Accounting principles and procedures (L1)

Question 1

What are financial accounts?

Answer 1

These are required by law. All private and public limited companies must file annual accounts with Companies House in line with the requirements of the Companies Act 2006.

Question 2

What are the key financial statements that all companies must provide?

Answer 2

• Profit and loss statement
• Balance sheet
• Cash flow statement

Question 3

What are management accounts?

Answer 3

Management accounts are for internal use and are often produced monthly to inform decision-making and business planning.

Question 4

What is a balance sheet?

Answer 4

A balance sheet shows a company’s assets, liabilities, and equity at a specific point in time. It shows what a company owns (Asset) and what it owes (Liability).

As the name suggests, it should always balance such that the assets equal liabilities and shareholder’s equity.

Question 5

What are the three things found on a balance sheet?

Answer 5

• Assets (current and non-current)
• Liabilities (current and non-current)
• Shareholder Equity

Question 6

What is meant by current and non-current assets and liabilities?

Answer 6

Current means something the business expects to convert into cash (Assets) or something that is due to a debtor (liabilities) within a year.

Non-current are long-term investments (Assets) or obligations (Liabilities) that are not expected to come to fruition in the short term.

Question 7

What is an asset?

Answer 7

Something a company owns

Question 8

Give me an example of a current asset

Answer 8

Inventory

Question 9

Give me an example of a non-current asset

Answer 9

Property

Question 10

What is a liability?

Answer 10

Something a company owes

Question 11

Give me an example of a current liability

Answer 11

Accounts payable

Question 12

What is a non-current liability?

Answer 12

Pensions

Question 13

What is shareholder equity?

Answer 13

Shareholder equity represents the net value of a company, meaning the amount that would be returned to shareholders if all the company’s assets were liquidated and all its debts repaid.

Question 14

What is a profit and loss statement?

Answer 14

It is a financial statement that shows the income and expenditure of the company over a specific period (usually a fiscal year) culminating in the net profit or loss made in that period.

It can be used to calculate the company’s profit margin percentage and it’s ability to convert revenue into profit.

Question 15

What does top line mean on a profit and loss statement?

Answer 15

The top line refers to a company’s revenue.

It only indicates how effective a company is at generating revenue and does not take into consideration operating efficiencies which can impact on the bottom line.

Question 16

What does bottom line mean on a profit and loss statement?

Answer 16

The bottom line refers to a company’s profit having deducted the cost of doing business from the top line.

It shows how efficient a company is managing its operating costs.

Question 17

What is the difference between a profit and loss statement and a balance sheet?

Answer 17

A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss

Where as the balance sheet shows what a company owns (assets) and what it owes (liabilities)

Question 18

What is a cash flow statement?

Answer 18

It is a financial statement that shows the amount of cash that comes into and out of a business

When a business has positive cash flow, more money is coming into the business than leaving it.

When a business has negative cash flow, the opposite is true.

Cash flow affects the amount of money available for a business to fund its day-to-day operations, otherwise known as working capital.

Question 19

How is a cash flow statement broken down?

Answer 19

It is generally broken down into cash relating to:

• Operations which includes transactions from all operational business activities
• Investment which relates to investment gains and losses, and
• Financing which provides an overview of cash used from debt and equity

Question 20

What are the 4 size classifications of companies in the UK which affect requirements related to the preparation of financial accounts?

Answer 20

• Micro entity
• Small
• Medium , and
• Large

Question 21

How is size classification determined in the UK with regards to the preparation of financial accounts?

Answer 21

Size classification is based on thresholds related to:

• Annual turnover
• Balance sheet totals, and
• Number of Employees

Question 22

What are the deadlines for submitting financial accounts?

Answer 22

9 months from the accounting reference date (ARD) for private companies and 6 months for public companies

Question 23

What are the penalties for submitting financial accounts late?

Answer 23

Financial penalties range from £150-£1,500 for Private Limited Companies and from £750-£7,500 for Public Limited Companies.

Penalties are doubled if accounts are filed late in two consecutive financial years.

If accounts are not filed at all, the company can be struck off the register and directors can face an unlimited penalty and run the risk of a criminal record.

Question 24

What business taxes are there?

Answer 24

• Corporation tax
• National insurance (on employees)
• Capital gains

Question 25

What is corporation tax?

Answer 25

Corporation Tax is a tax on profits that all UK limited companies are subject to.

Question 26

What is the current corporation tax percentage?

Answer 26

25%

Question 27

What is Employers National Insurance?

Answer 27

It is a type of National Insurance that employers have to pay to HMRC in respect of their employees’ wages.

Question 28

What is capital gains tax?

Answer 28

It’s a tax on the profit from selling an asset.

Question 29

What is turnover?

Answer 29

The amount of money taken by a business before any deductions

Question 30

What is gross profit?

Answer 30

The total amount of money taken by a business, minus the cost of producing the goods sold

Question 31

What is net profit?

Answer 31

The total amount of money taken by a business, minus the cost of producing the goods sold and ALL operating expenses

Question 32

What are accounting standards?

Answer 32

Rules that must be adhered to when producing company accounts such as:

• Generally Accepted Accounting Principles (GAAP)
• International Accounting Standards (IAS)

Question 33

What is the Companies Act 2006?

Answer 33

Legislation that governs how companies are managed, ran and financed.

Question 34

Why do chartered quantity surveyors need to understand and be able to interpret company accounts?

Answer 34

• To review their own firms accounts and
• To assess the financial strength of contractors and those tendering for contracts

Question 35

Why are keeping accounts important for a business?

Answer 35

To comply with legal requirements and to inform decision making and business planning

Question 36

What headings would you expect to see in a set of accounts?

Answer 36

• Profit and loss statement
• Balance sheet
• Cash flow statement

Question 37

How often are accounts expected to be lodged and where?

Answer 37

All private and public limited companies must file annual accounts with Companies House in line with the requirements of the Companies Act 2006.

Question 38

How do you/ could you use company accounts in your role? (e.g. addressing contractors’ financial stability)

Answer 38

• To review own firms accounts and
• To assess the financial strength of contractors and those tendering for contracts

Question 39

What is a balance sheet/ profit and loss statement?

Answer 39

A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss

Where as the balance sheet shows what a company owns (assets) and what it owes (liabilities)