Accounting Principles and Procedures (Level 1)

Question 1

What are the 3 different types of financial statement?

Answer 1

1. Balance Sheet
2. Income Statement (Profit and Loss Statement)
3. Cash Flow Statement

Question 2

What does a balance sheet set out?

Answer 2

Sets out a firm’s financial position including asset’s and liabilities e.g cash and accounts receivable, property, plant and equipment

Question 3

What does an income statement (profit and loss statement) set out?

Answer 3

Sets out a firm’s revenue, expenses and net income e.g sales figures, operating expenses and admin fees

Question 4

What does a cash flow statement set out?

Answer 4

Sets out a firm’s inflows and outflows of cash including VAT e.g cash flow from operations, investment and financing

Question 5

What is an asset?

Answer 5

Asset - resources that your company owns and can provide future economic income e.g rental property

Question 6

What is a liability?

Answer 6

Liability - things that your company owes or has borrowed e.g debt, leasing a vehicle

Question 7

What is the difference between financial and management accounts?

Answer 7

Financial accounts are audited accounts by a 3rd party and are a legal requirement

Management accounts are used for the day to day running of a company

Question 8

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

Answer 8

GAAP are standards that encompass the details, complexities and legalities of business and corporate accounting

The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its approved accounting methods and practices

Question 9

What accounting framework do UK companies have to comply with?

Answer 9

UK companies must comply with either International Financial Reporting Standards (IFRS) or UK GAAP

Question 10

What is covenant strength and how do you assess it?

Answer 10

Covenant strength in real estate refers to a tenant’s ability to comply with and observe the covenants outlined in their lease.

To assess covenant strength you can use:
- The Profits Test
- Financial reporting services e.g Dun and Bradstreet Report

Question 11

What is the Profits Test?

Answer 11

The profits test is whether the net profit of the business has been 3 times the annual rent of the property for 3 consecutive years

Question 12

What does a Dun and Bradstreet report set out?

Answer 12

A D & B report sets out a company’s:
- contact information
- credit history
- registration information
- industry classification
- ownership

A D & B report provides an overall rating on financial strength and risk indicator

Question 13

What is the role of an auditor?

Answer 13

To provide a professional and independent opinion of a businesses financial statements

Question 14

When are audited accounts needed and why?

Answer 14

UK companies have to have their accounts audited once a year unless they are exempt.

The purpose of an audit is to form a view on whether the information presented in the financial report reflects the financial position of the company

Question 15

When is a UK company exempt from auditing on an annual basis?

Answer 15

A company is exempt if:
- annual turnover is less than £10.2 million
- assets are worth no more than £5.1 million
- 50 or fewer employees on average

Question 16

How do public limited company and private limited accounts differ?

Answer 16

A public limited company must submit accounts within 6 months of the end of the accounting year

A private limited company can submit accounts up to 9 months after the end of the accounting year

Question 17

What is the purpose of the Companies Act (2006)?

Answer 17

The purposed of the act is to modernise and simplify corporate law and specify the relationship between parties involved in a company

Question 18

What are the principles of the International Financial Reporting Standards (IFRS)?

Answer 18

1. Clarity
2. Relevance
3. Reliability
4. Comparability

Question 19

What is the difference between IFRS and UK GAAP?

Answer 19

IFRS requires you to separate out each different part of a transaction whereas UK GAAP allows transactions to be considered as a bundle and accounted for as a single revenue stream

Question 20

What is the basis of value under IFRS 13?

Answer 20

Fair Value - the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price)

Question 21

What are statutory accounts?

Answer 21

Also known as financial statements or year end accounts that report financial measures and disclosures to companies house on an annual basis

Question 22

Why is good financial record keeping important to you?

Answer 22

Regulation - part of the regulatory process in the UK

Management - allows companies to keep track of their financial performance

Transparency - allows all parties access to financial information so they can assess who they are doing business with

Crime - helps to prevent crime and corruption

Question 23

Give me 3 ways you ensure that client’s money is handled properly.

Answer 23

1. Ensure that the firm I am working for is signed up to an RICS Money Protection Scheme
2. Ensure all client money is paid into a client money account upon receipt
3. Ensure that when mixed monies are received the receipt is paid into a client money account and the office money is paid into an office money account

Question 24

Is VAT included on a balance sheet or an income statement?

Answer 24

• VAT will be included on a balance sheet as a liability
• VAT will be included on a cash flow statement
• VAT will not be included on a profit and loss statement (income statement)

Question 25

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

Answer 25

Inflation is not considered in accounting, only those transactions which can be measured in terms of money can be recorded in the financial statements.

Question 26

What does EBITDA stand for?

Answer 26

Earnings Before Interest, Taxes, Depreciation and Amortisation - it is a measure of profitability

Question 27

What guidance does the RICS have relating to IFRS 16?

Answer 27

RICS Practice Information IFRS 16: Principles for UK Real Estate Professionals

Question 28

What are the key changes that IFRS 16 has brought in?

Answer 28

• IFRS 16 brings almost all leases onto the balance sheet, where they are treated as finance leases
• Introduced the concept of right of use asset - the value of a lessee’s right to use an underlying asset for the lease term - This new type of asset is recorded on the balance sheet along with a corresponding lease liability representing the discounted future lease payments

Question 29

Who regulates the financial sector in the UK?

Answer 29

The Financial Conduct Authority (FCA) regulates the financial services industry in the UK. Its role includes protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers