Accounting Principles and Procedures

Question 1

Difference between a cash flow forecast and a cash flow statement and why you need both?

Answer 1

The difference between a cash flow forecast and a cash flow statement is that a cash flow forecast or projection is looking into the future to predict future cash flows. Whereas a cash flow statement is a report of actual transactions that have already taken place.

Both are crucial for managng a company’s financial stability and growth.

Question 2

How would you access a contractor’s financial accounts?

Answer 2

Request a copy of the contractor’s company accounts for the last 3 years.

Assess – if the contractor has been profitable? Calculate the liquidity ratio.

Caveat any advice and recommend that further advise is sought through a financial reports and a qualified accountant.

Question 3

What financial check may you undertake on a company before entering into a contract with them?

Answer 3

Check their published accounts on companies house.

Check their credit ratings on a website

Ask for their order book.

Check references from previous clients.

Question 4

What is a covenant strength?

Answer 4

Ability of a tenant to meet the covenants of the lease. Includes rents, service charge, repairing and insuring obligations and statutory obligations

Question 5

How would you assess the covenant strength of a tenant?

Answer 5

References from a previous landlord.

A bank, accountant and 2 trade references

Ask an accountant to check at least 3 years of audited accounts.

A copy of the business plan for a new business

Profits test – net profit for business must be 3 times the rent for 3 consecutive years

Question 6

What is the difference between management and company accounts?

Answer 6

Company accounts are annual reports required by law for external parties. They show the profit, loss, assets, and liabilities of a business.

Management accounts are monthly or quarterly reports optional for internal parties. They show the sales, costs, budgets, forecasts, and analysis of a business.  

Question 7

What is an insolvency?

Answer 7

Insolvency – the state of being unable to pay debts, by a person or company. A situation where the value of a company’s liabilities exceeds the value of its assets.

Question 8

What is an audit?

Answer 8

Auditing - a report prepared by an auditor as an independent party confirms that the financial accounts of a company are fair and true

Is an financial statement audit or an objective examination and evaluation of a company’s financial statement, usually performed by an external third party.

Question 9

Why is auditing important?

Answer 9

Without proper regulations and standards, preparers can easily misrepresent their financial positioning to make the company appear more profitable or successful than they actually are.

Auditing is crucial to ensure that companies represent their financial positioning fairly and accurately and in accordance with accounting standards. 

Question 10

What is accounting?

Answer 10

Process of recording financial transactions relating to a business. The accounting process includes summarising, analysing and reporting these transactions to oversight agencies, regulators and tax collection entities.  

Question 11

What is the role of the auditor?

Answer 11

An auditor is a person whose job is to make sure that information reported on financial statements is **true and accurate **and that the financial statements are prepared according to the relevant standards (GAAP, IAS etc.) 

a report prepared by an auditor as an independent party confirms that the financial accounts of a company are fair and true

Question 12

What is balancing the books?

Answer 12

Aka double entry accounting.

Balancing the books is when every accounting transaction is entered as both a debit and a credit in two separate ledger accounts that will role up into the balance sheet and income statement.

Question 13

What is accounting principles?

Answer 13

The general rules and guidelines that companies are required to follow when reporting all accounts and financial data.

Currently no universally standardized accepted accounting principles the most common are IFRS, UK GAAP and US GAAP. GAAP are more ruled based, IFRS is more principles based.

Question 14

What is GAAP?

Answer 14

GAAP is the body of accounting standards published by the UK’s Financial Reporting Council (FRC). Depending on where you live, accounting standards will be regulated by a different authority.

They are a set of rules which regulate how accounts are prepared.

Question 15

What is IFRS?  

Answer 15

International Financial Reporting Standards Foundation (IFRS) – non-profit accounting organisation. Main objective includes the development and promotion of international financial reporting standards through the international accounting standards board which it oversees 

Question 16

What is an accountant?  

Answer 16

Responsible for maintaining records of a company’s daily transactions and compiling those transactions into financial statements such as the balance sheet, income statement, and statement of cashflows. 

Question 17

Why do we need accounting principles?  

Answer 17

Purpose of having and following accounting principles is to be able to communicate economic information in a language that is acceptable and understandable from one business to another.  

Question 18

What are the six financial reporting standards? 

Answer 18

• FRS 100: overall reporting framework
• Sets out and provides guidance on the overall reporting framework
• FRS 101: disclosure exemptions for qualifying entities
• FRS 102: single standard based on IFRS
• FRS 103: insurance contracts
• FRS 104: interim reporting
• FRS 105: micro-entities regime

Question 19

What is the main difference between IAS and GAAP?

Answer 19

The main difference between IAS and GAAP is that IAS is a principle-based accounting method while GAAP is a rules-based accounting method. IAS is practiced by over 120 countries to deliver accounting statements.  

Question 20

What is a balance sheets?

