Accounting Principles and Procedures - L1

Question 1

What are the three types of financial statement you may come across relating to a company?

Answer 1

• Balance sheet = statement of the businesses financial position showing its assets and liabilities at a given date usually at the end of the financial year
• Profit and loss statement / income statement = a summary of the businesses income and expenditure, transactions, prepared usually on an annual basis
• Cash flow statement = shows all actual receipts and expenditure to include VAT. It is not included in the annual accounts but is prepared for management purposes

Question 2

What is an asset / liability? Can you give an example of each?

Answer 2

• Asset = anything of value or resource of value that can be converted into cash i.e. cash, property, debtors, other investment held
• Liability = something a company / person owes. Settles over time through transfer of economic benefit i.e. money, goods, services, borrowings, overdrafts, loans and creditors

Question 3

What is the difference between financial accounts and management accounts?

Answer 3

• Financial accounts = the collection of accounting data to create financial statements
• Management accounts = the internal processing used to account for business transactions

Question 4

What do you understand by the term Generally Accepted Accounting Principles (GAAP)?

Answer 4

Authoritative standards and rules that govern financial accounting and reporting by businesses

Question 5

How do companies know which reporting framework to comply with? Which reporting framework do public limited companies have to comply with?

Answer 5

• Public listed companies are required to apply IFRS in preparation of group accounts
• Public listed companies may be required to choose between IFRS and UK GAAP for the preparation of individual parent accounts
• Under The Companies Act 2006, SMEs can use simplified FRS 102
• Other entities have free choice but in practice larger unlisted entities now adapt IFRS

Question 6

How would you assess the financial strength of an entity, e.g. for a valuation?

Answer 6

• Analyse liquidity, solvency, profitability and operating efficiency
• Liquidity - cash or easily converted assets measured using acid test
• Solvency - companies’ ability to meet debt obligations over long term. Debt to equity ratio measure
• Operating efficiency - operational profit after deducting variable costs of producing and marketing
• Profitability - net margin % of net profit to revenue (higher better)

Question 7

Can you tell me about a common financial measure?

Answer 7

• Return on Capital Employed - financial ratio of companies to gauge performance
• ROCE indicates effiency as it measures company profit after factoring in capital used to get profit

Question 8

What is the acid test / ROCE / working capital ratio / gearing ratio / net assets per share?

Answer 8

• Acid Test / Working Capital Ratio: indicator of whether it has sufficient short-term assets to cover short-term liabilities. Acid Test = Cash + Marketable Securities + Accounts Receivable / Current Liabilities
• ROCE: a method of assessing company profitability and capital efficiency. EBIT / Capital Employed
• Gearing Ratio: financial ratio that compares equity / capital to debt / funds
• Net Assets Per Share: Net asset value represents value per share. Net asset value over no. of shares

Question 9

Can you tell me what the role of an auditor is?

Answer 9

• Auditors assess financial operations, track cash flow and verify that funds are accounted for
• Audits assess public companies to check that GAAP are followed
• Auditors findings are presented in a report that appears as a preface in a financial statement

Question 10

When are audited accounts needed and why?

Answer 10

The Companies Act 2006 requires companies to audit if at any time in the financial year they qualify:
* Turnover of £12.2m
* Total assets of over £6.1m
* Over 50 employees
Company size does not apply if the company is ineligible:
* Public company
* Subsidary wihtin a group
* Authorised insurance company / carrying out insurance
* Involved in banking / e-money
* Corporate body that shares trades on a regulated European State

Question 11

How do public limited company accounts differ?

Answer 11

Companies annual financial statements due within 6 months for public company and within 9 months for private company within the accounting period

Question 12

Tell me something you understand from the Companies Act 2006.

Answer 12

The Companies Act 2006 states that SMEs can use the simplified FRS 102 as opposed to the IFRS

Question 13

Tell me what it means to prepare accounts in accordance with IFRS.

