Accounting principles and procedures Flashcards
What are the key financial statements a company provides?
- Profit & loss (income statement)
- Balance sheets
- Cash flow statements
What is the difference between management and financial accounts?
- Management accounts are for internal use - Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization’s goals.
- Financial accounts are company accounts required by law - Financial accounting involves recording, summarizing, and reporting the stream of transactions and economic activity resulting from business operations over a period of time to the public or regulators. Audited by an accountant.
What is a profit & loss account?
It shows the income and expense expenditure of a company and the resulting profit or loss i.e. to work out how much tax is likely
What is a balance sheet?
It shows what a company owns (assets) and what it owes (liabilities) and the value of the business at any given point in time. i.e. shows VAT and dividends
What is a cash flow statement?
It’s the summary of actual or anticipated ingoing and outgoing of cash over an accounting period
What are capital allowances?
Tax relief on items purchased for the business
What are sinking funds?
Funds set aside for future expense
What is insolvency?
An inability to pay debts where liabilities exceed assets
What is companies house?
An agency that incorporates and disolves limited companies
What are liquidity ratios?
They measure the ability of a company to pay off its current liabilities by converting its assets into cash
What are profitability ratios?
Measures the performance of a company in generating its profits
Why is it important to understand accounting principles?
To aid in preparing business accounts and to assess the financial strength of contractors
What is the purpose of a P&L?
- To monitor and measure profit or loss, to help calculate tax and compare against past performance
Is the difference between debtors and creditors?
Creditors are owed money by another entity, debtors owe money to another entity
What is a financial statement?
Forecasts of income and expenditure that can be used to identify potential shortfalls and services
What is a cash flow forecast?
A forecast of the amount of cash or cash equivalents entering and leaving company over a period of time
What are escrow accounts?
- An account owned by a third-party held on behalf of two other parties
- Can be used as a project bank account
- A payment certificate is required for the release of funds
When have you used company accounts in your work?
I review my own company accounts prior to submission to HMRC
How do you carry out a credit check?
There are online credit searching websites
Why would you not recommend the appointment of a contractor with a low credit rating?
There is an increased risk of the contractor not performing satisfactorily or becoming insolvent during the contract
What measures would you recommend if your client wanted to appoint a contract with a low credit rating?
I would suggest a performance bond and ensure that their interim valuations are accurate and not over client
What is a performance bond?
A performance bond, also known as a contract bond, is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. If they fail to do so, the Surety company is responsible for completing the contract obligations, either by securing a new contractor to complete the job or by financial compensation.
What are financial ratios?
Rations using info from financial statements to assess a company’s liquidity, profitablity, valuation etc
What is an efficiency ratio?
Measures how well a company is utilising its assets and resources
What are the UK auditing exemption qualification requirements for companies?
- annual turnover <£10.2m
- assets worth less than £5.1m
- 50 or fewer employees
What is IFRS 2016?
It is the lease accounting standards - International Financial Reporting Standards published by IASB (International Accounting Standards Board) - applies from Jan 2019
Who does IFRS 2016 apply to?
All companies who rent or lease assets for business purposes. Specifically, it applies to all leases with a term over 12 months, unless the underlying asset is of low value (which is unlikely to apply to most property transactions).
How would you deal with a company’s insolvency?
I would follow guidance from RICS and the UK government website
What are examples of assets and liabilities?
Examples of assets: Cash, inventory, building, furniture, and accounts receivable.
Examples of liabilities: Loans, accounts payable, sales tax payable, and debts.
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting.
What is the Companies Act 2006?
The Companies Act 2006 is the piece of legislation that serves as the main source for company law governing the UK.
How do companies know which reporting framework to comply with?
The Companies Act - Company law recognises two financial reporting frameworks – IFRS and UK and Ireland GAAP (generally accepted accounting practice)
Can you tell me about a common financial measure?
Financial ratios such as liquidity ratios or profitability ratios
Can you tell me what the role of an auditor is?
The auditor’s objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes the auditor’s opinion.
When are audited accounts needed and why?
The primary purpose of an audit it to comply with legal regulations which seek to ensure companies are operating legitimately. It is carried out at the end of the financial year
What is the difference between UK GAAP and IFRS?
The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based.
How have changes to FRS102 impacted upon investment property?
Under FRS 102, investment property whose fair value can be reliably measured without undue cost or effort must be measured at that fair value at each balance sheet date with gains and losses recognised in profit and loss.
What RICS guidance or Schemes relates to client money?
- RICS Client money handling professional statement
- Fraud response plan
- Client money handling
- RICS Client Money Protection Scheme for Surveying Services
Explain your understanding of the VAT domestic reverse charge for building and construction services.
The VAT reverse charge is a requirement that (except in certain circumstances mentioned below) any VAT registered contractor paying for construction services that are within the scope of the construction industry scheme (“CIS”) must pay the VAT payable on those construction services directly to HMRC, instead of paying them to the contractor/subcontractor or supplier.
When do changes to the reverse charge apply from?
The VAT reverse charge on construction service came into effect on Monday 1 March 2021
What is the impact of the reverse charge on VAT accounting?
The new reverse charge makes it the customer’s responsibility to account for VAT meaning there is no opportunity for the supplier to disappear before paying their VAT bill to HMRC
Is VAT included in a balance sheet or a profit & loss account?
Balance sheet
