Accounting Principles Flashcards
- What is an income statement
The income statement is a financial statement that shows a company’s profit and loss over a period of time.
- What is a balance sheet
Is a statement of financial position which shows a company’s assets and liabilities
- What is required as part of statutory accounts
Balance sheet and Income statement
- What ratios are used to assess financial performance of an organisation
Current Ratio = Current assets/ current liabilities
Quick ratio = Quick assets/ Current Liabilities
- Why it is important to carry out budget management
To ensure that your firm has sufficient drawn down funds to meet its current and future business objectives.
- What is the difference between management and 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. 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
- What would you typically include in a PLC account ?
Chairman’s Statement
Independent auditors report
Income Statement (Profit and Loss Account)
Statement of financial position (balance sheet)
Corporate governance report
Remuneration report
- What does IFRS stand for ?
International Financial Reporting Standards
- What part of the IFRS do you have regard for in your current role
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.
What reporting standards do smaller companies use
Generally Accepted Accounting Principles
What statutory accounting reports are limited companies required to produce annually?
(Full balance sheet, P&L statement, turnover, auditor report, directors report)
What is the difference between a profit and loss report and a balance sheet?
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
How would you use a profit and loss statement
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.
At what point do you need to start paying VAT
Income threshold of £85k
How would you financially assess a company
Dun and Bradshaw
Experian
What are the typical ratios used in valuation ?
Quick ratio: net current/ net liabilities - converted to cash within 90 days
Creditor days = creditors/ purchasers x 365
What is creditors days
The creditor days ratio shows the average number of days your business takes to pay suppliers.
How is creditor days calculated ?
Creditors/cost of sales x 365 days
What is the difference between management accounts and statutory account
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.
