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APC Revision > Accounting Principles > Flashcards

Accounting Principles Flashcards

1
Q

Types of financial statements

A

Profit and loss
Balance sheet
Cash flow

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2
Q

What does each financial statement represent?

A

Profit and loss - incomes and expenditure
Cash flow - summary of actual and anticipated ingoings and outgoings
- ability to pay bills
Balance sheet - owns i.e assets and owes i.e liabilities

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3
Q

Identify keys terms

A

Capital allowance - tax relief of items purchased

Sinking fund - funds for future or long term debt

Insolvency - inability to pay debts meaning more liabilities than assets

Companies House - incorporates and dissolves limited companies

HMRC - His Majesty’s Revenue and Customs

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4
Q

Describe a liquidity ratio

A

Ability to pay off current liabilities by converting assets to cash

Assets v liabilities

1.5 usual ratio - house builders often 1.3

0.75 - indicates insolvent

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5
Q

What is a profitability ratio?

A

Measure in generating profit
Ratio = turnover - (loss of sales/turnover)
Low margin = Growth

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6
Q

What is financial gearing ratio?

A

Indicator for suppliers of debt and equity
Measures insolvency
High = rely on borrowing
Interest payments reduce profit

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7
Q

Why is it important to understand finances?

A

Prepare own accounts

Assess contractors

Assess competition

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8
Q

What is the purpose of Profit and Loss?

A

Monitor and measure profit and loss
Compare previous performance and budget
Valuation purpose
Forecast future
Compare to competition
Taxation

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9
Q

What are management accounts?

A

For internal use
For lenders to evaluate performance
Not audited

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10
Q

What is a debtor?

A

An entity that owes money

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11
Q

What is a creditor?

A

Owed money by other - i.e owed fee payment

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12
Q

What is a financial statement?

A

Forecasts income and expenditure to analyse shortfalls and surpluses

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13
Q

What is in a profit and loss account?

A

Sales, running costs, profit or loss
Sales v expense
Identity non-profitable work

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14
Q

What is on a balance sheet?

A

Value of everything owned = assets, liabilities

Value of business

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15
Q

What is in a cash flow forecast?

A

Cash in and out of the business

S curve - small outlay at the start
- i.e construction process

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16
Q

How do surveyors use financial accounts?

A

Track, analyse, assess the performance
Identify financial strengths
Compare progress v predictions

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17
Q

What is escrow accounts ?

A

Owned by third party, held one half of others

Conditions and mechanism to release funds

I.e Project bank account

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18
Q

When have you reviewed accounts?

A

Instructing contractors

Application process for new tenants

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19
Q

What did you do with accounts?

A

Viewed the ratios for liquidity, profitability, gearing

Calculated myself

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20
Q

How do you credit check an applicant?

A

Credit safe site

Group and company accounts

Low = calculate ratios and pass on info

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21
Q

Would you recommend an applicant with a low rating?

A

No - risk of performance
- risk of deployment of resources
- risk of insolvency

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22
Q

What are the signs of insolvency?

A

Low rating
Liquidity below 0.75
Working capital ratio falling
Low return on equity
Large borrowing
Falling cash flow

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23
Q

Advice to the client if they want a low rated contractor?

A

Performance bond if they fail to perform

Review tender

Review valuations

Set up project bank account

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24
Q

What is equity?

A

Value an owner has in the business

Total liabilities from total assets on B/S

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25
Q

What does the Companies Act 2006 stipulate?

A

All private limited companies and PLCs must file annual accounts on Companies House

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26
Q

What is a hurdle rate?

A

Minimum rate of return required on an investment

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27
Q

What are the UK quarter days?

A

25 March 24 June 29 Sept, 25 Dec

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28
Q

What is VAT?

A

Value added tax

Charged on top of goods and services

Some goods exempt - Royal Mail postage costs

Installation of a/c units = 0% since 1 April 22

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29
Q

What are liabilities?

A

Things people/businesses owe

Mortgage, car payments, loans

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30
Q

What are assets?

A

Resources businesses own or control
Car fleet, buildings

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31
Q

How to calculate Net worth?

A

Assets - liabilities = net worth

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32
Q

What is insolvency?

A

The inability to pay money owed on time

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33
Q

What are the types of insolvency?

A

Administration = court manage company
Liquidation = company assets sold to pay debts
Receivership = creditors appt receiver over the insolvent firms asssts
Company Voluntary agreement = agreement between company and creditors

34
Q

What if a contractor goes bust?

A

Insure the site
Track materials
Withhold payment
Record time spent
Record value of works to date

35
Q

What is the order of money after liquidation?

A

Fixed charge holders = bank
Liquidator fees and expenses
Preferential creditors = pensions, employees
Floating charge holders
Unsecured creditors = client

36
Q

What is financial accounts?

A

Used externally for auditing
Required by law (companies house)

37
Q

Types of Ratio analysis

A

Gross profit
Net profit
Capital expenditure
Revenue expenditure
Gearing
Liquidity

38
Q

Types of tax

A

Vat
Stamp duty
Corporation
Land
Income

39
Q

What are the generally accepted accounting principles?

A

Standards of details, complexities of legal accounting

40
Q

What are management accounts?

A

Accounts shed light of business health and operational efficiency, not just numbers but holistic view

41
Q

When should management accounts be prepared?

A

Monthly, quarterly - help to act swiftly to opportunities or threats

42
Q

What are annual accounts for a private limited company?

