Accounting Principles Flashcards
What are management accounts?
- Management accounts are prepared for the business and can be in the form of:
- Balance Sheets
- Profit and Loss Statements
- Cash flows.
What are company accounts?
- Company accounts are prepared for Companies House or HMRC (Her Majesty’s Revenue & Customs)
How often are management account produced?
- They can be produced weekly, fortnightly, monthly, quarterly etc.
How often are Company accounts prepared?
- Annually
What are the three main financial accounts?
- Balance Sheets
- Profit and Loss Statements
- Cash Flow Statements
What does a Balance Sheet show?
- It shows your assets and liabilities and shareholder’s/owners’ equity
What is an asset?
- An item of property owned by a person or company.
What is a liability?
- Something that a person or company owes.
Name some assets?
- Land
- Buildings
- Stock
- Fixtures and fittings
Name some liabilities?
- Owners claim against a business
- Loans
- Wages
- VAT
- Corporation Tax
- PII Cover
What is a Balance sheet known as?
- A Statement of Financial Position.
Does a balance sheet relate to a period of time or a specific date?
- A snapshot of a given date.
What does a profit and loss statement show?
- A summary of income and expenditure to show a profit/loss.
What are Profit and Loss statements known as?
- An income statement.
Can you draw comparisons between Profit and Loss Statements for different years?
- Yes, as they relate to a specific time period.
What is a cash flow statement?
- A cash flow statement merges balance sheet and income statements to show actual receipts and expenditure including VAT.
What is a cash flow statement split into?
- Core operations
- Investing activities
- Financing activities
Why is cash flow analysis important?
- It provides details of income and expenditure.
- Helps on decision making.
- Allows a company to plan ahead.
- It helps with budgeting.
Who are audited accounts prepared by?
- An accountant.
What act are audited accounts required?
- The Companies Act 2006.
Why are audited accounts beneficial?
- Allows access to finance.
- Confirms no material misstatements.
- Better supplier terms.
- Required if business is SOLD.
- Identifies weaknesses.
What are typical UK Companies?
- Sole Trader
- Limited company
- LLP
- Partnership
- Public Limited Company (PLC)
Where is an annual report important for a public limited company?
- Shows performance to shareholders and investors.
- Helps potential investors in decision making.
What is the benefit of being a Public Limited Company (PLC)?
- Audited accounts are publicly available.
- Perceived prestige and status.
What are some common financial measures?
- Acid Test.
- Return on capital employed.
- Working capital ratio.
- Gearing ratio.
- Net assets per share.
What is the acid test (quick ratio)?
- How well are current liabilities covered by cash/liquid assets.
What is return on capital employed?
- How profitable is capital invested in business.
What is working capital ratio (liquidity)
- Ability of company to pay (solvency).
What is gearing ratio?
- Exposure of business to loans as opposed to share capital.
What is net assets per share?
- The price which shares can be bought and sold at.
What is the most common reason for business failure?
- Cash flow issues.
What are the two financial reporting frameworks recognised by UK company law?
- UK GAAP
- IFRS
What does UK GAAP stand for?
- UK Generally Accepted Accounting Principles.
What does IFRS stand for?
- International Financial Reporting Standards.
Which type of entity must use IFRS?
- Listed Companies.
Can other companies choose between IFRS and UK GAAP?
- Yes – But seek advice from an accountant.
What is UK GAAP?
- A financial reporting framework for how company accounts are prepared.
What is a key change in FRS 102?
- Investment properties held at Fair Value and (unrealised) revaluation movements recorded in income statement.
What is a listed company?
- A company that is on a stock exchange.
What is the basis for financial reporting under IFRS?
- Fair Value.
What is the Red Book definition of fair Value?
- The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
What does IFRS 16 relate to?
- Lease accounting.
When did IFRSS 16 come into force?
- 1st January 2016.
What are the impacts of changes to IFRS 16?
- Eliminated off balance sheet lease accounting.
- Encouraged short term arrangements as leases under 12 months are exempt.
- Affected financial metrics, e.g. gearing ratio EBITDA.
When would you want to assess financial strength of an entity as a surveyor?
- Prospective tenants.
- Profits valuation.
- Contractors/tenders.
- Competition assessment.
What a typical credit check reports?
- Experian
- Creditsafe
- D&B
What would you look for in a credit check report?
- Risk assessment.
- Failure risk score.
- Financial ratios.
- Delinquency score.
For a typical credit check report, what would be the best financial rating?
- A/1
What else would you ask to assess financial strength of an entity, e.g. prospective tenant?
- References, bank, trade, landlord and accountant with 3 years audited accounts.
What is the profits test?
- Net profit for proposed business must be 3 x rent for 3 consecutive years or NAV of business must be 5x rent.
Why is it important to check financial strength of entities you deal with?
- Assess risk of default and impact on investment security.
Do LLP’s pay Corporation Tax?
- No.