Answer 13

International Financial Reporting Standards are a set of accounting rules for public companies with the goal of making company financial statements consistent, transparent, and easily comparable around the world

Question 14

What is the difference between UK GAAP and IFRS?

Answer 14

• GAAP is rules-based and IFRS is principles-based
• This disconnect manifests itself in specific details and interpretations. Basically, IFRS provide much less overall detail than GAAP

Question 15

What is the basis of valuation under IFRS 13?

Answer 15

• Fair value
• Price that would be received to sell an asset or paid to transfer a liability between market participants at the measurement date

Question 16

What is fair value?

Answer 16

• RICS Valuation Global Standards 2020
• Price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date

Question 17

What has changed in relation to lease accounting / IFRS 16? When did the change come into effect?

Answer 17

• IFRS 16 is the new lease accounting standard which all companies have to comply with from 2019 when using IFRS
• Changes the accounting substantially for lessees
• The new Standard eliminates a lessee’s classification of leases as either operating leases or financial leases
• Instead, almost all leases are ‘capitalised’ by recognising a lease liability and a right-of-use asset on the balance sheet

Question 18

What is FRS 102?

Answer 18

• FRS 102 is the principal accounting standard in the UK financial reporting regime
• It sets out financial reporting requirements for entities not applying adopted IFRS, FRS 101 or FRS 105

Question 19

What changes have been made to FRS 102?

Answer 19

FRS 16 was introduced which means:
* Leases have to be accounted for on the balance sheet
* Increase in total assets and liabilities
* Rent obligation becomes a liability

Question 20

How have the changes to FRS 102 impacted upon investment property?

Answer 20

Investment property must now be held at fair value and movements in the valuation are taken to profit and loss

Question 21

What are statutory accounts?

Answer 21

• Statutory accounts (aka annual accounts) are financial reports prepared at the end of each financial year
• Statutory accounts report activity and performance of limited company

Question 22

Why is good financial record keeping important to you?

Answer 22

• Criminal offence not to file company accounts
• Fine up to £1,500 for private companies and £7,500 for public companies

Question 23

Tell me three ways you ensure that client’s money is handled properly.

Answer 23

General:
* Hold money in exclusively client controlled money account
* Account name includes word client and name of firm
* Not holds office money in client money account
Personal:
* Agreed fee budget itemised
* Ensure fees are agreed against a set scope of services within the budget
* Clear payment process in accordance with stage payments

Question 24

What RICS guidance or schemes do you adhere to when ensuring that client money is handled properly?

Answer 24

Client Money Handling October 2019

Question 25

Explain your understanding of the VAT domestic reverse charge for building and construction services.

Answer 25

• From 1 March 2021, the reverse charge means that a subcontractor in the CIS scheme will not charge VAT on its invoices to a VAT-registered contractor in the CIS scheme
• Instead, the contractor will account for the VAT in their VAT return as both Output (sales) VAT and as Input (purchases) VAT

Question 26

When do changes to the reverse charge apply from?

Answer 26

01-Mar-21

Question 27

What is the impact of the reverse charge on VAT accounting?

Answer 27

The new reverse charge makes it the customer’s responsibility to account for VAT meaning there is no opportunity for the supplier to disappear before paying their VAT bill to HMRC

Question 28

Is VAT included in a balance sheet or a profit & loss account?

Answer 28

Balance sheet, never profit and loss statement

Question 29

Explain Part 15 of the Companies Act 2006 to me.

Answer 29

Companies Act 2006 Part 15: Accounts and Reports
* Sets out companies qualifying
* Sets out duty to keep accounting records
* Sets out offences - imprisonment for up to 2 years or a fine or both

Question 30

What did the Berkeley Group Annual Report accounts include?

Answer 30

• Income statement
• Statement of financial position
• Cash flow statement
• Balance sheet

Question 31

What was the year end date in the BG Annual Report?

Answer 31

30-Apr-22