Accounting Principles And Procedures - L1 Flashcards
Asccounting Principles and Procedures - Extract from Candidate Guide - Aug 2018 (updated Feb 2022)
What are the three types of financial statement you may come across relating to a company?
Financial statements are formal records of the financial activities and position of a business, person, or other entity.
Balance Sheet, Cash Flow Statements, Income Statements
What is an Income (Profit & Loss) Statement?
The income statement shows the performance of the business throughout each period, displaying sales revenue at the very top. The statement then deducts the cost of goods sold (COGS) to find gross profit.
What is a balance Sheet?
The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time, typically annually.
What is a cash flow statement?
Cash flow statement then takes net income and adjusts it for any non-cash expenses. Then cash inflows and outflows are calculated using changes in the balance sheet.
Demonstrates a company’s ability to pay debtors etc.
What is a Company Asset?
Assets are the items your company owns that can provide future economic benefit. Examples of assets: Cash, inventory, building, furniture, and accounts receivable
What is a Company Liability?
Liabilities are what you owe other parties
Examples of liabilities: Loans, accounts payable, sales tax payable, and debts.
What is the difference between financial and management accounts?
The difference between financial and managerial accounting is that financial accounting is the collection of accounting data to create financial statements submitted to companies house and required by law each year, while managerial accounting is the internal processing used to account for business transactions - resourcing, investments, recruiting etc.
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting - The four basic principles in generally accepted accounting principles are: cost, revenue, matching and disclosure.
What is the acid test / ROCE / working capital ratio / gearing ratio / net assets per share?
Acid-test ratio = Current assets – Inventories / Current liabilities
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:
Return on capital employed is an accounting ratio used in finance, valuation, and accounting. It is a useful measure for comparing the relative profitability of companies after taking into account the amount of capital used.
Working capital ratio is calculated simply by dividing total current assets by total current liabilities. For that reason, it can also be called the current ratio. It is a measure of liquidity, meaning the business’s ability to meet its payment obligations as they fall due.
Debt to equity ratio = total debt ÷ total equity.
The price to net asset value is then derived by dividing the share price with the company’s net asset value per share. Traditionally, a price to book ratio below 1 is a good multiple since it potentially indicates that the shares are undervalued.
Can you tell me what the role of an auditor is?
The auditor’s objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes the auditor’s opinion.
How do public limited company accounts differ?
public companies have six months in which to file their annual accounts as opposed to private companies which have nine months. public companies are required to hold an annual general meeting whereas this is generally not a requirement for private companies.
Tell me something you understand from the Companies Act 2006.
(1) A private company must have at least one director. (2) A public company must have at least two directors. (1) A company must have at least one director who is a natural person.
What is the difference between UK GAAP and IFRS?
IFRS allowed companies to determine whether an intangible asset’s useful life is finite or infinite. However, the new UK GAAP establishes that these assets have a finite useful life
IFRS was developed by the International Accounting Standards (IAS) Board.
Tell me what it means to prepare accounts in accordance with IFRS.
The International Financial Reporting Standards (IFRS) 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. This helps for auditing, tax purposes, and investing.
What is the basis of valuation under IFRS 13?
IFRS 13 defines fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements.
IFRS 13 defines fair value as the 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 (an exit price).
What are statutory accounts?
Statutory accounts – also known as financial statements or year-end accounts – are drawn up by the Directors or Members of an entity to report various financial measures and related disclosures for filing with Companies House.
What is IFRS 16?
IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after 1 January 2019 (subject to EU endorsement).
IFRS 16 is an accounting standard that requires lessees to recognize lease-related liabilities and assets on their balance sheets for most leases, offering greater transparency. It changes the treatment of leases, eliminating off-balance sheet financing. Lessees amortize these balances over the lease term, impacting industries with significant leasing activities
What is taxation ?
The amount of money or % that is owed to HMRC based on the company profit.
What is revenue?
Income generated by the sales of the product or services.
What is a Finanicial Ratio / Ratio analysis ?
Method of gaining insight into a company’s liquidity, efficiency and profitability by studying its financial statements.
Common examples;
* Liquidity Ratios - Measure a company’s ability to pay off its short-term debts. (Current, or working capital ratio)
- Solvency Ratios - Compare a company’s debt levels with its assets, equity, and earnings (ability to meet long-term debt)
- Profitability Ratios - These ratios convey how well a company can generate profits from its operations. (ROCE/Gross Margin)
- Efficiency Ratios - Also called activity ratios, efficiency ratios evaluate how efficiently a company uses its assets to generate sales and maximize profits. (turnover ratio)
What is credit control ?
System used by businesses and central banks to make sure that credit is given only to borrowers who are likely to be able to repay it.
What is insolvency?
When a business can no longer meet your financial obligations, ie not enough money coming in to match money going out.
