Accounting Principles and Procedures Flashcards
Please tell me about cash-flow statements, with some examples of the factors that may affect cash flow.
A cash-flow statement shows the actual cash flow for the business. It reconciles the income with the business expenditure to give a cash flow for the business over a set period, usually on a monthly basis for the year ahead. My organisation revises this on an ongoing basis so it is more accurate for the forthcoming month and quarter, and may be reviewed against actual cash flow and business needs.
It is an essential business tool for decision-making as it predicts any negative cash flow – when reserves or loans may be needed – and also positive cash flow. This enables my organisation to be proactive in managing cash. Factors that affect income or expenditure will affect cash flow, and can include: finishing a project early so it can be invoiced and paid, or delays in a payment point that delay an invoice; and winning more work at the same or a greater fee rate to increase income, or being unsuccessful in winning fees, thus reducing income.
Factors affecting expenditure can include: increases in staffing that put up costs, or reductions in staff that bring savings; increases in salaries and bonuses at a set pay review being larger than forecast and increasing expenditure, or smaller than expected and thus reducing expenditure.
What are liquidity ratios?
=current assets/current liabilities
it measures the ability of a company to pay off its current liabilities by converting assets to cash
What is the Acid Test Ratio
current assets - stock / current liabilities
stock is excluded - could be perishable or not able to sell quickly
What is the difference between Cap Ex v OpEx?
CapEx funds used to acquire, upgrade and maintain physical assets.
e.g. new roof, new machinery, building a factory
OpEx - short-term expenses used for the day-to-day operation of the business
e.g. rent, marketing, payroll, insurance
What Taxes are applicable to businesses
Corporation Tax
VAT (Value Added Tax)
Income Tax
What is corporation tax?
Tax paid by businesses in the UK, calculated on their annual profits, in a similar way to income tax for individuals
What is VAT
Value Added Tax
A consumption tax paid on goods and services, levied at each stage of the supply chain where value is added, from initial production to the point of sale.
What is VAT
Value Added Tax
A consumption tax paid on goods and services, levied at each stage of the supply chain where value is added, from initial production to the point of sale.
What is a company’s obligation in terms of VAT?
Must register for VAT if the value of their taxable supplies in a given period is higher than the VAT registration threshold
What is income tax/PAYE
Income tax from employees as they earn it
What is the employers duty regarding income tax?
Employers must send amounts deducted to HMRC by 19th of each month
What are Accounting Principles?
Accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial data. These rules make it easier to examine financial data by standardizing the terms and methods that accountants must use
e.g
GAAP
IAS
What are benefits of accounting principles?
Easier for investors to analyse and extract useful information from the company’s financial statements, including trends over time
Allows comparisons of financial information across different companies
Helps mitigate accounting fraud by increasing transparency and allowing red flags to be identified
What’s the difference between GAAP and IAS?
Different nations have their own version of GAAP which are slightly different to each other. IAS is internation and aims to standardise accounting all over the world so that accounting principles are the same everywhere and the results of different countries can be compared.
What does GAAP standard for?
General Accepted Accounting Principles
They are a framework within which financial statements of any company are prepared, summarised and analysed.
They reflect the standards, rules and conventions used when recording and presenting financial results of a company
