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APC - Commerical > Accounting Principles and Procedures > Flashcards

Accounting Principles and Procedures Flashcards

1
Q

What is GAAP?

A

UK Generally Accepted Accounting Principles
Common set of accepted accounting principles, standards and procedures that companies and their accountants must follow when they compile their financial statements.
A combination of authoritative standards and the commonly accepted ways of recording and reporting accounting information

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2
Q

What is the benefit/purpose of GAAP?

A

To improve the clarity of the communication of financial information

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3
Q

What are the ten principles of GAAP?

A
  1. Regularity - rules applied as standard practice
  2. Consistency - used the same standards throughout
  3. Sincerity - provide objective and accurate info
  4. Permanence - consistent procedures so finances can be compared between reports
  5. Non-compensation - provide transparency of factors without any compensation
  6. Prudence - financial data is based on documented facts
  7. Continuity - financial data collection and asset valuations should not disrupt normal business operations
  8. Periodicity - data should be organised and reported according to relevant accounting periods
  9. Materiality - must rely on material factors and disclose all material and accounting facts
    Good facts - expectations of honesty and completeness
  10. Utmost good faith - parties remain honest in all transactions
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4
Q

What are the International Accounting Standards (IAS)?

A

The older accounting standards which were replaced in 2001 by the IFRS

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5
Q

Why were the IFRS introduced to replace IAS?

A

Goal was to make it easier to compare businesses around the world and increase transparency and trust in financial reporting and foster global trade and investment

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6
Q

What is IFRS?

A

International Financial Reporting Standards

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7
Q

What is IFRS 16?

A

Single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value

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8
Q

What is the objective of IFRS 16?

A

Report information that faithfully represents lease transactions and provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases
To meet this a lessee should recognise assets and liabilities arising from a lease
Requires leases to be places on balance sheet by recgnising a ‘right of use’ asset and lease liability

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9
Q

What is the result of IFRS 16 accounting reporting?

A
  • Results in an increase in assets, liabilities and net debt where leases are brought on to the balance sheet
  • It can also affect key accounting and financial rations impacting a company’s attractiveness to investors and its ability to raise finance
  • Provided transparency on companies’ lease assets and liabilities
  • Improves comparison between comapnies that lease and those that borrow to buy
  • Ended guesswork in calculating a company’s lease obligations
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10
Q

What governs the format of company accounts?

A

The Companies Act (2006)

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11
Q

What’s included in company accounts as laid out in the Companies Act (2006)?

A 
Cover page
Information and contents page
Directors report
Accountants / Auditors report
Statutory profit and loss account
Balance sheet
Notes to the accountant
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12
Q

What is a profit and loss account?

A

A summary of the business income and expenditure transactions on an annual basis. Gives and overall profit and loss figure

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13
Q

What is taxation?

A

The amount of money or percentage that is owed to HMDC based on the company profit

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14
Q

What is director’s remuneration in a profit and loss account?

A

Refers to how directors of a company are compensations by a company for their services, usually fees, salary, use of company property or benefits

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15
Q

How is gross profit calculated?

A

Turnover (the value of a company’s sales) minus the cost of sales

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16
Q

What can be interpreted from gross profit?

A

No much in isolation, but when compared to the previous year’s gross profits provides an idea of the direction the company profits are heading in

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17
Q

What is a better indicator of profit than gross profit?

A

Earnings before interest, tax, depreciation and amortisation (or EBITDA)
Calculated by subtracting administrative expenses from gross profit.
EBITDA is a good indicator of whether a company has a future

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18
Q

What is depreciation?

A

A planned, gradual reduction in the recorded value of a tangible asset over its useful life by charging it to expense.
It is applied to fixed assets, which generally experience a loss in their utility over multiple years

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19
Q

What is amortisation?

A

The process of incrementally charging the cost of an intangible asset to expense over its expected period of use, which shifts the assets from the balance sheet to the income statement. It reflects the consumption of an intangible asset over its useful life

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20
Q

What is the difference between amortisation and depreciation?

A

Amortisation charges off the cost of an intangible asset and depreciation does so for tangible assets

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21
Q

What is a balance sheet?

A

It outlines a company’s assets and liabilities.

It tells you how much a company is worth, how healthy it is and whether its shares reflect these factors.

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22
Q

What are assets on a balance sheet?

A

Items that the company owns and can provide economic benefit

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23
Q

What are the two types of asset?

A

Fixed (those that will be around for a long time, e.g., land and factories) and;
Current (shorter lift span like stock and cash in the bank

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24
Q

What are liabilities?

A

What a company owes to other parties

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25
Q

What are the two types of liability?

A 
Long term ( those not due to be repaid in the next year) and;
Current (those due within a year)
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26
Q

What key piece of information can be concluded from a balance sheet?

A

Whether a company is solvent, how likely it is that the company will still be in business in a year

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27
Q

What is the liquidity ratio?

