Accounting Principles Flashcards
What do you understand about GAAP?
- UK Generally Accepted Accounting Principles – body of accounting standards in the UK
- It is accepted ways for recording and reporting financial information between parties, which increases transparency and trust
What is IRFS
- International Financial Reporting Standards – international accounting standards
What is IFRS 16?
- providing guidance on accounting for leases.
- how will Rent Reviews be accounted?
- Inflated assets and liabilities could impact a company’s gearing / ratios
What is the acid test / ROCE / working capital ratio / gearing ratio /net assets per share?
- ROCE (Return on Capital Employed) = Operating Profit / Capital
- Current Ratio = Current assets / current liabilities
- Profit margin = profit / revenue
- Gearing Ratio = debt / equity
How would you assess the financial strength of an entity, e.g. for a valuation?
- Review Company accounts
- Run a credit check
What are the three types of financial statement you may come across relating to a company?
- Profit and loss
- Cashflow statement
- Balance sheet
- Otherwise known as Statutory Accounts
- Must meet either GAAP or IFRS
What is a profit and Loss?
- Details the company’s Income & expenditure
- Completed on an annual basis
What is a cashflow statement?
- Tells you how much money is running through a company at any time.
- The cash flow statement has three basic stages:
o Operating profit excluding depreciation, amortisation and some exceptional items.
o Adding or subtracting cashflows from non-business activities
o Cash flow from financing activities
What is a balance sheet?
- The balance sheet tells us how much a company is worth, how healthy it is, and whether its shares reflect these factors.
- It deals with two concepts – what a company owns (its assets) and what is owes (its liabilities)
What is an asset / liability? Can you give me an example of each?
- Fixed assets - equipment belonging to the business for example computers
- Current assets - monies owed to the company i.e work in progress and invoices raised but can also include cash in hand and cash balances in the bank.
How do you review a balance sheet?
- Divide current assets by current liabilities.
- This is called the liquidity ratio, anything less than one and your company is facing a cash crunch.
- Take the current assets and remove the value of the stock, which is difficult to shift in an emergency then divide that figure by current liabilities.
- This is known as the acid test ratio and is considered the best crude test of a company’s short-term viability.
How do companies know which reporting framework to comply with?
If companies are a limited company or a partnership, then they must produce a profit and loss statement.
How do public limited company accounts differ?
- Self-employed sole traders and most partnerships don’t need to create a formal profit and loss account - but they do need to keep adequate records to complete their Self-Assessment tax return fully and accurately.
- However, there are key benefits to producing formal accounts. If you are looking to grow your business, or need a loan or they are looking to agree a lease, for example, most institutions will ask to see three years’ accounts.
What is the difference between financial and management accounts?
- Financial accounts are legally required and reviewed by an external auditor
- Management accounts are internal reports to help a business reach its goals
Can you tell me what the role of an auditor is?
The auditors’ role in a company is to assist the business in maintaining its financial reliability by reviewing and verifying financial statements.
