Accounting Principles Flashcards
What is GAAP?
Generally Accepted Accounting Principles
What are the 10 principles of GAAP?
Regularity
Consistency
Sincerity
Continuity
Materiality
Periodically
Permanence
Prudence
Non-compensation
Utmost Good Faith
What is the benefit/purpose of GAAP?
To improve the clarity of the communication of financial information
What are the International Accounting Standards?
The older accounting standards that were replaced by the IFRS in 2001
What is the IFRS?
International Financial Reporting Standards
Why were IFRS introduced to replace IAS?
To improve the quality, consistency, and comparability of financial reporting globally.Goal was to make it easier to compare businesses around the world
Wanted to increase transparency and trust in global reporting
What is IFRs 16?
Effective from 1st January 2019
Requires lessee to recognise assets and liabilities for all leases with a term of more than 12 months
IFRS 16 sets out principles for an IFRS reporter to recognise, measure, present and disclose leases
What is the objective of IFRS 16?
The objective of IFRS 16 is to provide a faithful representation of lease transactions by requiring lessees to recognise most leases on balance sheet. This improves transparency, comparability, and understanding of a company’s financial commitments
What is the result of IFRS 16 accounting reporting?
IFRS 16 affects lessees’ financial reporting by bringing most leases onto the balance sheet
- can result in increase in assets, liabilities and net debt
Provides transparency on companies lease assets and liabilities.
What governs the format of company accounts?
The Companies Act 2006
What is included in company accounts, as laid out in the Companies Act 2006?
Cover page
Information and contents
Directors report
Accountants report
Statutory profit and loss account
Balance sheet
What is a profit and loss account?
A summary of the business income and expenditure transactions on an annual basis
Gives overall profit/loss figures
What is taxation?
The amount of money or percentage that is owed to HMRC based on company profit?
What is directors remunerations in a profit and loss account?
How directors are paid for their services - fees, salary, or dividends
How is gross profit calculated?
Turnover minus cost of sales
What can be determined from gross profit?
Not a lot by itself but when compared to previous years you can get an idea of where the company is heading
What is depreciation?
A reduction in the value of an asset over time - for example due to wear
What is amortisation?
A reduction in value of an intangible asset over time eg spreading out loan payments or a licence for software lasting only a number of years
What are financial statements?
Statements used to measure the performance of a company, plan for the future & record incomings and outgoings
What are financial statements?
Statements used to measure the performance of a company, plan for the future & record incomings and outgoings
What are the key financial statements that companies provide?
Company accounts
Management accounts
Profit & loss accounts
Balance sheets
Cash flow statements
What is the difference between management and company/financial accounts?
MGMT accounts are running totals that are kept for internal purposes. Unaudited
Company accounts are statutory documents under the Companies Act 2006 - Audited
What governs the format of company accounts?
Companies act 2006
What is included in company accounts, as laid out in the Companies Act 2006?
Cover Page
Information and Contents Page
Directors report
Accountants report
Statutory profit & loss account
Balance sheet
Notes to the accounts
Detailed profit & loss account
What is a profit and loss account? (also known as INCOME STATEMENT, STATEMENT OF COMPREHENSIVE INCOME)
A profit & loss account is a record of all income, minus the company’s operating costs.
This results in a bottom-line profit figure.
What are the three types of financial statement you may come across relating to a company?
Profit & loss sheet
Balance sheet
Cash flow statement
What is a balance sheet?
a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time. It provides a snapshot of the company’s financial position — what it owns, what it owes, and the value remaining for shareholders.
What is a cash flow statement?
financial report that shows how cash and cash equivalents move in and out of a business over a period of time. It helps to assess a company’s liquidity and ability to meet short-term obligations.
What is an asset / liability?
An asset is an item that belongs to the company and can be sold
A liability is something the company must pay for
Can you give me an example of each?
Assets could be cars in a company’s fleet that are owned
Liabilities could be leased cars in the company’s fleet
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
10 principles that are used as a guide for accounting globally.
Examples include:
Sincerity
Regularity
Prudence
Permanence of methods
How do companies know which reporting framework to comply with?
