Accounting principles

Question 1

What is a balance sheet and what does it contain?

Answer 1

Snapshot of a business at a fixed point in time.
Statement of assets, liabilities and capital of a business at a particular point in time
Balance of income and expenditure over preceding period
Shows net worth (Assets minus liabilities)
Assets – Fixed(building) Current (Cash)
Liability – Current Liability – due within one year of balance sheet date – Long term Liability not payable within one year of balance sheet date

Question 2

What is a Profit and Loss Account?

Answer 2

Shows financial performance over given time period EG one year
Shows if business made a profit or loss
Turnover – Operating Costs/Overheads = OPERATING PROFIT
Turnover = Sales made in a trading period i.e. Quantity Surveying Services -Represents amounts charged to clients
Operating Costs - Overheads = Staff Costs + External Charges + Expenses + Depreciation

Question 3

What is Ratio Analysis?

Answer 3

A quantitative method of gaining insight into a company’s liquidity, operational efficiency, and profitability by studying its financial statements such as the balance sheet and income statement.

Liquidity ratios - measure a company’s ability to pay off its short-term debts as they become due, using the company’s current or quick assets

Profitability ratios - convey how well a company can generate profits from its operations.

Solvency Ratios - Compare a company’s debt levels with its assets, equity, and earnings, to evaluate the likelihood of a company staying afloat over the long haul, by paying off its long-term debt as well as the interest on its debt.

Question 4

What is a Cash Flow?

Answer 4

Movement of money in and out of a business
Cash In (Operating profit)
Cash Out (Tax + Dividends)
Cash In – Cash Out = Total
The final line shows the total increase or decrease over the year in how much cash the company holds.
Shows a company’s financial strength.
Having ample cash on hand will ensure that creditors, employees and others can be paid on time.
No cash to meet debts = insolvency

Question 5

Difference between Capital Expenditure and Operational Expenditure?

Answer 5

Funds that fall under capital expenditures are for major purchases that will be used in the future. The life of these purchases extends beyond the current accounting period in which they were purchased. Because these costs can be recovered only over time through depreciation, companies usually prepare a capital expense budget apart from OPEX.

Operating expenses represent the day-to-day expenses necessary to run a business. Because these are short-term costs that are used up in the same accounting period in which they were purchased, it makes sense for them to have a separate budget.

Question 6

HMRC requirements for public accounts?

Answer 6

English companies must keep account books where are registered all the operations of the company and establish annual accounts including an annual report, a profit and loss account, a balance sheet, a table of financial flows, an appendix, an opinion of the auditors, a statement upon losses and earnings recorded, the comparison between the movements of interests of the shareholders and a note upon the result on historical costs basis.

Financial statements must be prepared annually.
Small companies (those meeting two of the three following requirements: annual turnover of no more than GBP 10.1 million, balance sheet total not more than GBP 5.1 million and a workforce of no more than 50 employees) may submit a shortened balance sheet and notes, and a special auditors’ report.
Medium-sized companies (those meeting two of the three following requirements: turnover of no more than GBP 36 million and balance sheet total of no more than GBP 18 million and 250 employees or less) may submit as a minimum a profit and loss account, a statement of other comprehensive income, a balance sheet and a statement of changes in equity, a directors’ report, a strategic report, an auditor’s report and notes to the accounts.

Question 7

Why is OPEX important to a business?

Answer 7

Opex is important to consider as it accurately reflect the costs of doing business, since no future benefits are gained. If the Opex is too high, a company can easily lose money. Unlike Capex, the debt of which can be offset by future benefits, suffering debt to pay for Opex is always a problem.