A

A financial ratio used to determine a company’s ability to pay its short-term debt obligations.
The metric helps determine if a company can use its current assets to cover it current liabilities

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28
Q

How is the liquidity ratio calculated?

A

The current assets are divided by current liabilities

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29
Q

How is the liquidity ration figure interpreted?

A

A ratio of 1 means that the company can exactly pay off all its current liabilities with its current assets.
A ratio of less than 1 means it is unable to satisfy its current liabilities

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30
Q

What is net asset value (NAV)?

A

Total assets (fixed and current) less total liabilities (long-term and current)
Simple way to establish how much a company is worth, frequently shown as a function of a company’s shares.
If a share price is higher than the NVA per share then the market is expecting the company to make future profits

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31
Q

What are the three parts of the balance sheet?

A

Assets, liabilities and ownership equity.

Assets are usually listed first in order of liquidity, followed by liabilities

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32
Q

What is the difference between assets and liabilities known as?

A

Equity, the net of assets, net worth, capital of the company

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33
Q

What is a cash flow statement?

A

A financial statement that provides aggregate data regarding all the cash flows a company receives from its ongoing operations and external investment sources.
It includes all cash outflows that pay for business activities and investments in a given period

34
Q

Why is the cash flow statement believed to be the most intuitive of all financial statements?

A

It follows that the cash made by the business in three main ways: operations, investment and financing
The sum of these three segments is called the net cash flow
It shows the movement of money in and out of a company and how well a company is managing it’s cash and growth

35
Q

What is a credit rating?

A

A numerical or quantified assessment of an organisation’s creditworthiness based on previous dealings.
It shows the ability of an organisation to fulfil their financial commitments or likelihood of defaulting on its debt obligations

36
Q

What are the main commercial credit rating agencies?

A

Dunn and Bradstreet
Moody’s
Standard and Poor (S&P)
Fitch Ratings

37
Q

Why do companies keep accounts?

A

For regulatory purposes
Keep track of outgoings and in goings
Compare performance and plan future growth

38
Q

What are the two parts of a Dunn and Bradstreet rating?

A

Financial strength indicator (5A to HH) - Financial strength indicator is an indication of the size of a subject’s tangible net worth based primarily of the most recent fiscal balance sheet results

Composite credit appraisal/risk indicator (1 (minimum risk) - 4 (high risk)) - linked to the level of risk and is an overall evaluation of credit worthiness. It takes into account the financial condition but also several non-financial factors such as trade, payment history, length of operation, employee numbers, legal structure, management experience and any adverse listings

39
Q

What is covenant strength?

A

Refers to a tenant’s ability to comply with and observe the covenants outlined in their lease

40
Q

What is taxation?

A

The amount of money or percentage that is owed to HMDC based on the company profit

41
Q

What is revenue?

A

Income generated by the sale of products or services

42
Q

What is capital expenditure?

A

Money spent by a business or organisation on acquiring or maintaining fixed assets such as land, buildings and equipment

43
Q

What is a financial audit?

A

An objective examination and evaluation of the financial statements of an organisation to make sure that the financial statements are a fair and accurate representation of the transaction they claim to represent

44
Q

What is ratio analysis?

A

Method of gaining insight into a company’s liquidity, efficiency and profitability by studying its financial statements

45
Q

What are profitability ratios?

A

Convey how well a company can generate profit from its operations. Include:
Gross profit ratio (=gross profit/net sales)
Net profit ratio (=net profit/net sales)
Operating profit ratio (=EBIT/net sales)

46
Q

What are solvency ratios?

A

Compare a company’s debt levels with its assets, equity and earnings. They suggest whether a company is solvent and can pay off the lenders’ debts or not. These include:
Debt equity ratio
Interest coverage ratio
Equity ratio

47
Q

What are efficiency ratio?

A

Evaluate how efficiently a company uses its assets to generate sales and maximise profits.
Also called activity ratios

48
Q

What is credit control?

A

Strategies employed by businesses to accelerate sales of products or services through the extension of credit to potential customers and clients. It is the process of checking their creditworthiness to ensure that credit is only given to parties who are likely to be able to pay it.

49
Q

What is profitability?

A

A relative metric used to determine the scope of a company’s profit in relation to the size of the business. It is a measure of efficiency.

50
Q

What is insolvency?

A

A term of when an individual or company can no longer meet their financial obligations to lenders as debts become due. It can arise from poor cash management, a reduction in cash inflow and increase in expenses

51
Q

What is VAT?

A

Value added tax.
A consumption tax on goods and services, levied at each stage of the supply chain where value is added.
Standard rate is 20%
Reduced rate is 5% for some goods and services
Zero rate 0%

52
Q

Where might you find information on a company’s assets?

A

On their balance sheet

53
Q

What is a cashflow statement?

