Accounting Principles and Procedures Flashcards
What are the three types of financial statement you may come across relating to a company?
Profit & loss account
Balance sheet
Cashflow statement
What is an asset / liability?
An asset is a thing owned by the company (cash/stock/equipment).
A liability is a debt or obligations owed by the company.
Can you give me an example of an asset and a liability?
Asset – in our case, computers, office equipment.
Liability – an unpaid bill for something like IT services.
What is the difference between financial and management accounts?
Financial accounts are a point in time analysis of the company’s financial position. Required by law on an annual basis.
Management accounts are for internal use and often go into much more detail about certain things. Can be at whatever frequency and include whatever detail the management requires.
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
Companies must adopt one of two financial reporting standards under Companies Act 2006 and GAAP is one of them.
How do companies know which reporting framework to comply with?
PLCs must adopt the IFRS standards but other companies can choose between the two.
Which reporting framework do public limited companies have to comply with?
IFRS – International Financial Reporting Standards
How would you assess the financial strength of an entity, e.g. for a valuation?
By examining its financial position using financial ratios calculated from its financial statements.
Can you tell me about a common financial measure?
They are KPIs, e.g.
Profitability: Measures a company’s ability to generate profit.
Liquidity: Assesses a company’s ability to meet short-term obligations.
Solvency: Evaluates a company’s long-term financial stability.
Efficiency: Examines how effectively a company uses its resources.
Valuation: Determines the worth of a company’s assets and stock.
What is the acid test ratio?
The acid-test ratio, commonly known as the quick ratio, indicates whether the company has the means to cover its short-term liabilities. It is the ratio between near-cash assets and current liabilities. Generally, a ratio of 1.0 or more indicates a company can pay its short-term obligations, while a ratio of less than 1.0 indicates it might struggle to pay them.
It disregards current assets that are difficult to liquidate quickly, such as inventory.
What is the ROCE ratio?
Return On Capital Employed - used to assess a company’s profitability & capital efficiency
ROCE = EBIT / Capital Employed
Where EBIT = earnings before interest & tax
Capital Employed = Total assets – current liabilities
What is the working capital ratio?
It is a general measure of a company’s liquidity.
It’s calculated by dividing its current assets by its current liabilities.
A good working capital ratio typically falls between 1.5 and 2.0.
What is the gearing ratio?
Gearing ratios are a group of financial metrics that compare shareholders’ equity to company debt in various ways.
They help assess the company’s amount of leverage and financial stability.
Gearing ratios have more meaning when they’re compared against the gearing ratios of other companies in the same industry.
What is the Net Asset Value Per Share?
Net asset value per share (NAVPS) represents the value per share of a mutual fund, an exchange-traded fund (ETF), or a closed-end fund. It is calculated by dividing the total net asset value of the fund or company by the number of shares outstanding. It is also known as book value per share.
Can you tell me what the role of an auditor is?
An auditor looks in more detail at the company’s accounts, looks at sample transactions, in order to verify the truth and fairness of the financial statements.
When are audited accounts needed and why?
If a company has over 50 employees, an annual turnover greater than £10.2m or assets of over £5.1m then they must have an audit.
How do public limited company accounts differ?
Require a minimum share capital of £50,000.
Must be audited.
PLCs are subject to more stringent reporting and disclosure obligations.
Tell me something you understand from the Companies Act 2006.
It abolished the requirement for private companies to hold annual general meetings.
Deadline for filing annual accounts reduced to 9 months.
Tell me what it means to prepare accounts in accordance with IFRS.
The statement of financial position and income statement must comply with IFRS standards. The aim of IFRS is to make accounts consistent, transparent and easily comparable around the world.
What is the difference between UK GAAP and IFRS?
GAAP requirements are more straightforward, more flexible and the accounts are less comprehensive.
What is the basis of valuation under IFRS 13?
The key concept is fair value measurement.
What is fair value?
Fair value is a measure of an asset’s current market value, determined by the price at which it is bought or sold when both the buyer and seller freely agree on the price. Fair value is an unbiased estimate of the potential market price, taking into account factors such as production costs, market conditions, and supply and demand.
What has changed in relation to lease accounting / IFRS 16?
The lease is ‘capitalised’ by being brought onto the balance sheet which makes it easier to assess an entity’s lease commitments.
When did the IFRS 16 change in relation to lease accounting come into effect?
1 January 2019
