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APC Mock Questions - BDG > Accounting principles and procedures > Flashcards

Accounting principles and procedures Flashcards

1
Q

What should be included in a set of public limited company accounts?

A
  1. Chairman’s statement
  2. Independent auditors report
  3. Income statement (profit and loss)
  4. Statement of financial position (balance sheet)
  5. Corporate governance report
  6. Remuneration report
  7. Other statutory information
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2
Q

What is a balance sheet?

A

A statement of the businesses financial position showing its assets and liabilities at a given date, usually at the end of a financial year

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3
Q

What is included in assets?

A
  1. Cash
  2. Property
  3. Debtors
  4. Other investments held
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4
Q

What is included in liabilities?

A
  1. Borrowings
  2. Overdrafts
  3. Loans
  4. Creditors
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5
Q

What is a Profit and Loss Accounts?

A

A summary of the business income and expenditure, prepared usually on an annual basis

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6
Q

Explain management accounts.

A

Prepared for internal use by a business and are not audited

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7
Q

Explain audited accounts.

A

Prepared by a Chartered or Certified Accountant

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8
Q

Explain consolidated set of accounts.

A

They comprise a number of individual subsidiary accounts for a company within a single set of accounts

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9
Q

Explain a cash flow statement.

A

Shows all the actual receipts and expenditure to include VAT

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10
Q

What does IFRS stand for?

A

International Financial Reporting Standards

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11
Q

Which lease accounting standard do all companies have to comply with?

A

IFRS 16

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12
Q

What are the 3 types of financial statements you might come accross relating to a company?

A
  1. Balance sheets
  2. Income statements
  3. Cash flow statements
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13
Q

What is an asset?

A

A resource owned or controlled by a business entity containing economic value

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14
Q

What is a liability?

A

Something a person or company owes

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15
Q

What is the difference between financial and management accounts?

A

Financial accounts is the collection of accounting data to create financial statements required by law

Managerial accounting is the internal processing used to account for business transactions

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16
Q

What do you understand about the term Generally Accepted Accounting Principles (GAAP)

A

Standards that encompass the details, complexities and legalities of business accounting and must be followed when compiling financial statements

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17
Q

What is the purpose of GAAP?

A

To improve the clarity of the communication of financial information

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18
Q

Name 3 principles of GAAP

A
  1. Regularity - rules applied as standard practice
  2. Consistency - use same standards throughout
  3. Sincerity - provide objective and accurate information
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19
Q

How do companies know which reporting framework to comply with?

A

It is set out in FRS 100 Application of Financial Reporting Requirements

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20
Q

Can you tell me about a common financial measure?

A

Gross profit margin / net profit margin

Working capital ( Current assets minus current liabilities)

Debt-to-equity ratio (total debt/total equity)

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21
Q

What is a debt-to-equity ratio?

A

Solvency ratio which measures how much a company finances itself using debt as opposed to equity

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22
Q

What is the acid test?

A

Type of liquidity ratio

Measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately

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23
Q

What is ROCE?

A

Return on capital employed

Compares the relative profitability of a company after taking into account the amount of capital use

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24
Q

What is the working capital ratio?

A

Working capital ratio = current assets / current liabilities

Assess companies liquidity

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25
Q

What is the gearing ratio?

A

Compares some form of owner equity (or capital) to funds borrowed by the company (debt-to-equity ratio - debt/shareholders equity)

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26
Q

What are net assets?

A

Value of a companies assets minus its liabilities

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27
Q

What is net assets per share?

A

An expression of net asset value that represents the value per share of a mutual fund or an exchange-traded fund

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28
Q

Can you tell me what the role of an auditor is?

A

Inspect organisations’ financial accounts to ensure they’re correct and comply with the law

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29
Q

When are audited accounts needed and why?

A

All UK companies require an audit, except for ‘small companies’ with turnover below £10.2m or total assets below £5.1m (or less than 50 employees)

Needed because it is require by law and provides a high level of assurance to shareholders

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30
Q

Do public limited companies need an audit?

A

Yes, PLC must get their annual financial statements audited each year by independent auditors or accountants as prescribed in section 143 of the Companies Act 2013

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31
Q

Tell me something you understand from the Companies Act 2006

A

Replaced Companies Act 1985 and aims to improve shareholders rights, modernise and simplify corporate law one of the largest acts in history with over 1300 sections

Primary source of UK company law

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32
Q

What are the International Accounting Standards (IAS) ?

A

Previous accounting standards - replaced in 2001 by the IFRS

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33
Q

Why was IFRS introduced to replace IAS?

A
  1. Easier to compare businesses around the world and increase transparency and trust in financial reporting
  2. Foster global trade and investment
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34
Q

What is the difference between UK GAAP and IFRS?

