Accounting principles Flashcards
What are the three types of financial statement you may come across relating to a company?
Balance Sheet, Profit and Loss statement, Cashflow statement
What is an asset / liability?
An asset is something containing economic value and/or future benefit. A liability is a debt owed by a company that requires the entity to give up an economic benefit (cash, assets, etc.) to settle past transactions or events.
Can you give me an example of each?
Asset - Cash, property, inventory etc. Liability - Debt, Wages owed, Taxes etc.
What is the difference between financial and management accounts?
Managerial accounting -
Internal use
Not audited
Financial accounting-
External use
Audited
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
GAAP in the UK it became FRS102
The four basic constraints associated with GAAP include objectivity, materiality, consistency and prudence.
How do companies know which reporting framework to comply with?
Consulting with a chartered accountant. CA 2006
Which reporting framework do public limited companies have to comply with? How would you assess the financial strength of an entity, e.g. for a valuation? Can you tell me about a common financial measure?
CA 2006 recognises two financial reporting frameworks – IFRS and UK GAAP.
IFRS - international standards and interpretations that have been endorsed by the EU (EU-adopted IFRS).
By using financial tests to measure a companies profitability, liquidity and solvency.
What is the acid test / ROCE / working capital ratio / gearing ratio / net assets per share?
Acid test - Short term liquidity position - ability to meet its short term obligations with its most liquid assets - Current Asset/current liabilities
ROCE -To show if a company is generating profits from its capital. EBIT/Capital Employed.
Working capital ratio - Same as acid test
Gearing ratio - how much borrowing the company has in comparison to equity- 3 methods - total debt/total equity
Net assets per share - how much an average share of a company is worth. Assets - liability/shares outstanding.
Can you tell me what the role of an auditor is? When are audited accounts needed and why? How do public limited company accounts differ?
Auditors
review the accounts
ensure the validity and legality of their financial statements
Audited accounts needed - in service charges, to ensure the tenants are being correctly charged.
Companies with an annual turnover of £10.2m or more, or 50+ employees. Public accounts need to be audited.
Tell me something you understand from the Companies Act 2006. Tell me what it means to prepare accounts in accordance with IFRS. What is the difference between UK GAAP and IFRS?
Companies Act 2006 (the 2006 Act). Part 15 (sections 380 to 474) sets out requirements for the preparation, distribution and filing of accounts and reports including the choice of accounting framework.
GAAP is a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements.
IFRS is a set of international accounting standards, which state how particular types of transactions and other events should be reported in financial statements.
UK GAAP is rules based and IFRS is principles based.
What is the basis of valuation under IFRS 13? What is fair value?
– Fair value measurement under IFRS 13
assumes that a transaction to sell an asset or to
transfer a liability takes place in the principal
market (or the most advantageous market in
the absence of the principal market)
What has changed in relation to lease accounting / IFRS 16? When did the change come into effect?
Business now have to account for the full cost of leases in their balance sheets from 2019
What is FRS 102?
FRS 102 is designed to apply to the general purpose financial statements and financial reporting of entities including those that are not constituted as companies and those that are not profit-oriented
What changes have been made to it?
Major changes
Reporting of investment property in a group at fair value or under cost model.
2017 Interim relief for small companies whose directors have provided a company with a loan below market rates.
Fewer recognition of intangible assets.
Clarity on financial instrucments
Removal of undue costs or effort exemptions
How has this impacted upon investment property? What are statutory accounts?
Reporting of investment property in a group at fair value or under cost model specified in section 17.
Statutory accounts - A statutory account is a report that is prepared annually by limited companies with one simple goal: to break down and showcase financial actions taken by the company in that year