FRS 102 is the default accounting standard for most UK and Irish companies that don’t qualify for the very simplified rules of FRS 105 or aren’t required to follow international accounting standards (IFRS).
Which reporting framework do public limited companies have to comply with?
Public companies traded on a stock exchange (i.e. On the LSE) have to comply with IFRS
how would you not be required to follow ifrs
Companies are only required to follow IFRS if they are publicly listed or preparing group consolidated accounts under listing rules. Otherwise, most UK private companies use UK GAAP — typically FRS 102, unless they qualify for FRS 101 or FRS 105.
How would you assess the financial strength of an entity, e.g. for a valuation?
There are a number of tests, including:
Credit ratings
Profits test
Ratios (liquidity, profitability, acid)
What does the acid test ratio measure and how is it calculated?
Measures a company’s short-term liquidity (ability to pay current liabilities without selling stock).
(CurrentAssets−Stock)÷CurrentLiabilities
What is ROCE and how is it calculated?
Return on Capital Employed
Shows how efficiently capital is being used to generate profit
(Earnings Before Interest & Tax) ÷ Capital Employed
What does the working capital ratio show and how is it calculated?
Measures a company’s ability to pay short-term debts.
Current Assets ÷ Current Liabilities
What is the gearing ratio and what does it indicate?
Shows the proportion of debt to equity in the business.
Indicates financial risk.
Borrowed Funds ÷ Equity (or Borrowed Funds ÷ Capital Employed)
Can you tell me what the role of an auditor is?
Under various ISO standards, and auditor conducts an independent review of a company’s activity.
In the financial sense, the auditor checks the veracity of a company’s financial statements, allowing for financial analysis
When are audited accounts needed and why?
When 2 of the 3 are fulfilled:
Company has turnover >£10.2 mil
Company assets >£5.1mil
Company employs over 50 people.
How do public limited company accounts differ?
These are companies that are listed on the London Stock Exchange.
They have to comply with IFRS
Public companies have a 6-month limit to file their accounts.
Tell me something you understand from the Companies Act 2006.
It governs the content of company accounts.
It’s the overarching legislation for the management, running and financing of UK businesses.
Tell me what it means to prepare accounts in accordance with IFRS.
International financial reporting standards.
These are a set of standards that include the reporting requirements for companies globally.
What is the difference between UK GAAP and IFRS?
GAAP is a set of principles used in the UK
IFRS sets out specific global reporting standards.
What is the basis of valuation under IFRS 13?
Fair Value
What is fair value?
The basis of value used when valuing property for company accounts.
What has changed in relation to lease accounting / IFRS 16?
IFRS 16 introduced the requirement for leases to be included in the asset reporting section of company accounts.
When did the change come into effect?
January 2019
What are statutory accounts?
Financial accounts provided by companies by law.
Why is good financial record keeping important to you?
Because it may be used to settled disputes in the future.
It means that we can be trusted by clients & tenants.
Tell me three ways you ensure that clients’ money is handled properly.
It is kept in separate accounts marked ‘client’ and with the client name.
The accounts are always kept in credit.
Money is always allocated as soon as reasonably possible
The funds are always available to the client
A monthly 3-way reconciliation is held
What RICS guidance or Schemes do you adhere to in doing so?
RICS Client Money Handling (Jan 2020 1st Ed.) (Pstandard Oct22)
Explain your understanding of the VAT domestic reverse charge for building and construction services.
Scheme to prevent fraud in construction.
VAT registered businesses have to issue reverse VAT invoices for construction services.
The construction service then has to account for this on their VAT return.
When do changes to the reverse charge apply from?
2021
Is VAT included in a balance sheet or a profit & loss account
No
What is the RPI and the CPI, and the difference between the two?
The retail price index tracks the cost of retail goods over time to measure inflation
The CPI is the consumer price index - and does not include everything in the RPI such as mortgages
When does a company need to submit micro accounts?
2 of the following 3:
Revenue under £632k
Assets under £316k
Less than 10 employees
What is included in micro accounts?
Shortened version of company accounts - has to contain balance sheet