A

A financial statement that summarises the movement of cash and cash equivalents that come in and go out of a company. It measures how well a company company manages its cash position

54
Q

What is the difference between a profit and loss statement and a balance sheet?

A

Balance sheet reports the assets, liabilities and shareholder equity at a specific point in time
A profit and loss statement summaries a company’s revenues, costs and expenses during a specific time period?

55
Q

Are profit and loss accounts current?

A

No - they are retrospective

56
Q

What are management accounts?

A

Management accounts are financial reports produced for the business owners and managers, generally monthly or quarterly, normally a Profit & Loss report and a Balance Sheet. In principle they are similar to Year End accounts but are less formal and are personalised to the user’s requirements

57
Q

What are company accounts?

A

Documents prepared at the end of the financial year showing a company’s performance over the accounting period. The are legally required from all companies under the Companies Act 2006. They must be prepared in accordance with the Act.

58
Q

What is capital expenditure?

A

Money spent by a business to acquire, upgrade and maintain physical assets

59
Q

When must a company be registered for VAT?

A

The company’s total VAT taxable turnover for the last 12 months was over £85,000 (the VAT threshold)
Or
The turnover is expected to go over £85,000 in the next 30 days

60
Q

What is the VAT threshold?

A

The amount of money a company can before you need to register for VAT.
Currently £85,000

61
Q

What is EBITA

A

Earnings before interest, taxes and amortisation.

It is a measure of company profitability

62
Q

What is goodwill?

A

An intangible asset that is associated with the purchase of one company by another
Portion of the purchase price that is above the net fair value
Things like brand name and good customer relation are examples of why goodwill exists

63
Q

What does it mean for a company to go into administration?

A

A company becomes insolvent and it is put under the management of Licensed Insolvency Practitioners

64
Q

What is insolvency?

A

The state that a company or individual enters when they are not able to pay their debts

65
Q

What is bankruptcy?

A

A legal proceeding initiated when a person or business is unable to repay its outstanding debts and liabilities.
The bankruptcy process makes sure any assets are shared among creditors and allows the party to make a fresh start from debt, with restrictions

66
Q

What is recievership?

A

A court appointed tool that can assist creditors to recover funds in default and can help companies avoid bankruptcy.
Goal is to return companies to profitability
Court appoints an independent receiver who manages the company’s business

67
Q

Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?

A

To assess the covenant strength of tenants

To assist with business operations

68
Q

Where can you find information on a company’s financial status?

A

Companies House

Credit check from credit agencies

69
Q

What is liquidation?

A

A process where assets are used to pay off its debts. Any money left goes to shareholders. The the company is then closed/deregistered
There are three types: creditors’ voluntary liquidations, compulsory liquidation, members’ voluntary liquidation

70
Q

What is the difference between management and financial accounts?

A

Management accounts are internal

Financial accounts are required by law and must follow a pre-determined format

71
Q

What is the Limitations Act 1980?

A

Outlines the time limit within which a creditor can chase a debtor for outstanding debts.
The Act only applies when no contact has been made between the creditor and debtor within the given time limit and only applies to residents of England and Wales

72
Q

What is the meaning of misappropriation of funds?

A

Occurs when a person who is entrusted to manage someone else’s money or property steals all or part of that money or property for their own personal gain.
It may be an internal matter involving employees, funds being diverted to another company or might involve a criminal gang infiltrating a company.

73
Q

What is a financial bond?

A

Fixed income instrument that represents a loan made by an investor to a borrower.

74
Q

What are the three tests of insolvency?

A

The cash-flow test.
The balance sheet test.
The legal action test.

75
Q

What are the consequences of insolvency?

A

The business will go into liquidation and stop trading or go into administration and be sold
Outcome may be a company voluntary arrangement.

76
Q

What is the impact of IFRS 16?

A
  • Lead to an increase of leased assets and financial liabilities on the balance sheet of the lessee
  • Increasing EBITA and net debt
77
Q

What is a gearing ratio?

A

Compare shareholders’ equity to company debt in ways to assess the company’s amount of leverage and financial stability

78
Q

What is the most commonly used accounting standard under UK GAAP?

A

FRS 102

79
Q

What is FRS 102?

A

The principal accounting standard in the UK financial reporting regime
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

80
Q

What are the main differences between IFRS and UK GAAP?

A
81
Q

What is statutory profit?

A

A company’s earnings calculated according to UK GAAP
Total revenue – costs = net income
Includes explicit costs of doing business such as operating expenses, depreciation, interest and taxes

82
Q

What is underlying profit?

A
  • Calculation of profit made internally by a company to show what it believes is a more accurate reflection of how much money it generates
  • It strips out unusual, non-recurring costs, and irons out random fluctuations and should make it easier to get a better idea of how the company’s profit from its standard business operations varies of several fiscal year

APC - Commerical (10 decks)

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