Answer 20

they indicate assets, liabilities and capital of a company at a single point in time.

Question 21

Why should you keep accounts  

Answer 21

Keeping accounts is the process of recording and reporting the financial transactions and events of a business or an organisation. Here is a concise answer to why you should keep accounts:
* It helps to reduce your tax obligations by claiming expenses.
* It helps to monitor and improve your business performance.
* It helps to meet the legal requirements and provide a summary of your past results.
* It helps to plan for the future and manage your cash flow, investments, and debts.
* It helps to protect your business from fraud, errors, and disputes

Question 22

What is Profit and Loss  

Answer 22

Profit and Loss is a statement of income and expenses.  

Question 23

What is asset and liabilities?  

Answer 23

Assets are the items your company owns that can provide future economic benefit. Liabilities are what you owe other parties. In short, assets put money in your pocket, and liabilities take money out.  

Question 24

What is financial statements?

Answer 24

Concise summary of financial transcriptions over an accounting period summarising a company’s operations, financial position and cashflow.

Regardless of size of a business, accounting is a necessary function for decision making, cost planning, and measurement of economic performance measurement.

Invaluable in making informed decisions.  

Question 25

What is double entry bookkeeping? 

Answer 25

Double-entry bookkeeping is an accounting method where each transaction is recorded in 2 or more accounts using debits and credits. A debit is made in at least one account and a credit is made in at least one other account. The total debits and credits must balance (equal each other).

Question 26

What is a cash flow statement?

Answer 26

Is a financial statement that summarizes the movement of cash and cash equivalents that come in and go out of a company.  

Question 27

What is cash and cash equivalents?

Answer 27

(CCE)- the line item on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately. Case Equivalents include bank accounts and marketable securities.

Question 28

What is financial ratios? 

Answer 28

Financial ratios or benchmarks are used to assess business profitability, balance sheet structure and overall business performance. Typically these measures are expressed as a ratio (number of times) or a percentage. Their trends over time can be used to identify areas of strength and weakness within the business.

Question 29

What is management/company accounts?

Answer 29

Management/Company Accounts – financial reports produced for the business owners and managers, generally monthly or quarterly, normally a Profit & Loss report and a Balance Sheet.

Question 30

What is capital expenditure?

Answer 30

(CapEx) – are a company’s major, long-term expenses. E.g. physical assets such as buildings, equipment, vehicles.

Question 31

What is operating expenditure?

Answer 31

Operating Expenditure (OpEx) – are a company’s day-to-day expenses. E.g. Employee salaries, rent, utilities and property tax.

Question 32

Explain your understanding of the term tax depreciation?

Answer 32

Tax depreciation is where the declining value of an asset is offset against a companies taxable profit.

The depreciation in value can be recorded as an expense in order to reduce the amount of taxable income.

This can be applied on things such as plant, tools, vehicles, computers, furniture and buildings.

Question 33

What are overheads?

Answer 33

• The terms overheads means the operating cost of the business that are incurred on an ongoing basis.
• Overheads can be both fixed or variable.
• Example of fixed overheads could take the form of rent on office buildings or building insurance costs that do not change each month
• Whereas as variable overheads tend to fluctuate depending on the activity of the business for example delivery or utility charges.

Question 34

What is escrow Account?

Answer 34

An escrow account, sometimes called an impound account depending on where you live, is set up by your mortgage lender to pay certain property-related expenses. The money that goes into the account comes from a portion of your monthly mortgage payment.

Question 35

Name the three different types of accounting ratios?

Answer 35

1. Liquidity ratios – consider 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
2. Profitability ratios – 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
3. Gearing ratios – 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.  

Question 36

Why does a business keep company accounts?

Answer 36

• Record and measure a companies profitability
• Tax calculation including tax calculating taxable deductions
• Legislation requires companies to keep accurate records
• Business Growth is encouraged by identifying profitable operations whilst also allowing management to minimise any loss making activities 

Question 37

What is financial leverage?

Answer 37

• Financial leverage is the concept of using borrowed funds in the form of debt to enhance business operations and increase the companies profitability and rates of return.
• In the event that the rate of return invested via borrowed funds is higher that the interest on those funds then more profit can be generated

Question 38

What are Capital Allowances?  

Answer 38

• 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 for example:
• Plant & Machinery
• Integral parts of Structures & Buildings (lifts, escalators etc)
• Research & Development costs
• Patents

Question 39

What is the difference between a current asset vs. a fixed asset?

Answer 39

• Current assets **can normally be converted into cash within one financial year **and are regarded as assets that allow day to day operation of the 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.

Question 40

What is a cash flow?

Answer 40

Cash Flow – incomings and outgoings of cash within a business

Question 41

How can cash flow be improved?

Answer 41

Cash flow can improve by negotiating shorter payment terms with clients and longer payment terms for sub-contractors and suppliers.

Question 42

How is company cashflow used in comparision to a project cashflow?

