Accounting Principles and Procedures Flashcards
What is the aim of GAAP?
To have a set of rules and principles to follow to ensure that a company’s financial statements are complete, consistent, and comparable.
What are the principles of GAAP?
Principle of:
* Regularity
* Sincerity
* Permanence of methods
* Non-compensation
* Prudence
* Periodicity
* Materiality
* Utmost good faith
What is accounting?
Accounting is the process of recording financial statements relating to a business. This includes summarising, analysing, and reporting transactions to agencies such as regulators or tax collectors.
What is the UK’s GAAP?
UK’s generally accepted accounting principles.
They outline standard methods of producing financial statements so that they are consistent across companies.
Why are the UK’s GAAP important?
Ensure business can be compared equally and fairly, regardless of size and complexity of assets. Maintains financial transparency and promotes consistency.
What is the FRS 102 under the UK’s GAAP?
FRS 102 is the breakdown of UK GAAP. It is a single financial reporting standard that applies to financial statements to entities in the UK that are not using larger adopted standards such as FRS 101, 105 or IFRS.
What are the international financial reporting standards (IFRS)?
Principle based approach to financial reporting and creating financial statements that is more flexible in its approach than GAAP.
It ensures entities have common accounting standards that allow financial statements to be consistent, comparable and TRANSPARENT across all business worldwide.
What are the IFRS main principles?
Clarity, Relevance, Reliability, Comparability.
Explain a balance sheet and cash flow statement
Examples include:
* Cash flow statement - summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
* Balance sheet - reports on a company’s assets, liabilities, and shareholder equity at a specific point in time TO REFLECT ITS FINANCIAL POSITION
What is the difference between profit and loss accounting and balance sheets?
A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss. The balance sheet shows what a company owns (its assets) and what it owes (its liabilities) at a given point in time.
What are the typical indications that a contractor may be having cash flow issues?
Indications include:
* Subcontractor not being paid
* Work not complete
* Asking for early payments
* Staff shortages
* Closing site
* Arguing over valuations.
How can contractor cash flow issues be managed?
Management strategies include:
* Request a bond
* Include terms and conditions in the contract
* Check tender is not front loaded
* Work is accurately valued at interim valuations
What is the purpose of an auditor?
To obtain an independent opinion about a company’s finances. Internal auditors provide an unbiased review of a company’s internal systems, processes, and procedures.
What is the difference between an internal and external auditor?
Internal auditors work on companies’ behalf measuring current performance and finding areas of improvement. External auditors are a third party who determine the accuracy of financial statements.
When are audits legally required?
Audits are required for:
* Public company
* Annual turnover of more than 10.2 million
* Assets worth more than 5.1 million
* 59 or more employees.
How does your organisation keep company accounts?
- using accounting software
- adhering to accounting principles
- regularly reconciling financial assets
What is the difference between a debtor and creditor?
Creditors are individuals/businesses who are owed money; they have lent. Debtors are individuals/businesses who owe money; they have borrowed.
What is the purpose of company accounts?
To track the cash balance, money owed to the business, money owed to creditors, and the payroll paid to employees.
What statements are included within the key financial statements?
Key financial statements include:
* Balance sheets
* Income statements
* Cash flow statements.
Difference between management and financial accounts?
Management accounts - Internal reports to aid management in decision making. Focus on real time data.
Financial accounting - External reports that provide a historical overview of a companies financial performance and position, following legal and regulatory standards
Why do Charted Surveyors need to understand company accounts?
To assess financial stability of companies, assess risks and help to inform decision making on investments, loans and partnerships.
What financial statements are provided to the auditor?
- Balance sheet
- Income Statement
- Cash flow statement
- Statement of changes in equity
In what way are IFRS considered more flexible than GAAP?
IFRS allows more judgment in accounting choices, such as asset valuation, while GAAP has more rigid rules.
Why is it important for a company to track money owed to the business and money owed to creditors?
It helps manage cash flow, ensures timely payments, and avoids financial strain or PENALTIES.
