Accounting Principles

Question 1

What is a balance sheet?

Answer 1

“Statement of the business’s financial position showing its assets and liabilities at a given date, usually at the end of a financial year
* Assets: cash, property, debtors and other investments
* Liabilities: borrowings, overdrafts, loans and creditors”

Question 2

What is a profit & loss account?

Answer 2

“Summary of the business’s income and expenditure transactions, prepared usually on an annual basis
Recorded on an accruals basis i.e. revenues are reported when they’re earned”

Question 3

What does a set of public limited company accounts include?

Answer 3

”- Chairman Statement
- Independent Audit Report
- Income Statement
- Statement of Financial Position
- Balance Sheet
- Corporate Governance Report
- Numeration Report
- Other Statutory information”

Question 4

What is a cash flow statement?

Answer 4

Shows actual receipts and expenditure. It is not included in the annual accounts but is prepared for management purposes

Question 5

What is cash flow

Answer 5

• The movement of cash inflows and outflows through an individual’s or organization’s accounts
• Cash flows show how much cash a business has, so a measure of how secure it is”

Question 6

What are the three primary types of financial accounts?

Answer 6

Balance Sheet
Profit and Loss Account
Cash Flow Statement”

Question 7

What are management accounts?

Answer 7

Prepared for internal use by the business and are not audited

Question 8

Who are audited accounts prepared by?

Answer 8

Chartered or Certified Accountant

Question 9

Define profitability?

Answer 9

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

Question 10

Define Turnover

Answer 10

This is the gross sales revenue (fee income) during a specified period?

Question 11

What is meant by the terms Gross and Net?

Answer 11

In salary terms, Gross is the total salary and net is salary minus tax and all other deductions (the net cannot get any lower).

Question 12

What is meant by depreciation in relation to an asset?

Answer 12

Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are furniture and IT equipment.

Question 13

What is a D&B rating?

Answer 13

The D&B Rating is an indicator that assesses the creditworthiness of a company based on the financial strength of the business, payment behavior, age of the company, company size and other important factors

Question 14

What are the two components comprising the D&B rating?

Answer 14

Financial Strength (e.g. 5A) rating is based on the tangible net worth as computed by D&B from financial statements supplied by the company. The rating indicates the credit capacity

Risk Indicator highlights the chance of business failure, ranging from 1 – 4 with one reflecting low/minimum risk and four reflecting high risk”

Question 15

What are the main types of ratio analysis used to assess a company’s financial strength?

Answer 15

• Liquidity – the ability of the company to pay its short term financial obligations.
  Current Ratio = Liquid assets / Liabilities
• Investment/shareholders – the extent of the risk and the earning potential of a business investment.
  Return on Investment (ROI) = (Gain – Cost) / Cost
• Gearing – the extent to which a company’s operations are funded by debt as opposed to equity
  Net Gearing = Net Debt / Equity
• Profitability – how effective the company is at generating profits given sales and/or its capital assets.
  Gross Margin = Gross profit / Net Sales
• Financial – the rate at which the company sells its stock and the efficiency with which it uses its assets.
  Asset Turnover = Net Sales / Total Assets”

Question 16

What is the difference between liquidity, administration and insolvency?

Answer 16

“Liquidity in finance refers to the ease with which a security or an asset can be converted into cash at market price.

Administration occurs when a business can no longer meet its debt obligations.

Insolvency occurs when the total value of a company’s liabilities exceeds the value of its assets, i.e., it has more debt than it has liquid assets”

Question 17

What is Corporate Tax?

Answer 17

A tax levied on a corporation’s profits, collected by a government as a source of income. It applies to a company’s income, which is revenue minus expenses.
In the U.S., the federal corporate tax rate is a flat rate of 21%. States may also impose a separate corporate tax on companies.
I would advise a client to seek advise from a tax expert”

Question 18

What is Sales Tax?

Answer 18

A tax on sales or on the receipts from sales.

In most states, construction contractors must pay sales tax when they purchase materials used in construction.”

Question 19

What is Auditing?

Answer 19

Auditing is the process conducting an official financial inspection of a company or its accounts. This should be done by a qualified professional, as we are unable to carry them out.

Question 20

What is the difference between management accounts and company accounts?

Answer 20

• Management accounts – for internal use of the management team
• Company accounts – they are accounts that are required by law”

Question 21

What would you say if a client asked you to comment on a contractor’s financial position?

Answer 21

I would politely refuse and refer them to someone who is qualified to review

Question 22

Why can’t we comment on a contractor’s financial information?

Answer 22

We are not qualified to do so, nor would our PI cover any advice provided

Question 23

What is included in an annual report?

Answer 23

• Number of owning partners
• Full financial results including
  o Groups fee income (turnover)
  o Profit
  o Turnover in terms of regions
• Services provided”

Question 24

What are capital allowances?

Answer 24

It is a tax deduction in lieu of depreciation and relate to assets approved by government.
Includes:
o Plant and machinery allowances
o Business premises and renovation allowances
o Flat conversion allowances
o R&D allowances
o Industrial buildings allowances
o Agricultural buildings allowance”