A

FRS 102 is the most commonly used UK GAAP accounting standard and is more cost effective than IFRS

IFRS is internationally used

Differences in lease and investment property

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35
Q

What is the basis of valuation under IFRS 13?

A

Fair value

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36
Q

What is fair value?

A

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

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37
Q

What is IFRS 16?

A

International accounting model that specifies how leases are recognised in financial statements

Single leaseholder accounting model - Leaseholders required to recognise leases as assets and liabilities in their financial statements

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38
Q

What is the objective of IFRS 16?

A
  1. Ensure that leaseholders provide relevant information that represents their lease
  2. Assess the effect that leases have on the financial position, financial performance and cash flows of an entity.
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39
Q

What is the result of IFRS 16 accounting?

A
  1. Increase in assets, liabilities and net debt where leases are brought onto the balance sheet
  2. Affects key accounting and financial ratios impacting a companies attractiveness and ability to raise finance
  3. Might result in entities taking shorter leases to reduce net debt on the balance sheet
40
Q

What has changed in relation to lease accounting / IFRS 16?

A

Changes the accounting substantially for lessees, eliminates a lessees classification of leases as either operating leases or finance leases

41
Q

What is FRS 102?

A

The financial reporting standard applicable in UK and Ireland, designed to apply to the general purpose financial statements and financial reporting of entities including those that are not constitutes as companies and those that are not-profit orientated

42
Q

What changes have been made to FRS 102?

A

Changes in the definition of intangible assets, greater range of intangible assets recognised

Companies required to account for holiday and sick pay liabilities at each year end. For example, employees carrying over holiday recognised as a liability on the balance sheet

43
Q

How have FRS 102 changes affected investment property?

A

Investment property is measured at fair value at each reporting date with changes in fair value recognised in profit or loss and will require a valuation exercise in practice, instruction of a valuation expert

44
Q

What are statutory accounts?

A

Also known as financial statements or year-end accounts

Drawn up to report various financial measures and related disclosures for filing with companies house

45
Q

Why is good financial record keeping important to you?

A
  1. Makes budgeting easier
  2. Important for tax purposes
  3. Prevents fraud and theft
  4. Helps to efficiently manage cash flow
  5. Makes management easier
46
Q

Tell me 3 ways you ensure that Client money is handled properly?

A
  1. Kept in a seperate account with word ‘client’ in the account name and distinct identifier of client
  2. Have in clear writing, confirmation from the bank that client money in the account is not to be transferred or combined
  3. Ensure account details are provided to clients and that money is immediately available
47
Q

What RICS guidance or schemes do you adhere to in relation to Client money?

A

RICS Client Money Handling, 2019 (professional statement)

RICS Client Money Protection Scheme, 2019

48
Q

Explain your understanding of the VAT domestic reverse charge for building and construction services

A

The VAT domestic reverse charge procedure is an anti-fraud measure designed to counter criminal attacks on the UK VAT system

Customers are able to charge themselves VAT and pay it directly to HMRC, rather than the supplier sending them an invoice at a later date

49
Q

When do changes to the reverse charge apply from?

A

1st March 2021 - to include Building and Construction Services

50
Q

What is the impact of the reverse charge on VAT accounting?

A
  1. Subcontractor impact on cashflow, losing 20% of income ahead of quarterly VAT return
  2. Boost to main contractors cash flow
51
Q

What governs the format of company accounts?

A

The Companies Act (2006)

52
Q

What is taxation?

A

Amount of money or % that is owed to HMRC based on company profit

53
Q

What is directors remuneration in a profit & loss account?

A

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

54
Q

How is gross profit calculated?

A

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

55
Q

What can be interpreted from gross profit?

A

Provides an idea of company performance year-on-year when comparing with previous gross profit

56
Q

What is a better indicator of profit than gross profit?

A

EBITA - Earnings Before Interest, Tax, Depreciation and Amortisation

Calculated by subtracting administrative expenses from gross profit

Good indicator on whether company has a future

57
Q

What is depreciation?

A

Planned, gradual reduction in recorded value of a tangible assset over its useful life

Applied to fixed assets, which generally experience a loss in their utility over multiple years

58
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 asset from the balance sheet, to the income statement

Reflects the consumption of an intangible asset over its useful life

59
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

60
Q

What are the two types of asset?

A

Fixed (around for a long time, such as land)

Current (shorter life span, such as stock)

61
Q

What are the two types of liability?

A

Long term (not due in the next year)

Current (due within the year)

62
Q

What key 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

63
Q

What is the liquidity ratio?

A

Ability to pay short-term debt obligations

64
Q

How is liquidity ratio calculated?

A

Current assets / current liabilities

65
Q

How is the liquidity ratio figure interpreted?

