Accounting Principles and Procedures

Question 1

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

Answer 1

The three types of financial statements are:
1. Income Statement: Shows the company’s revenues and expenses over a specific period, indicating profit or loss.
2. Balance Sheet: Provides a snapshot of the company’s assets, liabilities, and shareholders’ equity at a specific point in time.
3. Cash Flow Statement: Details the cash inflows and outflows from operating, investing, and financing activities over a period

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Question 2

What is an asset / liability?

Answer 2

Asset: An asset is a resource owned by a company that is expected to provide future economic benefits. Example: Cash, inventory, property.

Liability: A liability is an obligation that a company owes to external parties, which will result in an outflow of resources. Example: Loans, accounts payable

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Question 3

Can you give me an example of each?

Answer 3

Asset: A company’s office building.

Liability: A bank loan taken out by the company.

Question 4

What is the difference between financial and management accounts?

Answer 4

Financial Accounts: Prepared for external stakeholders such as investors, creditors, and regulators. They follow standardized rules (e.g., GAAP or IFRS) and provide a historical view of the company’s financial performance and position.

Management Accounts: Prepared for internal use by the company’s management. They are more detailed, can include both financial and non-financial information, and are used for decision-making and strategic planning

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Question 5

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

Answer 5

GAAP refers to a set of accounting standards, principles, and procedures that companies in the U.S. must follow when preparing their financial statements. These principles ensure consistency, reliability, and comparability of financial reporting

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Question 6

How do companies know which reporting framework to comply with?

Answer 6

Companies determine their reporting framework based on regulatory requirements, the nature of their business, and their geographical location. Public companies typically follow frameworks mandated by regulatory bodies, such as IFRS for international companies or GAAP for U.S. companies

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Question 7

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

Answer 7

Public limited companies in the UK must comply with International Financial Reporting Standards (IFRS) as endorsed by the EU

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Question 8

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

Answer 8

To assess the financial strength of an entity, you would analyze its financial statements and calculate key financial ratios, such as liquidity ratios, solvency ratios, profitability ratios, and efficiency ratios. Comparing these ratios to industry benchmarks and historical performance provides insights into the company’s financial health

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Question 9

Can you tell me about a common financial measure?

Answer 9

A common financial measure is the Return on Equity (ROE), which indicates how effectively a company is using shareholders’ equity to generate profit. It is calculated as Net Income divided by Shareholders’ Equity

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Question 10

What is the acid test / ROCE / working capital ratio / gearing ratio / net assets per share?

Answer 10

Acid Test (Quick Ratio): Measures a company’s ability to meet short-term obligations with its most liquid assets. Formula: (Current Assets - Inventory) / Current Liabilities.

ROCE (Return on Capital Employed): Indicates the efficiency and profitability of a company’s capital investments. Formula: EBIT / Capital Employed.

Working Capital Ratio: Measures a company’s operational efficiency and short-term financial health. Formula: Current Assets / Current Liabilities.

Gearing Ratio: Assesses a company’s financial leverage. Formula: Total Debt / Shareholders’ Equity.

Net Assets per Share: Indicates the value of a company’s assets per share. Formula: (Total Assets - Total Liabilities) / Number of Shares

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Question 11

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

Answer 11

An auditor reviews and verifies the accuracy of a company’s financial records and ensures compliance with accounting standards and regulations. They provide an independent opinion on whether the financial statements present a true and fair view of the company’s financial position

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Question 12

When are audited accounts needed and why?

Answer 12

Audited accounts are needed for public companies, large private companies, and certain regulated industries to provide assurance to stakeholders that the financial statements are accurate and comply with accounting standards. Audits help detect and prevent fraud, improve internal controls, and enhance the credibility of financial reporting

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Question 13

How do public limited company accounts differ?

Answer 13

Public limited companies must have their accounts audited, file them more frequently, and disclose more detailed information compared to private companies. They are also required to hold annual general meetings and comply with stricter regulatory requirements

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Question 14

Tell me something you understand from the Companies Act 2006.

Answer 14

The Companies Act 2006 is the primary source of UK company law, consolidating and modernizing previous legislation. It covers various aspects of company formation, management, and reporting, including directors’ duties, shareholder rights, and financial reporting requirements

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Question 15

Tell me what it means to prepare accounts in accordance with IFRS.

