Accounting Principles and procedures Flashcards
What are the fundamental accounting principles?
Fundamental accounting principles are the core guideline that govern financial reporting and book keeping. These include accrual accounting, consistency, prudence, going concern, and matching principles, ensuring financial statements are reliable and comparable.
What are company account, and why are they important?
Company accounts include financial statements such as profit and loss account, balance sheet and cash flow statement. They provide insight into a company’s financial position, helping stakeholders make informed decision regarding investments, risk and financial performance.
What is the purpose of a profit and loss account?
The Profit and Loss account (INCOME STATEMENT) is a summary of the business’s income and expenditure transactions, prepared usually on an annual basis. It helps assess business profitability and financial health.
What does a balance sheet show?
The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It shows assets and liabilities at a given date usually at the end of the financial year.
In a balance sheet what are considered assets and what are liabilities?
ASSETS - Cash, property, debtors and other investments held
LIABILITIES - borrowings overdraft, loans and creditors
What is included in the contents of a set of public limited company accounts?
Chairman statement
Independent auditor report
Income statement (profit and loss account)
State of financial position (Balance sheet)
Corporate governance report
Remuneration report
Over statutory information
Why is it important to refer clients to financial professionals for advice?
As surveyors are not financial advisors, it is important to refer to qualified chartered accountants or financial experts to ensure they receive accurate and compliant financial guidance tailored to their needs.
What are Management accounts?
Management accounts are prepared for internal use by a business and are not audited.
Who provides audited accounts?
Chartered or certified accountants
What is a cash flow statement?
A cash flow statement shows all the actual receipts and expenditure to include VAT.
What is the IFRS 16?
This is the lease accounting standard with which all companies have to comply when using the International Financial Reporting Standards in respect of reporting property liabilities.
The FULL cost of leases has to be accounted for on the balance sheet.
An occupiers obligation to pay rent has be recognised as a LIABILITY, though service charge payments would be accounted for separately.
Exemptions exist for leases of 12 months or shorter.
Why do businesses keep company accounts?
LEGISLATION/ PROFITABILITY/ TAX
Legislation requires companies to.
It helps measure a company’s profitability.
It is used for tax calculation.
What is the importance of understanding the tenant’s covenant strength, and how does this influence investors’ decisions in the commercial property market?
Tenant covenant strength indicates the financial health and creditworthiness of a tenant, influencing whether they can meet lease obligations and not default.
Strong covenant tenants reduce risk, offering secure and predictable rental income.
How do you assess tenant covenant strength?
I use CreditSafe – which provides a detailed risk rating and financial insights into a tenant’s creditworthiness.
On CreditSafe, I look for risk rating, financial health indicators (cash flow, profitability, liquidity ratios), payment history and company age.
What is a Credit Safe ‘risk rating’, and how does it help in determining the likelihood of tenant default?
CreditSafe gives a risk rating, scoring the creditworthiness of a company, giving insights into its ability to meet financial obligations.
It determines the likelihood of default by analysing: payment history, current and past financial performance and outstanding debts.
Can you explain the difference between current assets and fixed assets, and why this distinction is important when analysing a company’s financial position?
Current assets – those expected to be converted into cash or use within one year (e.g. inventory, receivables)
Fixed assets – long-term that a company uses for more than a year (e.g. property, machinery, equipment)
The distinction shows the company’s liquidity and its capital investment.
How do you interpret the financial strength of a tenant when reviewing their profit and loss statement or balance sheet?
P&L – review their revenue growth, profitability (positive net income or generating losses) and expense management.
Balance Sheet – liquidity (can tenant cover short-term liabilities with current assets), debt levels (determine if tenant is over-leveraged) and equity (positive or negative).
In terms of accounting principles, what do you understand by ‘assets, liabilities, and equity,’ and how are these reflected in a balance sheet?
Assets – resources owned by the company e.g. inventory or property
Liabilities – obligations that the company owes to external parties e.g. loans or rent
Equity – the firms net worth after all liabilities are paid (Assets minus liabilities)
What is the acid test/ROCE/Working Capital Ratio/Gearing Ratio?
Acid test = indicator if a business has short-term assets to cover its short-term liabilities
ROCE = return on capital employed
Working capital ratio = total assets /current liabilities
Gearing ratio = compares company debt to equity (how a company is funded)
What is the Profits Test?
Method used to evaluate the financial performance of a tenant to ensure they can meet their lease obligations.
To pass the profits test, the net profit of proposed tenant’s business must be 3x the rent for 3 consecutive years.
How is the Profits Test used?
Analyse the tenants P&L accounts, focusing on revenue, expenses and net profit – consider financial performance over the last 3 to 5 years to see if tenant has been consistently profitable over time.
Calculate what percentage of the tenant’s profits would go towards covering the rent – if the rent represents too high a proportion of profits could indicate financial strain on tenant.
Is used for disposals – used to evaluate the incoming tenant’s ability to meet rent obligations.
Can you explain what a sinking fund is?
Sinking fund – a reserve fund set aisde to cover major future expenses for maintenance or replacement of capital assets e.g. major repairs.
What is the significance of management accounts versus statutory accounts?
Management accounts – used internally to monitor day-to-day financial performance, not audited and only provide a limited insight.
Statutory accounts – prepared with legal requirements (IFRS) and must be audited; these are submitted to provide a true view of a company’s financial performance, usually annually.
What is the IFRS?
International Financial Reporting Standards – a set of accounting standards to ensure transparency, comparability and consistency in financial reporting across different countries.
How do liquidity ratios and gearing ratios provide insights into a company’s financial stability?
Liquidity ratio – measure a company’s ability to meet short-term obligations using its current assets.
Gearing ratio – measures a company’s financial leverage and the proportion of debt financing versus equity. A high gearing ratio suggests the company relies more on borrowed money.
What is the difference between IFRS 13 and IFRS 16?
IFRS 13 – is required for reporting Fair Value.
IFRS 16 – is for all the lease accounting standards which companies have to comply with when using IFRS.
What accounting principles do you know of?
IFRS – International Financial Reporting Standards
UK GAAP – Generally Accepted Accounting Principles
Have there been any recent accountancy changes in relation to the profession?
Yes – recent changes to IFRS 16 which affects how occupiers account for property leases.
Came into effect 1st January 2019
Previously, rent was treated as operating expenses, but now occupiers must recognise rent as a liability on their balance sheet. There is an exemption on lease under 12 months.
How does these recent changes to the IFRS 16 influence occupiers?
By rent now being recognised as a liability, this can affect their financial ratios, such as gearing ratio, potentially making them appear more leveraged.
As a result, tenants may seek shorter or more flexible lease terms to minimise their liability recorded on their balance sheet, to help them look financially stronger.