A

Ratio of 1 = can exactly pay off all current liabilities with current assets

66
Q

What is Net Asset value (NAV)?

A

Total assets minus total liabilities

If share price is higher than NAV per share, market expects company to make future profits

67
Q

What are the 3 parts of a balance sheet?

A
  1. Assets
  2. Liabilities
  3. Owners equity
68
Q

What is a credit rating?

A

A numerical or quantified assessment of an organisations creditworthiness, based on previous dealings.

Shows the ability for an organisation to fulfil their financial commitments or likelihood of defaulting on its debt obligations

69
Q

What are the main commercial credit rating agencies

A
  1. Dunn and Bradstreet (D&B)
  2. Moody’s
  3. Standard and Poor (S&P)
  4. Fitch Ratings
  5. Creditsafe
70
Q

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

A

Financial Strength indicator (5A - HH)

Indicator of size of tangibles and net worth based on recent balance sheet

Composite credit appraisal/risk indicator (1,minimum → 4, high risk)

Overall evaluation of creditworthiness and takes several factors into account: financial condition, payment history, length of operation, employee numbers etc

71
Q

What is covenant strength?

A

Tenant ability to comply with lease obligations

72
Q

What is revenue?

A

Income generated by the sale of products or services

73
Q

What is capital expenditure?

A

Money spent by a business on acquiring or maintaining fixed assets (land, real estate, equipment)

74
Q

What is a financial audit?

A

Objective examination/evaluation of financial statement to ensure they are fair and accurate

75
Q

What is ratio analysis?

A

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

76
Q

What are profitability ratios?

A

Convey how well a company can generate profit from its operations

Gross profit ratio (gross profit/net sales)

Net profit ratio (Net profit/net sales)

Operating profit ratio (EBITA/net sales)

77
Q

What are solvency ratios?

A

Compare a company’s debt levels with its assets, equity and earnings

Suggest whether a company is solvent and can pay debt

Debt equity ratio
Interest coverage ratio
Equity ratio

78
Q

What are efficiency ratio?

A

Evaluate how effective a company uses its assets to generate sales and maximise profits

Also called activity ratios

79
Q

What is credit control?

A

Strategies employes by businesses to accelerate sales of products or services through the extension of credit to potential customers and Clients

Process of checking their creditworthiness to ensure that credit is only given to parties able to pay it

80
Q

What is profitability?

A

Determines the scope of a company’s profit in relation to the size of the business

Measure of efficiency

81
Q

What is insolvency?

A

When an individual or company can no longer meet their financial obligations to lenders as debts become due

Can arise from poor cash management, reduction in cash inflow, and increases in expenses

82
Q

What is VAT?

A

Consumption tax on goods and services, levided at each supply chain stage where value is added

20%
5% (reduced rate for some goods and services)
0% (zero rate)

83
Q

Where might you find information on company assets?

A

On the balance sheet

84
Q

Are profit & loss accounts current?

A

No - retrospective

85
Q

When must a company be registered for VAT?

A

Total VAt taxable turnover for the last 12 months was over £85,000

or

The turnover is expected to go over £85,000 in the next 30 days

86
Q

What is the VAT threshold?

A

Amount of money a company can earn before registering for VAT → £85,000

87
Q

What is EBITA?

A

Earnings Before Interest, Taxes and Amortisation

Measure of a company’s profitability

88
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 higher than the sum of the net fair value of all assets purchased in the acquisition and the liabilities assumed in the process

The value of a company’s name, brand reputation, loyal customer base represents aspects of goodwill → this is why one company may pay a premium for another

89
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 licenced insolvency practitioners

90
Q

What is bankruptcy?

A

A legal proceeding initiated when a person or business is unable to repay its outstanding debts and liabilities

Makes sure any assets are shared amongst creditors and allows the party to make a fresh start from debt, with restrictions

91
Q

What is receivership?

A

A court appointed tool that can assist creditors to recover funds in default and can help companies avoid bankruptcy

Aims to return companies to profitability

Court appoints an independent receiver who manages the company’s business

92
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 building operations

93
Q

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

A

Companies House

Credit check from credit agencies

94
Q

What is liquidation?

A

A process where assets are used to pay off its debts

Leftover money goes to shareholders and the company is then closed / de-registered

95
Q

What is the Limitations Act 1980?

A

Outlines the time limit which a creditor can chase a debtor for outstanding debts

Only applies where no contact between creditor and debtor has been made in a specific period

96
Q

What is the meaning of misappropriation of funds?

A

Occurs when a person entrusted to manage someone else’s money or property, steals all or part of that for their own gain

Can be internal, such as a employee or external, such as targeted infiltration

97
Q

What are the three types of liquidation?

A
  1. Creditors voluntary
  2. Compulsory
  3. Members voluntary

APC Mock Questions - BDG (18 decks)

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