Accounting Principles and Procedures

Question 1

What is included in the Annual Report and Financial Statements?

Answer 1

Strategic report, Directors Report, Independent auditors report, income statement (profit and loss), statement of financial position (balance sheet).

Question 2

What is a balance sheet?

Answer 2

It is a statement of the businesses financial position, showing its assets and liabilities at a given date, usually at the end of the financial year. It can be used to assess its financial position or health and compare to its previous one.

Question 3

What else can a balance sheet be called?

Answer 3

Statement of financial position

Question 4

What are assets?

Answer 4

Cash, property, debtors and other investments held

Question 5

What are liabilites?

Answer 5

Borrowings, overdrafts, loans and creditors

Question 6

What is a profit and loss account?

Answer 6

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

Question 7

What else can a profit and loss statement be called?

Answer 7

Income statement

Question 8

What are management reports?

Answer 8

They are financial reports prepared for internal use by a business and are not audited.

Question 9

Who audits the financial accounts?

Answer 9

Prepared by a Chartered or Certified accountant

Question 10

What is a cash flow statement?

Answer 10

It shows all the actual receipts and expenditures going in and out of the business. It shows the net cash flow position.

Question 11

What is auditing?

Answer 11

A report prepared by auditors as an independent party who confirms that the financial accounts of the business are fair and true.

Question 12

What governs the requirement of submitting financial accounts?

Answer 12

The Companies Act 2006

Question 13

What is equity?

Answer 13

The value that the owner has in the business. It is calculated by deducting total liabilities from total assets on a companies balance sheet.

Question 14

What are financial accounts?

Answer 14

All private limited companies must file annual accounts with Companies House, in line with the requirements of the Companies Act 2006. These accounts are made publicly available.

Question 15

What is a Gearing Ratio?

Answer 15

It is a type of financial ratio that helps when analysing a companies capital structure and financial leverage. It represents the proportion of debt finance relative to equity. A gearing ratio of 50% is high. A ratio of 25% is low.

Question 16

What is a hurdle rate?

Answer 16

A minimum rate of return on an investment.

Question 17

What is Joint Venture?

Answer 17

A contractual agreement where two or more parties undertake an economic activity in joint control.

Question 18

What a KPI’s?

Answer 18

Key Performance Indicators which are used to measure the performance and plan for the future. Examples could be sales rate, profit, growth.

Question 19

What are management accounts?

Answer 19

They are used for the owners of the business and use to inform decision making.

Question 20

What is a NAV? Net Assest Value

Answer 20

It is a financial ratio that shows the net value of an entitys assets minus its liabilities, divided by outstanding shares.

Question 21

What is Return on Capital Employed (ROCE)?

Answer 21

The measure of profitability and the efficiency in which a company uses its capital. It is calculated by taking earnings before interest and tax and dividing by the capital employed (operational costs). It is used to assess a company’s financial health and performance.

Question 22

What is working capital?

Answer 22

It represents the amount available to a company on a day to day basis and ability to meet its current liabilities.

Question 23

What is a private limited company?

Answer 23

The business is a separate legal entity from its owners. It is responsible for its own actions, finances and liabilities.

Question 24

What is an annual report?

Answer 24

Its a corporate document to present the companies financial condition.

Question 25

What are the key financial statements?

Answer 25

• Profit and loss accounts (income statement)
• Balance Sheet (statement of financial position)
• Cash flow statement

Question 26

What is the difference between a profit and loss account and a balance sheet?

Answer 26

A profit and loss account shows the incomes and expenditures of a company and the resulting profit and loss.

The balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time.

Question 27

What are sinking funds?

Answer 27

Funds that are set aside for future expenses or long-term debt.

Question 28

What is companies house?

Answer 28

An agency that incorporates and dissolves limited companies within the UK.

Question 29

What are the signs of insolvency?

Answer 29

Low credit rating
A liquidity ratio below 0.75
Low return on equity
Heavily reliant on loans
A falling cashflow statement