Answer 15

Preparing accounts in accordance with IFRS means following the International Financial Reporting Standards, which provide a common global language for financial reporting. This ensures transparency, comparability, and consistency of financial statements across different jurisdictions

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Question 16

What is the difference between UK GAAP and IFRS?

Answer 16

UK GAAP is the set of accounting standards used in the UK, while IFRS is a global set of standards used in many countries.

Question 17

What does it mean to prepare accounts in accordance with IFRS?

Answer 17

Preparing accounts in accordance with IFRS means following the International Financial Reporting Standards, which provide a common global language for financial reporting. This ensures transparency, comparability, and consistency of financial statements across different jurisdictions.

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Question 18

What is the difference between UK GAAP and IFRS?

Answer 18

UK GAAP is the set of accounting standards used in the UK, while IFRS is a global set of standards used in many countries. IFRS tends to be more principles-based, whereas UK GAAP can be more rules-based. IFRS is required for public companies in the UK, while UK GAAP can be used by private companies.

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Question 19

What is the basis of valuation under IFRS 13?

Answer 19

The basis of valuation under IFRS 13 is fair value, which is defined as 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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Question 20

What is fair value?

Answer 20

Fair value is the estimated price at which an asset or liability could be exchanged in an orderly transaction between knowledgeable, willing parties in the market.

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Question 21

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

Answer 21

IFRS 16 requires lessees to recognize most leases on the balance sheet as right-of-use assets and lease liabilities, eliminating the distinction between operating and finance leases for lessees. This change increases transparency and comparability of financial statements.

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Question 22

When did the change come into effect?

Answer 22

The change came into effect on 1 January 2019.

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Question 23

What is FRS 102?

Answer 23

FRS 102 is the Financial Reporting Standard applicable in the UK and Republic of Ireland. It provides a simplified framework for financial reporting by small and medium-sized entities, aligning with IFRS but with reduced disclosure requirements.

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Question 24

What changes have been made to it?

Answer 24

Recent changes to FRS 102 include updates to align with IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers), enhancing clarity and consistency in financial reporting.

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Question 25

How has this impacted upon investment property?

Answer 25

The changes to FRS 102 require investment properties to be measured at fair value, with changes in fair value recognized in profit or loss, providing more relevant and timely information to users of financial statements.

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Question 26

What are statutory accounts?

Answer 26

Statutory accounts are the annual financial statements that companies are required by law to prepare and file with regulatory authorities. They include the balance sheet, income statement, cash flow statement, and accompanying notes.

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Question 27

Why is good financial record keeping important to you?

Answer 27

Good financial record keeping is important because it ensures accuracy and completeness of financial information, facilitates compliance with legal and regulatory requirements, supports decision-making, and helps detect and prevent fraud.

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Question 28

Tell me three ways you ensure that clients’ money is handled properly.

Answer 28

1. Segregation of Funds: Keeping client money separate from the firm’s funds.
2. Regular Reconciliation: Conducting regular reconciliations of client accounts.
3. Compliance with RICS Regulations: Adhering to RICS guidelines and schemes for client money handling.

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Question 29

What RICS guidance or Schemes do you adhere to in doing so?

Answer 29

I adhere to the RICS Client Money Protection Scheme and the RICS Professional Statement on Client Money Handling, which provide detailed guidelines on managing and safeguarding client funds.

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Question 30

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

Answer 30

The VAT domestic reverse charge for building and construction services shifts the responsibility for accounting for VAT from the supplier to the customer. This measure aims to combat VAT fraud in the construction industry.

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Question 31

When do changes to the reverse charge apply from?

Answer 31

The changes to the reverse charge apply from 1 March 2021.

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Question 32

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

Answer 32

The reverse charge impacts VAT accounting by requiring the customer to account for the VAT on their VAT return, rather than the supplier. This reduces the risk of missing trader fraud.

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Question 33

Is VAT included in a balance sheet or a profit & loss account?

Answer 33

VAT is typically included in the balance sheet as a liability (VAT payable) or an asset (VAT receivable). It is not included in the profit & loss account, except for irrecoverable VAT, which is treated as an expense.

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Question 34

How do you account for the impact of inflation when reporting to clients?

Answer 34

To account for the impact of inflation when reporting to clients, I adjust financial projections and valuations to reflect current price levels, ensuring that the reported figures are realistic and relevant. This may involve using inflation indices or adjusting for specific cost increases.

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