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Accounting Principles > Accounting Principles > Flashcards

Accounting Principles Flashcards

1
Q

What is GAAP

A

Generally Accepted Accounting Principles

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2
Q

What is the benefit/purpose of GAAP

A

To improve the clarity of the communication of financial information

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3
Q

What are the 10 principles of GAAP

A
  • regularity
  • consistency
  • sincerity
  • permanence
  • non-compensation
  • prudence
  • continuity
  • periodicity
  • materiality
  • upmost good faith
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4
Q

what are the International Accounting standards?

A

the older accounting standards that were replaced by IFRS in 2001

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5
Q

what is IFRS

A

International Financial Reporting Standards

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6
Q

Why were IFRS introduced to replace IAS?

A
  • Goal was to make it easier to compare businesses Globally
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7
Q

What is IFRS16?

A
  • Effective 1 Jan 2019
  • Requires Lessee to recognise assets and liabilities for all leases with a term of more than 12 months
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8
Q

What is the result of IFRS accounting reporting?

A
  • 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
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9
Q

What governs the format of company accounts

A

The Companies Act 2006

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10
Q

What is included in company accounts, as laid out in the Companies Act 2006

A
  • Cover page
  • information and contents
  • Directors report
  • accounts report
  • Profit and loss account
  • balance sheet
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11
Q

What is a profit and loss account

A
  • A summary of the business income and expenditure on an annual basis
  • gives overall profit/loss figure
  • Looks back at a period of time
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12
Q

what is taxation

A

the amount of money or percentage that is owed to HMRC based on company profit

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13
Q

What is directors remuneration in a profit and loss account

A

How directors are paid for their services - fees, salary, dividends

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14
Q

How is gross profit calculated

A

Turnover minus cost of sales

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15
Q

What is depreciation

A
  • A reduction in the value of an asset over time
  • EG a car due to wear and tear
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16
Q

What is amortisation

A
  • A reduction in value of an intangible asset over time
  • EG a football player
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17
Q

What is the difference between depreciation and amortisation?

A
  • amortisation focuses on intangible assets
  • depreciation focuses on fixed assets
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18
Q

What is a balance sheet

A
  • A snapshot of a companies assets and liabilities at a particular moment in time.
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19
Q

what are assets? provide 2 examples

A
  • Items the company owns which provide economic benefits.
  • fixed assets - real estate
  • current assets - stock
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20
Q

what are liabilities?

A
  • 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
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21
Q

what key pieces of information can be concluded from a balance sheet

A
  • if a company is solvent
  • how likely it is that the company will still be active in a year
22
Q

what is a liquidity ratio

A
  • ratio to determine a companies ability to pay its short term debt obligations
  • eg CASH / current liabilities
23
Q

How is liquidity ratio interpreted?

A
  • 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
24
Q

What is Net Asset Value?

A
  • Total assets minus total liabilities
  • Simple was to establish how much a company is worth
25
Q

what are the three parts of a balance sheet?

A
  • assets
  • liabilities
  • ownership equity
26
Q

what is the difference between assets and liabilities known as?

A

equity/ net asset value/ net worth/ capital

27
Q

what is a cash flow statement

A

Financial statement that summarises movement of cash in and out of a company

28
Q

Why is cash flow statement believed to be the most intuitive of all financial statements?

A

shows movement of money in and out of a company, and how well a company is managing its cash and growth

29
Q

what is a credit rating?

A

Shows ability of an organisation to fulfil financial commitments. Assesment is based of their on their previous dealings

30
Q

what are the main commercial credit rating agencies

A
  • Dunn & Bradstreet
  • FAME
31
Q

What would you see in a D&B report

A
  • Name of company and company number
  • company info eg address name of key directors
  • credit score rating
  • profit before tax
32
Q

What are the D&B score ratings?

A
  • 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)
33
Q

what is capital expenditure?

A

money spent by a business or organisation on acquiring or maintaining fixed assets like buildings and equipment

34
Q

What is financial audit?

A

an objective examination of the financial statements to ensure they are fair and accurate.

35
Q

what are profitability ratios?

A

shows how well a company can generate profit from its operations

36
Q

What are solvency ratios?

A
  • Compare company debt levels against its assets equity and earnings
  • Suggest whether a company can pay its liabilities
37
Q

what are efficiency ratios?

A

Evaluate how efficiently a company uses assets to generate sales

38
Q

what is VAT

A
  • Value Added Tax
  • Tax on goods and services
  • standard rate 20%, reduced to rate of 5% or zero
39
Q

When must a company be VAT registered

A

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.

40
Q

where might you find information on a company’s assets?

A

balance sheet

41
Q

what are management accounts?

A
  • 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
42
Q

What is EBITDA

A
  • Earning before Interest, tax, depreciation and amortisation
  • measure of a companies profitability
43
Q

What does it mean for a company to go into administration

A
  • Company becomes insolvent
  • it is put under management of licenced insolvency practitioners
44
Q

What is Insolvency

A
  • can no longer meet financial obligations
  • A result of reduction in cash inflow or increased expenses
45
Q

What is Bankrutcy

A
  • Can no longer meet debt payments
  • liquidate assets to pay debts or create payment plan
46
Q

What is receivership

A
  • court appointed tool that protects a company
  • receiver steps in to manage company
47
Q

What is liquidation

A

Process where assets ae used to pay off debts

48
Q

Why do surveyors need to be able to interpret company accounts?

A

To assess covenant strength of tenants

49
Q

What is misappropriation of funds

A

When someone entrusted with managing money, steals it for personal gain

50
Q

What are the 3 tests of insolvency

A
  • 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.
51
Q

what is statutory profit

A

A company’s earnings calcualted according to UK GAAP

Accounting Principles (1 decks)

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