Accounting Principles and Procedures (L1) Flashcards
Describe the difference between P&L accounts, balance sheets and cash flow statements?
Profit & Loss/ Income Statement = Tells you a companies Total Revenue - Total Costs = Profit then deducts tax on profit over a period of time (normally over the financial year).
Balance sheet = snapshot in time of a companies condition (assets and liabilities).
Cash flow statement = shows the businesses incomings and outgoings within a given time.
Talk me through what you would expect to see on a P+L account?
Turnover - Cost of sales = Gross Profit
- Overheads/ expenses = Operating profit before tax
- Tax on profit = Net Profit for the financial year
Talk me through what you would expect to see on Cash Flow statement?
Cash incomings
Cash outgoings
= Net Cash Flow
Difference between P&L and a Cash Flow statement?
A business can be profitable but have a poor cash flow.
e.g. small manufacturer selling products to a large company might receive a delayed payment, meaning they cannot pay their suppliers. Therefore, could have good sales and a profitable business, but a negative cash flow statement.
When would you use a balance sheet over a profit and loss account?
The balance sheet reports the assets, liabilities and equity at a point in time, whereas a P&L statement summarises a company’s revenues, costs, and expenses during a specific period of time.
What is meant by equity?
This is a companies ‘net worth’ = assets minus liabilities.
What is included within a balance sheet?
For countryside I would expect
Assets:
- Physical assets (property/machinery)
- Cash
- Debtors (people who owe money)
Liabilities:
- Creditors (e.g. trade creditors = people you owe money)
- Debt
- Tax (Overheads)
- Other provisions (remedial work on sales)
What is Countryside’s turnover and net profit for the last financial year? and how did it compare to the previous year?
Revenue
2023: £3,564.2m (2022: £2,771.3m)
Profit
2023: £311.8m (2022: £212.5m)
FY 23 Completions for your firm? Other KPIs
16,118 (2022: 11,951) 65% forward sold.
What is the difference between a profit and loss account and a balance sheet?
A P&L account shows the income and expenditure of a company resulting in profit or loss a balance sheet shows what the company owns and what it owes at a given point in time.
What are the key financial statements that all companies must provide. What are company accounts?
The key financial statement are a profit and loss statement, balance sheet and cash flow statement. These are the company accounts produced annually and filed at Companies House.
What is a cashflow statement?
It is a summary of actual or anticipated income or outgoings of a firm over the accounting period. It is broken down into operating, investing, financing activities. It measures a firm’s short-term ability to pay off its debts.
What are statutory accounts and who does the differ from management accounts?
These accounts must be filed at Companies House, and include a balance sheet, P&L account, cashflow statement, and notes to the accounts and a director’s report. Management is for internal use to measure day to day movement.
What are statutory accounts?
These accounts must be filed at Companies House, and include a balance sheet, P&L account, cashflow statement, and notes to the accounts and a director’s report.
What is IFRS?
International; Financial Reporting Standards – provide common accounting language to increase transparency in the representation of financial information
What is you firms accounting policies and principles and what is required to produce their annual report?
Financial year end on 31st December and applies the IFRS also referred to as IAS and the IDRIC. Chair’s Statement, Market, Business Model, Strategy, Sustainability Report,
Can you explain golden brick?
Golden Brick is a mechanism which enables a developer to complete a sale of VAT elected land to a Registered Provider (RP) before practical completion of the affordable housing dwellings and for that sale to be treated as a zero-rated supply for VAT purposes rather than a standard rated supply.
Definition of GB in the AHA at Clapham Park referenced ground floor slab.
There is no legislative definition of “golden Brick” but HMRC guidance states that for golden brick to be achieved a building must be “ clearly under construction” and it is accepted that a building is being constructed when work has progressed above foundation level.
Advise is sought also around VAT conflict between the developer and the RP. Such arrangements can be beneficial for both developer and RP. However, it is important to structure and document such transactions correctly to protect the interests of both developer and RP and to avoid either one of them falling foul of the HMRC rules.
What is the Role of the Auditor?
Review and Verify the Accuracy of Financial Records and Ensure that Companies Comply with Tax Laws.
What is ROCE? How do you calculate ROCE (Return on Capital Employed) ?
ROCE – assess a company’s profitability and capital efficiency. How well a company is generating profits from its capital. It is calculated through dividing profit by cumulative funds.
In textbook terminology it is you EBIT / Capital Employed (total assets - liabilities)
How do you calculate Profit Margin?
The amount by which revenue exceeds costs.
(Total Revenue - Total Cost) / Total Revenue = Profit Margin
How have you treated SDLT in your appraisal? how is it usually calculated?
Stamp Duty Land Tax (SDLT) is paid on the purchase of an interest in land as a percentage of the purchase consideration. Different rates apply according to the type of property and the type of purchaser.
SDLT is treated as 5% within my appraisal
0% on the first £500k
5% on next £425k
10% on next £575k
12% on everything in access on 12%
What is an asset/liability?
Can you give an example of each?
Assets are things that add to your company’s overall value. That could be cash, tangible assets like equipment or intangible ones like your reputation in the community. Liabilities are what you owe to others, like investors or banks that issue your company a loan
Asset: Cash
Liabilities: Leases (Under IFRS 16) - service charge would be accounted for separately exemptions for leases shorter than 12 months - changes in 2022.
What do you understand by the term Generally Accepted Accounting
Principles (GAAP)?
UK GAAP. Generally Accepted Accounting Practice in the UK (UK GAAP) is the body of accounting standards published by the UK’s Financial Reporting Council (FRC).
it helps to ensure that financial statements are consistent and accurate.
How would you assess the financial strength of an entity, e.g. for a
valuation?
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company’s financial strength and provide a quick picture of a company’s financial health and underlying value.
