Accounting Principles and Procedures Flashcards
Explain your understanding of the term ‘tax depreciation’?
Where the declining value of an asset is offset against a companies taxable profit
Depreciation in value can be recorded as an expense in order to reduce amount of taxable income
Can be applied to things such as tools, vehicles, computers, buildings, etc
What are overheads?
The operating costs of the business that are incurred on an ongoing basis
Can be fixed or variable
Eg fixed- rent on office buildings each month
eg variable- depend to fluctuate based on usage, eg utility charges
What is an escrow account?
Contractual agreements that are used as financial instruments within a transaction
Asset or currency being transferred between two primary parties is held by an intermediary third party
Currency being exchanged is held securely by third party until each of the 2 parties have met their contractual obligations, allowing the money to be transferred
Often used by mortgage lenders when completing on the buying or selling of the real estate that is being exchanged
Name three different types of accounting ratios
Liquidity Ratios
Profitability ratios
Gearing ratios
What is a ‘liquidity ratio’?
Considers an organisations ability to pay their debt obligations and assess its margin of safety by looking at a number of metrics including their operating cash against short term debts
What does a ‘profitability ratio’ concern?
Assess an organisations ability to generate profits from its sales operations and shareholding equity. The ratio indicates how efficiently a company is in generating its profit
What does a ‘gearing ratio’ do?
Compare capital within the company against its debts.
The gearing is a measure of companies financial leverage and sets out what proportion of the firms activities are funded by shareholders vs its creditor funds
Why does a business keep company accounts?
Record and measure a companies profitability
Tax calculation including tax calculating deductions
Legislation requires companies to keep accurate records
Business growth is encouraged by identifying profit making activities, whilst also allowing management to identify loss creating activities
What is financial leverage?
The concept of using borrowed funds in the form of debt to enhance and increase the companies profitability and rates of return
In the event that the rate of return invested via borrowed funds is higher than the interest on those funds, then more profit can be generated
What are capital allowances?
Capital allowances allow tax payers to gain tax relief by using their expenditure to be deducted from their taxable income
The expenditure used to lower taxable income is only allowed within certain categories, eg
Research & Development costs
Integral parts of structures and buildings (eg lifts, escalators, etc)
Plant & machinery
What is the difference between a current asset vs a fixed asset?
Current assets can normally be converted in to cash within one financial year and are regarded as assets that allow day to day operation of business. Examples may include money owed to the company following sales of its products or services, inventory, and prepaid expenses
Fixed assets typically cannot be converted into cash within one year. These kind of assets are recorded on a companies balance sheet as fixed assets the company owns on a long term basis. Examples include vehicles, office furniture, machinery, buildings and land
What is the difference between a profit and loss account and a balance sheet?
A profit and loss account shows the incomes and expenditures of a company, and the resulting profit or loss
The balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time
What are they key financial statements a company must provide? What are company accounts?
Profit and loss account
Balance sheet
Cash flow statements
What is a cash flow statement?
The summary of actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
Broken down into operating, investing, and financing activities
Measures the short term ability of a company to pay of its debts
Why do chartered surveyors need to be able to interpret company accounts?
For reviewing their own firms accounts
For assessing the financial strength of contractors and those tendering for contracts
For reviewing profitability and sustainability
What is the purpose of a profit and loss account?
Monitor and measure profit (or loss).
Significant problems can arise if information is inaccurate (eg through incompetence or deliberate fraud).
Allows comparisons of past performance, compared to the budget and compared to other businesses
What is the difference between debtors and creditors?
Creditor- your firm owes another firm money - eg if you owe a sub-consultant fees then you are a creditor
Debtor - a firm who owes your firm money - eg a client who owes you fees is a debtor
What are Financial Statements?
Forecasts of income and expenditure
Can be used as an analytical tool to identify potential shortfalls and surpluses
What are profit and loss accounts?
Show the sales and expenditure of the company over a financial reporting period
Used to show the sales vs the expenditure
Can be used to show any profitable or non profitable activities
What are Balance Sheets?
Shows the value of everything the company owns, owes and is owed
Shows the value of the business at any given point
Summarises the Assets and Liabilities
What are signs of insolvency in company accounts/ credit checks?
Low credit rating
Current ratio below 0.75
A falling in working capital ratio, which suggests that the company has taken on more contracts than it can finance.
What are Management Accounts?
For internal use only, not audited
Used for decision making - planning for future and forecasting
What is IFRS 16?
International Financial Reporting Standards
Principles based. Set by International Accountancy Standards Board that set how particular transactions and events should be reported in financial statements
Must be followed by Local and Central Governments
Relates to accounting for leases on the balance sheet of a company, shown as a liability
Service charge accounted for separately
Exemptions exist for leases of less than 12 months
Can you tell me about Generally Accepted Accounting Principles?
GAAP
Rules based
Standard accounting rules that accountants must follow when compiling financial statements
Generally used by small to medium sized businesses
What is in the ‘Contents of set of Public Limited Company Accounts’?
Chairman’s statement
Independent auditors report
Profit and loss account
Balance sheet
Corporate governance report
Remuneration report
Other statutory information
