Accounting Principles Flashcards
What is the difference between a profit and loss statement and a balance sheet?
Profit and loss statement shows the profit/loss earned by a company during a particular period, normally one financial year. Balance sheet shows the list of assets and liabilities of a company on one particular day.
What do companies need to provide every year in accordance with the Companies Act 2006?
All companies must file their annual accounts with Companies House and ensure that those accounts give a true and fair view.
What is the purpose of a cash flow statement?
Cash flow demonstrates an organisation’s ability to operate in the short and long term, based on how much cash is flowing into and out of business.
What are the key financial statements that all companies must provide?
Profit and loss account, balance sheet and cash flow.
What is the difference between management and financial accounts?
Management accounts are for the internal use of the management team. Financial accounts are the company accounts required by law.
What is the difference between a statement of comprehensive income and a statement of financial position?
A statement of comprehensive income shows the income, expenditure and profit or loss of the company. The statement of financial position shows what a company owns (assets) and what it owes (liabilities) at a given point in time.
What are the main types of ratio analysis used to assess a company’s financial strength?
Liquidity, Investment/shareholders, Gearing, Profitability, Financial.
Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?
To consider for your own business accounts, assess the covenant strength of potential tenants and landlords, assess the financial strength of contractors and those tendering for contracts, for profits-method valuation (for leisure properties), and for assessing competition.
What are the three main financial accounts?
Balance Sheet, Income Statement, Cash Flow Statement.
What is the balance sheet also known as?
Statement of financial position.
What does the balance sheet show?
View of financial position showing assets, liabilities (owned vs owed) and shareholder’s/owners equity.
Does a balance sheet relate to a period of time or a specific date?
Snapshot (given date).
What is the income statement also known as?
Profit and loss.
What does an income statement show?
Summary of income and expenditure to show net profit/loss for a specific period of time.
Can you draw comparisons between income statements for different years?
Yes - because they relate to a specific period of time (1 year usually).
What is a cashflow statement?
Merges balance sheet and income statement to show actual receipts and expenditure including VAT.
What is a cashflow statement split into?
Investing activities, Financing activities, Core operations.
What is an asset?
Resources controlled by a business as a result of past events and from which future economic benefits are expected to flow.
Which of these could be assets to a business?
Land, Buildings, Machinery, Fixtures and Fittings, Patents, Stock, Debtors cash.
What is a liability?
Present obligations of a business arising from past events, the settlement of which to result in an outflow from the business embodying economic benefits.
Which of these could be liabilities to a business?
Capital, Owner’s claim against the business, Shareholders’ funds, Retained Profits, Creditor’s claims, Loans.
Who are audited accounts prepared by?
Accountant.
Under which Act may audited accounts be required?
Companies Act 2006.
Why are audited accounts beneficial?
They identify misstatements, weaknesses, facilitate access to finance, provide better supplier terms, and are required if the business is sold.
Which are typical UK company types?
Sole trader, Partnership, LLP, Limited Company, Public limited company.
Why is an annual report important for a public limited company?
It explains performance to shareholders and investors and helps potential investors in decision making.
What is the benefit of being a Public Limited Company (PLC)?
Audited accounts are publicly available, allowing the public and suppliers to check financial performance, and it provides perceived prestige and status.
What are some common financial measures?
Acid test, Return on capital employed, Working capital ratio, Gearing ratio, Net assets per share.
What is the acid test (quick ratio)?
How well are current liabilities covered by cash/liquid assets.
What is return on capital employed?
How profitable is capital invested in business.
What is working capital ratio (liquidity)?
Ability of company to pay (solvency) / how quickly can assets be turned into cash to pay short-term obligations.
What is gearing ratio?
Exposure of business to loans as opposed to share capital.
What is net assets per share?
Essentially the price which shares can be bought and sold at.
What is the most common reason for business failure?
Cash flow issues.
Which are the two financial reporting frameworks recognised by UK company law?
IFRS and UK GAAP.
What does UK GAAP stand for?
UK Generally Accepted Accounting Practice.
What does IFRS stand for?
International Financial Reporting Standards.
Which type of entity must use IFRS?
Listed companies.
Can other companies choose between IFRS and UK GAAP?
Yes - seek advice from an accountant.
What is UK GAAP?
Financial reporting framework for how company accounts are prepared.
What is the valuation basis for financial reporting under IFRS?
Fair Value.
When would you want to assess financial strength of an entity as a surveyor?
For prospective tenants, contractors/tenders, profits valuation, and competition assessment.
Which are typical credit check reports?
D&B, Experian, Creditsafe.
What would you look for in a credit check report?
Risk assessment rating, Failure risk score, Delinquency score, Financial ratios.
What is the profits test?
A typical profits test would be for the tenant to provide 3 years audited accounts showing a net profit of 3 times the annual rent.
Why is it important to check financial strength of entities you deal with?
To assess risk of default and impact on investment security.
What is the UK Corporation tax rate?
The main rate of corporation tax is 25% for the financial years 2023 and 2024, previously 19%.
Tell me about VPGA 1?
Valuation Practice Guidance Application (VPGA 1) – Valuation for inclusion in financial statements
Valuations for inclusion in financial statements must comply strictly with the applicable financial reporting standards adopted by the entity (e.g IFRS).
It is important in the context of financial reporting that there are terms of engagement which are clear, leaving no areas of doubt as to what the member undertakes to do.
It is the responsibility of the valuer to discuss and agree with their client and include within the terms of engagement, full details of the accounting standards to be adopted in the valuation, and to include the full definition of the basis of value, including reference of the basis of value definition (e.g. IFRS 13 or FRS 102, etc.), along with details of the accounting standard body or a local regulator whose definition has been applied.
Talk me through one of the IFRS standards that you are aware of?
IFRS 16 Leases, introduced in 2016, sets out the principles for the recognition, measurement, presentation and disclosure of leases.
The objective of 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. To meet that objective, a lessee should recognise assets and liabilities arising from a lease.
IFRS 16 relates to accounting for leases on the balance sheet of a company, shown as a liability. Service charge is accounted for separately. Exemptions exist for leases of less than 12 months.
