Accounting Principles and Procedures

Question 1

What is shareholder’s equity?

Answer 1

The total amount that would be returned to shareholders if a company’s assets were to be liquidated.

Question 2

What are financial statements?

Answer 2

Accounting reports that summarise a business’s activity over a period of time

Question 3

What is the basic formula of a balance sheet (the accounting equation)?

Answer 3

Assets = Liabilities + Shareholders equity

Question 4

What does shareholders equity consist of?

Answer 4

Shareholders capital contributions plus retained earnings

Question 5

What are retained earnings?

Answer 5

Accumulated profits held for future use, made up of opening retained earnigs plus current year profits minus current withdrawals (owner’s dividends).

Question 6

What figures are contained in a profit and loss statement?

Answer 6

\+ Total revenue
- Cost of revenue
= Gross profit
- Operating costs
= Operating profit
- taxation & depreciation
= Net profit

Question 7

What is a balance statement?

Answer 7

A snapshot of a business’s assets, liabilities and equity at a single point in time.

Question 8

Explain the difference between current assets non-current assets

Answer 8

Current assets can be converted into cash in a short period of time, typically a year.
Non-current assets are long-term assets used in operations to generate profit, can’t easily be converted into cash

Question 9

What are the three most common types of current asset?

Answer 9

Cash (money already paid to you)
Accounts receivable (money due to you for purchases)
Inventory (stock for selling)

Question 10

What are the three common categories or non-current assets?

Answer 10

Long-term investments - stocks, bonds etc.
Tangible Assets - land, buildings, machinery etc
Intangible Assets - Intellectual property

Question 11

What does capitalise mean with regard to financial statement?

Answer 11

We record it as an asset on the balance sheet rather than as an expense on the profit and loss account

Question 12

What is goodwill?

Answer 12

The premium one company would pay for another over and above the fair value for their assets.

Question 13

What is the difference between a P&L statement and a cash flow statement?

Answer 13

P&L shows a companies income from their trading activities, cash flow shows all inflows and outflows. E.g. sale of equipment, cash from trading activities.

Question 14

What are the three categories a cash flow statement will typically be broken down into?

Answer 14

Operating activities
Investing activities
Financing activities

Question 15

What is the difference between IFRS and GAAP?

Answer 15

GAAP is rules based and IFRS is principles based

Question 16

Who publishes UK Generally Accepted Accounting Principles (GAAP)?

Answer 16

UK’s Financial Reporting Council (FRC)

Question 17

What should be included in a companies statutory accounts?

Answer 17

1. A profit and loss acount (or income and expenditure if not trading for profit)
2. balance sheet signed by a director
3. notes to the accounts
4. Group accounts (if appropriate)
   and. ..
5. a Directors report
6. an auditor’s report (unless small business)

Question 18

What constitutes a small business?

Answer 18

1. Less than £6.5m turnover
2. Less than £3.26m balance sheet
3. 50 or less employees

Question 19

How is a companies accounting period determined and can this be changed?

Answer 19

It is 12 months from the date the company was incorporated. A company can shorten or lengthen its first accounting period in order to align with a chosen date.

Question 20

What is the difference between company (statutory) accounts and management accounts?

Answer 20

Company accounts are mandatory and requested by HMRC, these come in a generic format. Management accounts are for internal decision making. They tend to be more detailed and do not follow a set format.

Question 21

What are the deadlines for filing company accounts to Companies House?

Answer 21

9 months after financial year end. 6 months if PLC.

Question 22

What is the dealine for filing company tax return?

Answer 22

12 months after accounting period.

Question 23

What is the current corporation tax rate?

Answer 23

19%

Question 24

When does a business qualify for business rates relief?

Answer 24

If the rateable value is below £15,000.

Question 25

What is the basic property rate (business rates)?

Answer 25

49 pence

Question 26

Who can file abridged accounts?

Answer 26

Small companies, dormant companies and micro-entities

Question 27

What is the taxable supply threshhold for a business becoming VAT registered?

Answer 27

£85,000

Question 28

What are the rates for capital gains tax?

Answer 28

10% for basic rate income tax payers, 20% for higher rate and additional rate income tax payers. This rises to 18% and 28% respectively for gains made on the sale of residential property.

Question 29

What is the standard personal allowance on income tax?

Answer 29

£12,570

Question 30

What are the employer and employee national insurance rates?

Answer 30

13.8% and 12%, respectively.

Question 31

What is the allowance for inheritance tax and the standard IHT rate?

Answer 31

£325,000 allowance. 40% IHT rate.

Question 32

Lifetime gifts: explain the difference between a potentially exempt transfer and a gift with reservation of benefit. Will these still be subject to inheritance tax?

Answer 32

Potentially exempt transfer: this is a lifetime gift that the person has given away and not continued to use. This will be free from IHT if the donor lives for another seven years after the transfer. if they live less than seven years, this will be eligible for taper relief. A gift with reservation of benefit it when a person has gifted part of their estate but continued to use it. This will be subject to IHT.

Question 33

What is the residence nil rate band for IHT?

Answer 33

£175,000