Accounting Principles and Procedures

Question 1

What is included in a public limited company’s account?

Answer 1

• Chairman’s Statement
• Independent Auditor Report
• Income Statement (profit & loss statement)
• balance sheet
• Corporate Governance Report
• Remuneration report
• Other Statutory information

Question 2

What are the three types of financial statement you may come across relating to a company?

Answer 2

• Balance Sheet
• Income Statement (profit and loss account)
• Cash Flow Statement

Question 3

What is a balance sheet?

Answer 3

• A statement of the business’s financial position showing its assets and liabilities at a given date, usually the end of a financial year.

Question 4

What is an asset?

Answer 4

• Assets can include cash, property, debtors and other investments held

Question 5

What are liabilities?

Answer 5

• Liabilities can include borrowings, overdrafts, loans and creditors.

Question 6

What is a profit and loss account?

Answer 6

• A summary of a business’s income and expenditure transactions usually prepared on an annual basis.

Question 7

What the difference between a management account and statutory accounts?

Answer 7

• Management accounts are prepared for internal use by a business and are not audited. Statutory accounts are audited and have to be submitted

Question 8

Who prepares accounts that are to be audited?

Answer 8

• Audited accounts are prepared by a Chartered or Certified Accountant.

Question 9

Can you tell me what the role of an auditor is? / When are audited accounts needed and why?

Answer 9

• To make sure that accounts have been recorded correctly
• Audited accounts are needed for all accounts unless exempt
• Exemptions include: if the company is too small

Question 10

10. What is a cash flow statement?

Answer 10

• A cash flow statement shows all the actual receipts and expenditure to include VAT.

Question 11

11. What are the main bodies and standards for account that are used in the UK?

Answer 11

• The Financial Reporting Standards (FRS)
• UK GAAP is generally accepted

Question 12

12. What do you understand by the term Generally Accepted Accounting Principles (GAAP)?

Answer 12

GAAP consists of a common set of accounting rules, requirements, and practices issued by the Financial Accounting Standards Board (FASB)

Question 13

13. What is IFRS?

Answer 13

International Financial Reporting Standards

Question 14

14. What is the difference between FRS and GAAP?

Answer 14

• FRS is more comprehensive/detailed
• GAAP is more detailed and prescriptive while IFRS is more high-level and flexible. GAAP requires more disclosures while IFRS requires fewer disclosures

Question 15

16. Which reporting framework do public limited companies have to comply with?

Answer 15

IFRS

Question 16

17. How are leases treated under IFRS 16?

Answer 16

• Full cost of leases have to be accounted for on the balance sheet. An occupiers obligation to pay rent has to be recognised as a liability (service charge payments would be accounted for separately).

Question 17

18. Who is exempt from IFRS16?

Answer 17

• Leases of 12 months or shorter.

Question 18

19. What is an accrual?

Answer 18

• Accounting for a payment on the issue of a bill/invoice rather than when the fee is actually paid.

Question 19

20. How would you assess the financial strength of an entity, e.g. for a valuation.

Answer 19

• 3 years audited accounts
• Profits test
• External credit rating eg. Dunn & Bradstreet
• References

Question 20

21. Why do you need to assess covenant strength?

Answer 20

• Risk of tenant defaulting affects security of income
• Affects capital value of the property

Question 21

23. What does D&B show?

Answer 21

• Commercial database containing business records
• Runs credit checks and assesses business risk
• 2 numbers:
  o First - signifies financial strength determined by a company’s net worth, based on latest filed accounts
  o Second – risk indicator of 1-4 indicates minimum to high risk

Question 22

24. What are the limitations of D&B?

Answer 22

• Relies on the tenant’s accounts being up to date
• Therefore score could be incorrect or outdated