Accounting Principles and Procedures L2 Flashcards
What is GAAP?
Generally Accepted Accounting Principles
What is the benefit/purpose of GAAP?
To improve the clarify of the communication of financial information
What are the 10 principles of GAAP?
Regularity
Consistency
Sincerity
Permanence
Non-compensation
Prudence
Continuity
Periodicity
Materiality
Utmost good faith
What are the International Accounting Standards?
The older accounting standards that were replaced by IFRS in 2001
What is IFRS?
International Financial Reporting Standards
Why were IFRS introduced to replace IAS?
Goal was to make it easier to compare businesses around the world
Wanted to increase transparency and trust in global reporting
What is IFRS 16?
Effective from 1 January 2019
Requires lessee to recognise assets and liabilities for all leases with a term of more than 12 months
IFRS 16 sets out principles for an IFRS reporter to recognise, measure, present and disclose leases
What is the objective of IFRS 16?
Report information that represents lease transactions
Leases need to be placed on balance sheets
What is the result of IFRS 16 accounting reporting?
Results in increase in assets, liabilities and net debt where leases are brought onto the balance sheet
Can affect key accounting and financial ratios - impacts a companies attractiveness to investors
Provides transparency on companies’ lease assets and liabilities
What governs the format of company accounts?
The Companies Act 2006
What is included in company accounts, as laid out in the Companies Act 2006?
Cover page
Information and contents
Directors report
Accountants report
Statutory profit and loss account
Balance sheet
What is a profit and loss account?
A summary of the business income and expenditure transactions on an annual basis
Gives overall profit / loss figure
What is taxation?
The amount of money or percentage that is owed to HMRC based on company profit
What is directors remuneration in a profit and loss account?
How directors are paid for their services - fees, salary, or dividends
How is gross profit calculated?
Turnover minus cost of sales
What can be determined from gross profit?
Not a lot in isolation, but when compared to previous years gross profit then can get an idea of what direction the company is heading in
What is depreciation?
A reduction in the value of an asset over time EG due to wear and tear
What is amortisation?
A reduction in the value of an intangible asset over time EG spreading out loan payments over time
What is the difference between depreciation and amortisation?
Amortisation focuses on intangible assets, whereas depreciation focuses on fixed assets
What is a balance sheet?
Outlines companies assets and liabilities
What are assets on a balance sheet?
Items the company owns which provide economic benefit
What are the two types of asset?
Fixed / Long-Term EG land, factories
Current / Short-Term EG stock, cash in bank
What are liabilities?
What a company owes to others
What are the two types of liability?
Long-Term EG not due to be repaid in next year
Current - those due within the year
What key piece of information can be concluded from a balance sheet?
Whether a company is solvent
How likely it is that the company will still be in business in a year
What is the liquidity ratio?
A financial ratio used to determine a company’s ability to pay its short term debt obligations
How is liquidity ratio calculated?
Current assets divided by current liabilities