Accounting Principles Flashcards
What are the key financial statements that companies provide?
The key financial statements are:
* Profit and loss accounts
* Balance sheets
* Cash flow statements
These statements provide a comprehensive overview of a company’s financial performance and position.
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 that are required by UK law.
What is the difference between a profit and loss account and a balance
sheet?
- A profit and loss account shows the incomes and expenditures of a company and the resulting
profit or loss. - The balance sheet shows what a company owns (it’s assets) and what it owes (it’s liabilities) at
a given point in time.
What is a cashflow statement?
It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the
accounting period.
* It measures the short-term ability of a firm to pay off its bills.
Explain your understanding of the following Terminology?
Capital Allowances
Sinking Finds
Insolvency
Companies House
HMRC
- Capital Allowances - Tax relief on certain items purchased for the business for example tools and
equipment. - Sinking Finds – Funds that are set aside for future expense or long-term debt.
- Insolvency – An inability to pay debts where liabilities exceed assets.
- Companies House – An agency that incorporates and dissolves limited companies within the United
Kingdom. - HMRC - Her Majesties Revenue and Customs.
What are Liquidity ratios?
Liquidity rations measure the ability of a company to pay off its current liabilities by converting its
current assets into cash.
* Liquidity ratio calculation = current assets / current liabilities.
* The ratio is usually around 1.5 but it depends on the sector of activity.
* For example house builders often operate on a liquidity ratio over 3 because they retain high value
assets in the form of unsold houses.
* A liquidity ratio of less than 0.75 can be an early indicator of insolvency.
What are Profitability ratios?
Profitability ratios measure the performance of a company in generating its profits.
* The trading profit margin ratio = turnover – (cost of sales / turnover).
What are Financial Gearing Ratios?
These measure the financial structure of the company which are crucial indicators for the external
suppliers of debt and equity as well as for internal management.
* They help to measure solvency.
* Highly geared companies rely mainly on borrowing.
What is the purpose of a P & L?
To monitor and measure profit (or loss).
* To compare against past performance and against company budgets.
What is the difference between debtors and creditors?
Creditors are business entities that are owed money by another entity
* For example if you have provided services to a client and they owe payment of your fees, you
become a creditor to that client.
* Debtors are business entities that owe money to another respective company.
What are Management Accounts?
The accounts prepared by a company for internal management use.
* Accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the
funding.
* These accounts are not be audited externally
What is a Financial Statement?
Forecasts of income and expenditure that can be used as an analytical tool to identify potential
shortfalls and surpluses.
What is a Profit and Loss account?
They demonstrate a companies sales, running costs and profit or loss over a financial period (usually 1
year).
* They are used to show sales vs expense (invoicing vs time and disbursements).
* They can also be used to identify non-profitable work.
What is a Balance Sheet?
They shows the value of everything the company owns made up of its assets and liabilities.
* The balance sheet demonstrates the value of the business at any given point in time
What is a Cash Flow forecast?
A cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a
company or project entity.
* On construction projects they usually show as an ‘S’ curve.
What is an S-Curve?
S-Curve means ‘standard’ and refers to the shape of the expenditure profile when shown in
graphical form.
* During the start of a project, the rate of expenditure is typically lower due to site setup and
lower value enabling works.
* As the scheme progresses to the middle of the programme, the rate of expenditure will
typically increase as more expensive building components such as M&E and Structural Steel
Work are installed.
* Towards the back end of the programme, the rate of expenditure will slow down which is
shown by the flattening of the S-Curve.
What are Escrow Accounts?
A sperate account owned by a third party, held on behalf of two other parties.
* A bank account with defined contractual conditions for the release of funds.
When have you used company accounts in your work?
To assess tenant covenant strength, risk and deposit level
How do you analyse a company’s accounts?
The client’s accountants will carry out the detailed analysis but I can look at the warning signs by
calculating ratios such as liquidity ratios, profitability ratios and gearing ratios.
- I should always use the group or consolidated accounts rather than the company accounts unless it is a
limited company.
How do you carry out a credit check? Give an example.
I use a credit check website like Experion
If the credit rating is low, I calculate some key ratios and pass on all the information to my client’s
accountants for them to analyse further.
What are signs of insolvency in company accounts or credit checks?
- A low credit rating.
- A liquidity ratio below 0.75.
- A falling working capital ratio suggesting that the company has taken on more contracts than it can
finance. - A low return on equity.
- A highly geared company that is heavily reliant on loans.
- A falling cashflow statement.
What are the contents of a set of public limited company accounts
- Chairman’s statement
- Independent auditor’s report
- Income statement (profit and loss account)
- Statement of financial position (balance sheet)
- Corporate governance report
- Remuneration report
Other statutory information
Balance Sheet (statement of financial position)
- A statement of the business’s financial position showing its assets and liabilities at a given date, usually at the end of a financial year
- Assets can include cash, property, debtors and other investments held
- Liabilities can include borrowings, overdrafts, loans and creditors
Profit and Loss Account (Income statement)
A summary of the business’s income and expenditure transactions, prepared usually on an annual basis
