Accounting Principles Flashcards
What is the difference between management and financial accounts?
Management accounts are for internal use of management team
Financial accounts are company accounts produced by law
What are the three components of management accounts?
Profit and loss account
Balance Sheet
Cashflow
What is the purpose of management accounts?
To review income and outgoings and make sure the financial position of the business is healthy and sustainable and the business plan is on track.
What information must be supplied annually for company accounts?
Balance sheet showing financial position at the end of the year.
Profit and loss account to report on performance over the financial year.
Cashflow
Notes about the accounts.
Directors report.
Copies of the above should be sent to shareholders, people who attend AGMs, Companies House and HMRC as part of the company tax return.
Difference between a profit and loss account and balance sheet?
Profit and loss account shows revenue and expenses during period (shows if company is profitable).
Balance sheet sumarises the financial position of a company at a point in time (assets, equity and liability). Shows what the company is actually worth.
Why request three year accounts?
Check for patterns, one year wouldn’t show significant trends.
What might you ask a contractor to provide?
Profit and loss account (3 years)
Balance Sheet (3 years)
Cashflow
Orderbook
Do year–on–year turnover increases suggest positives?
Not necessarily – form could be in difficulty and over committing resources to claw back losses to remain seen as profitable.
What are the advantages / disadvantages of using audited / submitted accounts?
Always at least a year out of date
– Dun and Bradstreet
– Creditsafe
What are main types of ratio analysis used to assess a companies financial strength?
Liquidity
– Current ratio: current assets / current liabilities – tests ability to pay debts.
– Acid test: Current assets excluding stock / current liabilities – shows liquidity by excluding cash invested in stock.
Solvency
– Gearing: Debt / Equity
Efficiency
– Stock turnover: Average cost of sales / average value of stock.
Why are these ratios important?
To assess the financial stability of contractors and those tendering for a contract. To protect the employer from going into contract with a contractor who may later become insolvent.
To monitor the financial position of own accounts, if working as a sole trader or running a practice or joining the management team at C5.
To assess the covenant strength of potential tenants and landlords
To assess competitors.
Why is the Companies Act 2006 relevant to surveyors?
The Companies Act 2006 forms the primary source of UK company law and determines the accounting provisions for all business’ and director responsibility.
