Accounting Principles Flashcards
How is IAS (IFRS) different from GAAP?
IAS is more principles-based, GAAP is more rules-based
What do IAS and GAAP stand for?
International Accounting Standards and Generally Accepted AccountinG Principles
Which framework is IAS a part of?
IFRS - International Financial Reporting Standards
What is double entry bookkeeping?
Every financial transaction shows it is debited and credited. This helps prevent fraud and is easier to spot mistakes.
What is the accounting equation?
Assets = Liabilities + Equity
What are the Basic Accounting Concepts?
- Accruals
- Consistency
- Prudence
- Going concern
- Realisation
- Matching concept
- Materiality
- Objectivity
What is an Income Statement (Profit and Loss)?
A financial report which shows a company’s profitability over a specific period, used to determine its financial performance.
What is shown on an Income Statement (Profit and Loss)?
Cost of goods sold (COGS), gross profit, Operating expenses, operating profit (gross profit less op ex), other income I.e. interest, net profit/loss
What are some standard financial statements?
P & L, Balance sheet, Cash-flow statement
What is the difference between management and financial accounts?
Management are for internal use, Financial are company accounts required by law
Name some financial ratios
Profitability ratio, liquidity ratio, solvency ratio
What is CapEx and OpEx
Capital and Operational Expenditure
What’s the difference between P&L and Balance sheets
P&L shows incomes and expenditures and resulting P&L, balance sheet shows what a company owns (assets) and owes (liabilities)
What does a cash-flow statement show?
Short term ability to pay bills
What are Capital Allowances?
Tax relief on certain items purchased for business I.e. tools
What is a sinking fund
Funds set aside for future expense or long term debt
What is insolvency
Inability to pay debts where liabilities exceed assets
What is Companies House
Agency which Incorporates and dissolves limited companies in the UK
What is liquidity?
Liquidity measures ability of a company to pay off its liabilities by converting assets to cash
What is the liquidity ratio?
Liquidity = current assets/ current liabilities
What is a good liquidity ratio?
Depends on sector but usually 1.5. If under 0.75, risk of insolvency
What is profitability?
The performance of a company in generating profits
What is the profitability ratio?
Trading profit margin ratio= turnover - (cost of sales/ turnover)
What are Financial Gearing Ratios?
The measure of the financial structure of a company to help measure solvency
What level of borrowing would a highly geared company have?
High reliance
What are Management Accounts
Accounts for internal management use, prepared for a lender to evaluate how it will be able to repay
Are management accounts externally audited
No
What is a Financial Statement
Forecast of income and expenditure to identify potential shortfalls
What is a working capital ratio
the ratio of assets to liabilities, i.e. how many times a company can pay off its current liabilities with its current assets
What is an S curve
S=Standard. Shape of expenditure profile when shown on a graph
What does an S curve show
That initial expenditure is less on a project for site set up then larger spends on MEP etc, then slows again
Why are S curves used?
To compare actual progress against predictions
What is an Escrow account
Separate account owned by third party on behalf of two other parties, with contract conditions for release of funds
How do you analyse a company’s accounts
Detail reviewed by accountants but I can calculate ratios. Any ratios in company accounts might be manipulated.
How do you carry out a credit check
D&B which my company utilises and review key ratios
How would you protect from a low credit rating
Performance bond, and review front loading risk
What would a falling working capital ratio show
Liquidity ratio below 0.75, low credit rating, falling cash-flow
What are signs of insolvency
Liquidity ratio below 0.75, low credit rating, falling cashflow
What would you do in the event of contractor insolvency?
Inform all parties and secure site,
Inform bondsman,
Stop pending payments/seek legal advice
Take ownership of vested materials
Schedule all materials on site
Value works to date
Terminate the contract
What is liquidation?
Closure of a limited company - assets are sold (liquidated) for the benefit of outstanding creditors
What is the difference between administration and liquidation?
Administration - someone is appointed to manage the company affairs on behalf of the creditors.
Liquidation - shutting company and selling assets to pay creditors
What is bankruptcy?
Individuals, not limited companies, share assets amongst creditors to make a fresh start from debt.
What’s does a Dunn & Bradstreet report cover?
Revenue, equity (assets less liabilities), profitability metrics, balance sheet info, cash flow
+ credit risk rating
What scores/ratios are in a D&B report?
- paydex score (how timely it pays its bills)
- current ratio (assets over liabilities)/liquidity ratio
- acid test ratio (incl inventory)
- etc
