Accounting Principles and Procedures

Question 1

What is a profit and loss statement / income statement / statement of comprehensive income?

Answer 1

• A financial statement that summarises a company’s revenues and costs during specified period, which is normally a year.
• Shows the profitability of a company over the specified period by showing net profit or net loss (revenue minus total costs).

Question 2

What is a cash flow statement?

Answer 2

• A financial statement that summarises the true movement of money through a business by showing the actual cash generated and used during a specified period (normally a year).
• Separated into three categories; operating activities, investing activities and financing activities.

Question 3

What is a balance sheet / statement of financial position?

Answer 3

• A financial statement that summarises a company’s assets, liabilities and shareholder’s equity at a specific point in time.
• Shows the value of a business at a specified point in time.

Question 4

What will a set of financial accounts contain?

Answer 4

• Director / Chairman report
• Name and signature of company director / chairman
• Independent auditors report
• Profit and loss statement
• Balance sheet

Question 5

What is the difference between capital expenditure and revenue expenditure?

Answer 5

• Capital expenditure relates to the purchase or improvement of an asset such as purchasing a new property or undertaking refurbishment works to an existing property.
• Revenue expenditure relates to the day-to-day operating of a business such as rent, insurance and maintenance costs.

Question 6

Define Insolvency

Answer 6

Inability to pay debts where liabilities exceed assets

Question 7

What is Companies House?

Answer 7

An agency that incorporates and dissolves limited companies in the UK

Question 8

Who enforces the Data Protection Act 2019?

Answer 8

The Information Commissioner’s Office

Question 9

Who enforces the GDPR?

Answer 9

European Data Protection Board

Question 10

What is Capital Allowances?

Answer 10

Tax relief on certain items purchased for the business for example tools and equipment.

Question 11

What are sinking funds?

Answer 11

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

Question 12

What is insolvency?

Answer 12

An inability to pay debts where liabilities exceed assets.

Question 13

Why is it important to compare a profit and loss statement with a cash flow statement?

Answer 13

• Revenue and costs may be logged on the profit and loss statement but may not yet be logged on the cash flow statement if the company hasn’t collected particular revenues or paid particular costs during the specified period.
• This is important as although a company may be shown as profitable on the profit and loss statement, a negative cash flow statement may mean the company is unable to fund its costs in the meantime.

Question 14

What are the 2 types of financial report a company will produce?

Answer 14

• Financial accounts, which are required by law and need to be submitted to Companies House and the HMRC annually.
• Management accounts, which are for internal use by the management team.

Question 15

What will a set of financial accounts contain?

Answer 15

• Director / Chairman report
• Name and signature of company director / chairman
• Independent auditors report
• Profit and loss statement
• Balance sheet

Question 16

What is a credit rating?

Answer 16

• A credit rating is an assessment of the creditworthiness of an individual or company.
• Used to dictate the level of borrowing and terms of borrowing an institution will offer to an individual or company.

Question 17

What credit rating systems are you aware of?

Answer 17

• The Dun and Bradstreet rating system rates the creditworthiness of companies between 1 and 5A1 (whereby 1 is a high credit appraisal and 4 is a limited credit appraisal). 5A1 is the best rating and reflects an estimated financial strength of over £50 million.
• The credit safe rating system rates the creditworthiness of companies (including Workman LLP) between 100 and 1 (whereby 100 is a high credit appraisal and 1 is a limited credit appraisal).

Question 18

What is the difference between capital expenditure and revenue expenditure?

Answer 18

• Capital expenditure relates to the purchase or improvement of an asset such as purchasing a new property or undertaking refurbishment works to an existing property.
• Revenue expenditure relates to the day-to-day operating of a business such as rent, insurance and maintenance costs.

Question 19

What are the 8 principles of Data Protection?

Answer 19

• Data held must be:
   Fairly and lawfully processed
   Processed for limited purposes
   Adequate, relevant and not excessive
   Accurate
   Not kept for longer than is necessary
   Processed in line with your rights
   Secure
   Not transferred to other countries without adequate protection

Question 20

What is the fine for breaching the Data Protection Act?

Answer 20

If there is an infringement of other provisions, such as administrative requirements of the legislation, the standard maximum amount will apply, which is £8.7 million or 2% of the total annual worldwide turnover in the preceding financial year, whichever is higher.