Answer 42

While company cash flow provides a holistic view of the organization’s financial activities, project cash flow zooms in on the financial implications of individual projects

Question 43

What is credit control?

Answer 43

• Credit Control - Strategy employed by manufacturers and retailers to promote good credit among the creditworthy and deny it to delinquent borrowers. This will both increase sales and decrease bad debts, thus improving a company’s cash flow.

Question 44

What is the difference between profit and loss statement and balance sheet?

Answer 44

Balance sheets; they indicate assets, liabilities, and capital of a company at a SINGLE POINT IN TIME.

A Profit and Loss is a statement of income and expenses over a SPECIFIED PERIOD.

Question 45

Can you tell me about taxation? How much does Motts pay?

Answer 45

• Taxation - accounting is intrinsically linked with taxation, which for UK companies includes corporation tax.
• This is paid on a company’s profits in any financial year, from April 2023 the tax rate is 25%. The 25% main rate is payable by companies with taxable profits above £250,000. A small profits rate (SPR) applies for companies with profits of £50,000 or below, meaning they will pay 19%.
• Companies will also pay corporation tax on chargeable gains; that is, profits from the disposal of business assets such as land, property, equipment and machinery. Capital allowances can be claimed against chargeable gains, with specialist advice being required in these circumstances.
• MM will therefore pay 25%.

Question 46

What is Revenue?

Answer 46

Revenue - income the business receives from its business activities e.g. money from things it sells.

Question 47

What is Ratio Analysis?

Answer 47

Ratio Analysis – a method of quantifying a company’s liquidity, operational efficiency, and profitability to evaluate its performance over time and relative to its peers.

Question 48

What is vetting?

Answer 48

Vetting

financial reports, alongside credit reports, can be used when vetting suppliers, tenants or contractors. Typically, a credit report will show information about a company, a credit risk score and any issues relating to insolvency, credit defaults or debt repayments. Surveyors should always refer clients to an accountant for specialist advice, recognising their scope of competence.

Question 49

Is there any legislation that undermines accounting principles and procedures>

Answer 49

Companies Act 2006

The Companies Act 2006 is legislation that governs companies in the UK in just about every way a company is managed, run and financed.

the goal of the Companies Act 2006 is to make life easier for business owners

In Section 172, Companies Act 2006 states that directors must “promote the success of the company,” meaning that they must act in a way that benefits shareholders.

Question 50

Have you heard of gearing?

Answer 50

Yes

Gearing ratio: this is a type of financial ratio that helps when analysing a company’s capital structure and financial leverage. It represents the proportion of debt finance relative to equity held in a company. Typically, a high gearing ratio is above 50%, a low ratio is below 25%, and an optimal one is somewhere in between – although this will depend on the type of company.

Question 51

What are the two types of insolvency?

Answer 51

– Cash flow insolvency
– Balance sheet insolvency

Question 52

What are the three stages of insolvency?

Answer 52

Answer – ALR
– Administration – Company is taken under the management of a court
– Liquidation – Companies assets are sold to pay off debts / creditors
– Receivership – Creditors appoint receiver over one or more of the insolvent company’s assets

Question 53

If you were successful in your APC and you wanted to set up your own practice, so you were out on your own, so still with accounting principles in mind, are you aware how you would manage VAT?

Answer 53

– I personally am not a specialist in VAT so I would always seek the guidance of a chartered accountant

Question 54

Whats the difference between management and financial accounts?

Answer 54

financial accounting is about historical financial performance for external stakeholders, while management accounting is about providing actionable insights for internal decision-making.

Question 55

What headings would you expect to see in a set of accounts?

Answer 55

Are you talking about the annual account, the company account if so government does not set out headings but explains for a private limited company it will include:

a ‘balance sheet’, which shows the value of everything the company owns, owes and is owed on the last day of the financial year
a ‘profit and loss account’, which shows the company’s sales, running costs and the profit or loss it has made over the financial year
notes about the accounts
a director’s report (unless you’re a ‘micro-entity’)

Question 56

How often are accounts expected to be lodged and where?

Answer 56

End of each financial year for a private limited company. Lodged on Companies House. Or if a newly registered company then 21 months after the date you registered.

Question 57

What is the VAT rate and what is the corporate tax rate

Answer 57

20% VAT
25% Corporate tax

Question 58

What is capital expenditures and operating expenses?

Answer 58

Capital expenditures are a company’s major, long-term expenses while operating expenses are a company’s day-to-day expenses.

Examples of CapEx include physical assets, such as buildings, equipment, machinery, and vehicles.

Examples of OpEx include employee salaries, rent, utilities, and property taxes.
Items covered by OpEx often have a useful life of one year or less, while CapEx tends to pay for a benefit to the company for longer than one year.

Capital expenditures cannot be deducted from income for tax purposes, but operating expenses are eligible.