Accounting Principles and procedures Flashcards
What is UK GAAP?
Financial reporting framework for how company accounts are prepared
What is a key change in FRS 102?
Revaluation of investment properties are recorded in income statement
Why might the introduction of changes to investment property accounting in FRS 102 be problematic?
Can affect key profitability ratios (with the potential to breach loan covenants)
What does IFRS 16 relate to?
Lease accounting
What is the balance sheet also known as?
Statement of financial position
What does the balance sheet show?
Shows a company’s assets & liabilities at a given date, usually at the end of the financial year.
Assets = property, debtors and other Liabilities = borrowing, overdrafts, loans and creditors
What is the income statement also known as?
Profit and loss account
What does an income statement show?
- Summary of the business’ income and expenditure to show net profit/loss for a specific period of time, usually prepared annually.
- recorded on an accrual basis i.e revenues are recorded when they are earned.
What is a cashflow statement?
- Merges balance sheet and income statement to show actual receipts and expenditure including VAT
- Not included in annual accounts but is prepared for management purposes.
What is an asset?
Resources containing economic value for future benefit.
eg. cash, property, debtors and other investments
What is a liability?
A debt owed by a company that requires an entity to give up an economic benefit.
eg. borrowing, overdrafts, loans and creditors
Why are audited accounts beneficial?
- Confirms no material misstatements
- Identifies weaknesses
- Facilitates access to finance
- Better supplier terms
- Required if business sold
What is the acid test (quick ratio)?
How well are current liabilities covered by cash/liquid assets
What is return on capital employed?
How profitable is capital invested in business
What is working capital ratio (liquidity)?
Ability of company to pay (solvency) / how quickly can assets be turned into cash to pay short-term obligations
What is gearing ratio?
Exposure of business to loans as opposed to share capital
What is net assets per share?
Essentially the price which shares can be bought and sold at
Which type of entity must use IFRS?
Listed companies
What does a set of public limited company accounts include?
- chairman’s statement
- independent auditor’s report
- income statement (profit & loss account)
- statement of financial position (balance sheet)
- corporate governance report
- remuneration report
- other statutory information
What are management accounts?
Prepared for internal use by the business and are not audited.
What does IFRS 16 require companies to do?
Full cost of the lease has to be accounted for on the balance sheet as occupiers obligations to pay rent will have to be recognised as a liability.
Is service charge counted as a liability under IFRS 16?
No service charge payments are accounted for separately
What leases are exempt from IFRS 16?
Leases for 12 months or shorter.
What is a covenant strength?
The ability of a tenant to meet the covenants of a lease. includes rents, service charge, repairing and insuring obligations and stat obligations.
What is a D&B rating?
An indicator that assesses the credit worthiness of a company based on the financial strength of the business, payment behaviour, age of the company, company size and other important factors.
What is the risk indicator score produced by D&B based on?
- outstanding charges or slow payment experiences reported
- tangible net worth of the parent company
- pre taxed profits over total assets ratio
- values, ratios and trends from the balance sheet
What are the two components comprising the D&B rating?
1) Financial strength - tangible net worth/credit capacity
2) Risk indicator - chance of business failure
What is the difference between GAAP and IFRS?
GAAP is rules based and IFRS is principle based.
What is a cashflow statement split into?
Investing activities and financing activities
Under which Act may audited accounts be required?
Companies Act 2006
