Accounting principles and procedures Flashcards
What’s the contents of a public limited company account include:
*Chairman’s Statement
*Profit and loss account (income statement)
*Balance Sheet (statement of financial position)
*Corporate governance report
*Remuneration report
*Other statutory information
Can you explain the key financial statements used in accounting?
*Balance Sheet - current financial position, assets, liabilities and equity
*Profit and loss statement - revenue, costs & expenses
*Cash flow statement - tracks cash inflows and outflows
What is a balance sheet?
A statement of the business’s financial position showing assets, liabilities and equity
Should a balance sheet always balance?
Yes as the entry for shareholders equity will always been the remainder or difference between company’s total assets and liabilities
What is an asset?
Resource owned by a company - cash, property etc
What are liabilities?
Obligations a company owes - borrowings, overdrafts, loans and creditors
What is equity?
The owners residual interest in the assets minus the liabilities
What is a profit and loss account and what’s included?
Summary of the business income and expenditure transactions: turnover, profits, expenses, taxations, dividends
Difference between management accounts and audited accounts?
*Management account: prepared for internal use by a business and not audited
*Audited accounts: prepared by chartered/certified accountant submitted to companies house
What is the role of an auditor?
Ensure a company’s financial statements are accurate, reliable and comply with accounting standards
What is a cashflow statement?
Track cash ins and outs, shows all receipts and expenditure
What is a consolidated set of accounts?
Comprises of a number of individual subsidiary accounts for a company with a single set of accounts
What is the difference between a profit/loss account and a balance sheet?
A balance sheet states the business’s financial position showing its assets and liabilities, where as profit and loss account is a summary of the business income and expenditure transactions
How are profit/loss accounts and balance sheets utilised within a business?
Both go into the audited accounts but profit and loss shows a summary of the income and expenditure for the year and may be used to compare to a previous year for performance review. Balance sheet shows a snapshot of the assets and liabilities typically at year end to understand over state of financial position.
What is IFRS 16?
New lease accounting standard where leases now have to be included on the balance sheet as a liability, exemptions for leases 12 months or less
Tell me about The Generally Accepted Accounting Principles (GAAP)?
*Refers to a common set of accepted accounting principles, standards and procedures that companies and their accounts must follow when they compile their financial statements
* Plays crucial role in ensuring financial statements are fit for purpose and robust
What is another reporting standard and how is it different to GAAP?
International Financial Reporting Standards and GAAP are both sets of accounting standards but IFRS is a global standard for financial report where UK GAAP is tailored for UK-based companies
What reporting standard does Bruntwood use?
Bruntwood use FRS102 accounting standard under the UK GAAP
How are debtors and creditors shown on the balance sheet?
*Debtors are shown as assets under the asset section
*Creditors are shown as liabilities under the liability section
What are capital allowances?
Allow tax payers to gain tax relief from expenditure such as plant and machinery and land remediation
Why do businesses need to keep accounts?
*Assess profitability
*Legislation requires it
*Assist with tax calculations
*Supports business growth by identifying profitable areas and minimising loss making activities
What are overheads?
*Operating costs incurred on an ongoing basis
*Could be fixed or variable eg rent vs utility charges
What is an escrow account?
Contractual agreement used as financial instrument in a transaction, currency held by a third party accounting until contractual obligations have been met allowing the money to be transferred
Different types of accounting ratios?
*Liquidity ratios - assess a company’s ability to meet its short term obligations
* Profitability ratio - indicate how efficiently a company is generating profit
*Solvency ratio - assess a company’s ability to meet its long term obligations
What is a gearing ratio?
*Type of financial ratio that helps when analysing a companies capital structure and financial leverage, represents the proportion of debt finance relative to equity held
*How much a company relies on borrowing to finance its activities
What is a yield?
It is a rate of return of an investment
What is a current asset vs a fixed asset?
*Fixed - long term assets typically used for business operations such as property, plant or equipment, not intended for immediate sale
*Current - short term and easily converted to cash within a year, for example inventory
Are you competent to advise on accounting matters?
No I would always advise that we get specialist advice from an expert
What is the difference between gross and net profit?
*Gross profit = revenue - cost of sales
*Net profit = revenue - all costs (operating, cost of sales, interest, taxes, etc)
International account standard (IAS) defines which financial statements are required and how they must be presented, what are they?
*Balance Sheet
*Profit and loss statement
*Cash flow statement
*Statement of changes in owners equity
*Explanatory note including a summary of accounting policies
Give me some examples of different VAT rates?
*Standard rate - 20% - most goods and services
*Reduced rate - 5% - some goods and services including domestic gas and electricity, children’s car seats etc
*Zero rate - 0% - food and public transport
