Accounting Principles and Procedures - Level 1

Question 1

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

Answer 1

1. A P&L accounts shows the incomes and expenditures of a company resulting in profit or loss.
2. A balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time.

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 is a cashflow statement?

Answer 3

It is a summary of income or outgoings of a firm over the accounting period.

It
It measures a firm’s short term ability to pay off its debts.

Question 4

Why do Chartered Surveyors need to understand and be able to interpret company accounts?

Answer 4

1. For reviewing own firms accounts
2. Assessing the financial strength of a contractor and those tendering for a contract
3. For reviewing profitability and sustainability

Question 5

What is the purpose of a profit and loss account?

Answer 5

Shows the company’s income and outgoings over a financial period.

1. To monitor profit and loss.
2. Compare current to past performance
3. Assisting with budgeting and taxation

Question 6

What is the difference between creditors and debtors

Answer 6

1. Creditors - Firm owe them

2. Debtors - Owe the firm

Question 7

What are financial statements?

Answer 7

• Analysis of income and expenditure

- can be used as an analytical tool to identify shortfalls and surpluses

Question 8

What is a balance sheet?

Answer 8

shows what a company owns (assets) and what it owes (liabilities) at a given point in time.

Question 9

What are signs of insolvency in company accounts/credit checks?

Answer 9

• Low credit rating
• A current ratio below 0.75.
• A falling working capital ratio suggesting a company has taken on more than it can finance

Question 10

When looking for a contractor what should you look at in their accounts?

Answer 10

• Credit rating
• Working capital ratio = total assets/total liabilities
• Profitability

Question 11

What are statutory accounts?

Answer 11

1. These accounts must be filed at Companies House.

2. They include a balance sheet, P&L account, cashflow statement and notes to the accounts and a directors report.

Question 12

What are management accounts?

Answer 12

Management accounts are financial reports used by a business owner for day to date management and strategic decision making.

Produced monthly or quarterly, provide an insight in to the financial health of a company.

Question 13

What is the difference between management accounts and statutory accounts?

Answer 13

Management - internal use to measure day to day performance

Statutory - professionally produced accounts which are filed at Companies House

Question 14

What are IFRS?

Answer 14

International Financial Reporting Standards

• provide common accounting language to increase transparency in the representation of financial information

Question 15

How can you use company accounts to assess covenant strength?

Answer 15

You can look at the profitability and net assets in the accounts to determine the company’s ability to pay of debts.

Question 16

What is covenant strength?

Answer 16

A way of assessing a tenant’s financial strenght before they lease a property.

Question 17

What does gross profit mean?

Answer 17

Gross profits = Revenue – costs of goods sold

Question 18

What does Net profitmean?

Answer 18

Net profit = Total Revenue – total expenses ​

Question 19

What is a cash flow?

Answer 19

Explains how a company’s cash and cash equivalents have changed during a specified period of time

Question 20

What is Capital Expenditure?

Answer 20

costs associated with one-off expenditure on the acquisition that will be of use or benefit for more than one financial year.​

Question 21

What is Revenue Expenditure?

Answer 21

an amount that is expensed immediately—thereby being matched with revenues of the current accounting period

Question 22

What is corporation tax?

Answer 22

Corporation tax is paid by businesses in the UK, and is calculated on their annual profits, in a similar way to income tax for individuals.

Question 23

What is ratio analysis?

Answer 23

a quantitative method of gaining insight into a company’s liquidity, operational efficiency, and profitability by studying its financial statements such as the balance sheet and income statement.

Question 24

What is Auditing?

Answer 24

The process of reviewing and investigating any aspect of a business, whether financial or nonfinancial.

Question 25

What is Credit Control?

Answer 25

The process of controlling the credit extended to credit customers

Question 26

What are Generally Accepted Accounting Principles (GAAP)?

Answer 26

The overall body of regulation establishing how company accounts must be prepared in UK

Question 27

What is Profitability ?

Answer 27

Profitability is a situation in which an entity is generating a profit

Question 28

What is Insolvency?

Answer 28

A situation in which a firm or individual has a Negative Net Worth.