added Tax
- Tax on goods and services
- standard rate 20%, reduced to rate of 5% or zero
When must a company be VAT registered
If company total VAT taxable turnover for the last 12 months was over £85,000 OR turnover is expected to go over £85,000 in next 30 days.
where might you find information on a company’s assets?
balance sheet
what are management accounts?
- Management accounts are financial reports produced for business owners/managers either quarterly or monthly.
- Normal includes profit and loss report and balance sheet
- Less formal than year end accounts and more up to date
What is EBITDA
- Earning before Interest, tax, depreciation and amortisation
- measure of a companies profitability
What does it mean for a company to go into administration
- Company becomes insolvent
- it is put under management of licenced insolvency practitioners
What is Insolvency
- can no longer meet financial obligations
- A result of reduction in cash inflow or increased expenses
What is Bankrutcy
- Can no longer meet debt payments
- liquidate assets to pay debts or create payment plan
What is receivership
- court appointed tool that protects a company
- receiver steps in to manage company
What is liquidation
Process where assets ae used to pay off debts
Why do surveyors need to be able to interpret company accounts?
To assess covenant strength of tenants
What is misappropriation of funds
When someone entrusted with managing money, steals it for personal gain
What are the 3 tests of insolvency
- Cash flow test - check if able to pay bills in near future
- Balance sheet test - Check if assets are greater than liability
- Legal action test - check if legal action has been taken against business for debt.
what is statutory profit
A company’s earnings calcualted according to UK GAAP
