Accounting Principles and Procedures (L1)

Question 1

Describe the difference between P&L accounts, balance sheets and cash flow statements?

Answer 1

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.

Question 2

Talk me through what you would expect to see on a P+L account?

Answer 2

Turnover - Cost of sales = Gross Profit
- Overheads/ expenses = Operating profit before tax
- Tax on profit = Net Profit for the financial year

Question 3

Talk me through what you would expect to see on Cash Flow statement?

Answer 3

Cash incomings
Cash outgoings
= Net Cash Flow

Question 4

Difference between P&L and a Cash Flow statement?

Answer 4

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.

Question 5

When would you use a balance sheet over a profit and loss account?

Answer 5

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.

Question 6

What is meant by equity?

Answer 6

This is a companies ‘net worth’ = assets minus liabilities.

Question 7

What is included within a balance sheet?

Answer 7

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)

Question 8

What is Countryside’s turnover and net profit for the last financial year? and how did it compare to the previous year?

Answer 8

Revenue
2023: £3,564.2m (2022: £2,771.3m)

Profit
2023: £311.8m (2022: £212.5m)

Question 9

FY 23 Completions for your firm? Other KPIs

Answer 9

16,118 (2022: 11,951) 65% forward sold.

Question 10

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

Answer 10

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.

Question 11

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

Answer 11

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.

Question 12

What is a cashflow statement?

Answer 12

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.

Question 13

What are statutory accounts and who does the differ from management accounts?

Answer 13

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.

Question 14

What are statutory accounts?

Answer 14

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.

Question 15

What is IFRS?

Answer 15

International; Financial Reporting Standards – provide common accounting language to increase transparency in the representation of financial information

Question 16

What is you firms accounting policies and principles and what is required to produce their annual report?

Answer 16

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,

Question 17

Can you explain golden brick?

Answer 17

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.

Question 18

What is the Role of the Auditor?

Answer 18

Review and Verify the Accuracy of Financial Records and Ensure that Companies Comply with Tax Laws.

Question 19

What is ROCE? How do you calculate ROCE (Return on Capital Employed) ?

Answer 19

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)

Question 20

How do you calculate Profit Margin?

Answer 20

The amount by which revenue exceeds costs.

(Total Revenue - Total Cost) / Total Revenue = Profit Margin

Question 21

How have you treated SDLT in your appraisal? how is it usually calculated?

Answer 21

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%

Question 22

What is an asset/liability?

Can you give an example of each?

Answer 22

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.

Question 23

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

Answer 23

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.

Question 24

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

Answer 24

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.

Question 25

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

Answer 25

CA 2006 recognises two financial reporting frameworks – IFRS and UK GAAP. In this context IFRS means international standards and interpretations that have been endorsed by the EU (EU-adopted IFRSs).

UK listed companies and AIM companies are required to use EU-adopted IFRSs in their consolidated accounts but may choose between EU-adopted IFRSs and UK GAAP in their individual accounts. Almost all other companies have a choice between preparing their accounts under UK GAAP or EU-adopted IFRSs.

Question 26

Tell me something you understand from the Companies Act 2006.

Answer 26

CA 2006 includes an overarching requirement that the directors must not approve accounts unless they are satisfied that they give a true and fair view.

Question 27

Tell me what it means to prepare accounts in accordance with IFRS.
What is the difference between UK GAAP and IFRS?

Answer 27

CA 2006 recognises two financial reporting frameworks – IFRS and UK GAAP. In this context IFRS means international standards and interpretations that have been endorsed by the EU (EU-adopted IFRSs).

GAAP is a framework based on legal authority while IFRS is based on a principles-based approach. While principles guide, GAAP is mostly rules-based. In essence, this means that IFRS Standards behave more like recommendations with flexibility for interpretation than GAAP Standards, which are more prescriptive and explicit.

Question 28

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

Answer 28

Recorded as a liability on the company’s balance sheet. Income and expenses within a profit or loss account are likely to be shown as net.

Question 29

How do you account for the impact of inflation when reporting to
clients?

Answer 29

Build cost inflation - 3% contingency.

Question 30

What is the difference between consolidated accounts and individual accounts.

Answer 30

The individual accounts show the position and the performance of each individual company, but not the group as a whole. The consolidated accounts combine all the information from the subsidiaries under the parent’s control

Question 31

What would a Public Limited Company have to produce:

Answer 31

Chairmans statement
Independent auditors Report
Profit and Loss statement
Balance Sheet

Question 32

What are the UK GAAP principles?

Answer 32

Standards & rules that govern the accounting profession
10 principles

Regularity, Consistency, Sincerity, Permanence, Prudence, Continuity, Periodicity, Materiality, Good Faith