A

Summary of financial activity of 12 month period. Prepared for HMRC and companies house. Incl balance sheet, profit and loss statement and cash flow statement

43
Q

What is a balance sheet?

A

Statement giving insight to assets, liabilities and shareholders equity at a point in time. Owned v owed. Business health at a snapshot in time. Assets and liabilities shown.

44
Q

On a balance sheet, what is an asset?

A

Owned or benefit from - fixed (long term = land, property), current (short term = petty cash, cash in the bank)

45
Q

On a balance sheet, what is a liability?

A

Obligation for debt arising that needs to be repaid. Long term = money not due to be repaid in next year. Current = repaid in 1 year

46
Q

What is a profit and loss statement?

A

Records performance over time. Revenues v expenses throughout year

47
Q

What is a cash flow statement?

A

Cash movements in and out over the financial year. Money in and out during period of time

48
Q

When is a statutory financial audit required?

A

Annual, independent inspection required by law unless exempt if below threshold. Legal requirement to be audited. Ensure accounts are correctly, prepared, accurate and in line with standards. Independent auditor and specialist.

49
Q

Explain tax depreciation?

A

Where declining value of an asset is offset against a companies taxable profit
Recorded as an expensive in order to reduce the amount of taxable income
Applied to plant, tools, vehicles, computers, furniture and buildings

50
Q

What are overheads?

A

Operating cost of the business that are incurred on an ongoing basis
Fixed or variable
Fixed - e.g rent, building insurance
Variable - e.g utility charges

51
Q

What’s is an escrow account?

A

Contractual agreements used as financial instruments within a transaction
Asset/currency being transferred is held by intermediary third party
Currency being exchanged is held by third party until each party meets contractual obligations allowing money to be transferred
Mortgage lenders when completion buying/selling of real estate

52
Q

What are Liquidity ratios?

A

Ability to pay debt obligations and assess its margin of safety by looking at e.g cash v short term debt s

53
Q

Profitability ratios?

A

Ability to generate profits from sales operations and shareholding equity. Indicates how efficiently the company is generating profit

54
Q

Gearing ratios?

A

Capital v debt.
Measure companies leverage and sets out proportion of the firms activities are funded by shareholders v creditor funds

55
Q

Why does a business keep company accounts?

A

Record and measure profitability
Tax calculation
Legislation requires accurate records
Business growth identifies profitable operations

56
Q

What is financial leverage?

A

Borrowed funds in form of debt
Enhance business operations and increase profitability

57
Q

What a capital allowances?

A

Allow tax payers to gain tax relief by using their expenditure to be deducted from their taxable income
The expenditure used to lower taxpayer income is only allowed within certain categories: plant and machinery, integral parts of structure and buildings (lifts), research and development costs, patents

58
Q

Current asset vs fixed assets

A

Current = converted to cash within one year, allow day to day operation of the business. E.g money owed for products or services

Fixed = cannot be converted within one year. Owns for long term e.g vehicles, machinery, land

59
Q

Profit and loss accounts v balance sheet

A

P&L = income and expenditure

B/s = assets and liabilities and given point in time

60
Q

Key financial statements?

A

Profit and loss
Cash flow
Balance sheet

61
Q

What is a cash flow statement?

A

Actual and anticipated in/outgoings of cash over a period.
Operating, investing and financing activities

Measure short term ability to pay debts

62
Q

Why understand accounts?

A

Own accounts
Contractors
Profitability and sustainability

63
Q

Purpose of profit and loss?

A

Monitor and measure p/l
Compare performance vs past/competition
Forecast future
Calculate tax

64
Q

Debtors v creditors

A

Creditor - coop owes another firm

Debtor - firm owes coop

65
Q

What are financial statements?

A

Forecast of income and expenditure
Analytical tool

66
Q

What are profit and loss accounts?

A

Sales and costs over a period of
Sales v expenses

67
Q

What are balance sheets?

A

Shows value of everything the company owns, owes, and is owed
Value at given points
Summaries assets and liabilities

68
Q

Signs of insolvency?

A

Low credit rating
Ration below 0.75
Falling working capital

69
Q

How long to keep accounting records?

A

Private - 3 years
Public - 6 years

70
Q

What is IFRS?

A

International Financial Reporting Standards

Common rules so statements are consistent, transparent and comparable worldwide

71
Q

UK Standards?

A

UK GAAP - generally accepted accounting practice in the UK

72
Q

Financial audit exemptions?

A

Small/micro businesses.
Qualify: turnover less than 10.2m
B/S not more than 5.1m
Average number of employees not more than 50

73
Q

When do you use accounting principles?

A

Review applications

Service charge year end and budgets

74
Q

What act governs the production of accounts?

A

Companies Act 2006

75
Q

What is the role for an auditor?

A

Independent party confirming financial accounts are fair and true

76
Q

What is insolvency?

A

Inability to pay debts due to

77
Q

What is bankruptcy?

A

Legal declaration of inability or impairment of ability to pay creditors

78
Q

What are statutory accounts?

A

Financial records prepared at the end of your company’s financial year.

79
Q

Who must receive copies of statutory accounts?

A

All shareholders
People who can go to company’s general meetings
Companies House
HMRC

80
Q

What are included in statutory accounts?

A

Balance sheet
Profit and loss accounts
Notes about accounts
Directors report

Auditor report depending on company size

81
Q

What standards must statutory accounts meet?

A

Either:
International Financial Reporting Standards
New UK Generally Accepted Accounting Practice (GAAP)

APC Revision (17 decks)

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