Accounting Principles

Question 1

1. What is an income statement

Answer 1

The income statement is a financial statement that shows a company’s profit and loss over a period of time.

Question 2

2. What is a balance sheet

Answer 2

Is a statement of financial position which shows a company’s assets and liabilities

Question 3

3. What is required as part of statutory accounts

Answer 3

Balance sheet and Income statement

Question 4

4. What ratios are used to assess financial performance of an organisation

Answer 4

Current Ratio = Current assets/ current liabilities

Quick ratio = Quick assets/ Current Liabilities

Question 5

5. Why it is important to carry out budget management

Answer 5

To ensure that your firm has sufficient drawn down funds to meet its current and future business objectives.

Question 6

6. What is the difference between management and statutory accounts ?

Answer 6

Statutory accounts are required by law and all private limited companies are required to prepare these at the end of each financial year. A balance sheet and income statement must be included.

Management accounts are not required by law but tend to be used internally to assist the business’ management and decision making

Question 7

7. What would you typically include in a PLC account ?

Answer 7

Chairman’s Statement
Independent auditors report
Income Statement (Profit and Loss Account)
Statement of financial position (balance sheet)
Corporate governance report
Remuneration report

Question 8

8. What does IFRS stand for ?

Answer 8

International Financial Reporting Standards

Question 9

9. What part of the IFRS do you have regard for in your current role

Answer 9

IFRS 16 is to report information that (a) faithfully represents lease transactions and (b) provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

Question 10

What reporting standards do smaller companies use

Answer 10

Generally Accepted Accounting Principles

Question 11

What statutory accounting reports are limited companies required to produce annually?

Answer 11

(Full balance sheet, P&L statement, turnover, auditor report, directors report)

Question 12

What is the difference between a profit and loss report and a balance sheet?

Answer 12

P&L companies position at a moment in time, balance sheet is a statement of revenue and costs incurred over a specific length of time

Question 13

How would you use a profit and loss statement

Answer 13

Good for decision making

See if your business is successful and see how it has grown over the period.

Identifies where you are making and losing money.

Question 14

At what point do you need to start paying VAT

Answer 14

Income threshold of £85k

Question 15

How would you financially assess a company

Answer 15

Dun and Bradshaw

Experian

Question 16

What are the typical ratios used in valuation ?

Answer 16

Quick ratio: net current/ net liabilities - converted to cash within 90 days

Creditor days = creditors/ purchasers x 365

Question 17

What is creditors days

Answer 17

The creditor days ratio shows the average number of days your business takes to pay suppliers.

Question 18

How is creditor days calculated ?

Answer 18

Creditors/cost of sales x 365 days

Question 19

What is the difference between management accounts and statutory account

Answer 19

Statutory Accounts

Statutory accounts are required by law and all private limited companies are required to prepare these at the end of each financial year, meeting certain preparation standards (IFRS or UK GAAP). They are also known as annual accounts and are a set of financial reports which show the position and financial actions of the company for that financial year.

A balance sheet and profit and loss statement must be included within statutory accounts. The size of the company will depend on whether this information can be simplified or whether additional reports or notes are needed.

Statutory accounts need to be sent to Companies House and Shareholders, they are also sent to HMRC with the company’s corporation tax return.

Management Accounts

Management accounts are not required by law but tend to be used internally to assist the business’ management and decision making. The frequency of reporting, types of report and who uses these are specific to each business and their needs.

These types of accounts can also be useful to third parties such as banks in supporting finance applications.