Accounting Principles and Procedures (Level 1) Flashcards
What are the 3 different types of financial statement?
- Balance Sheet
- Income Statement (Profit and Loss Statement)
- Cash Flow Statement
What does a balance sheet set out?
Sets out a firm’s financial position including asset’s and liabilities e.g cash and accounts receivable, property, plant and equipment
What does an income statement (profit and loss statement) set out?
Sets out a firm’s revenue, expenses and net income e.g sales figures, operating expenses and admin fees
What does a cash flow statement set out?
Sets out a firm’s inflows and outflows of cash including VAT e.g cash flow from operations, investment and financing
What is an asset?
Asset - resources that your company owns and can provide future economic income e.g rental property
What is a liability?
Liability - things that your company owes or has borrowed e.g debt, leasing a vehicle
What is the difference between financial and management accounts?
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
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
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
What accounting framework do UK companies have to comply with?
UK companies must comply with either International Financial Reporting Standards (IFRS) or UK GAAP
What is covenant strength and how do you assess it?
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
What is the Profits Test?
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
What does a Dun and Bradstreet report set out?
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
What is the role of an auditor?
To provide a professional and independent opinion of a businesses financial statements
When are audited accounts needed and why?
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
When is a UK company exempt from auditing on an annual basis?
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
How do public limited company and private limited accounts differ?
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
What is the purpose of the Companies Act (2006)?
The purposed of the act is to modernise and simplify corporate law and specify the relationship between parties involved in a company
What are the principles of the International Financial Reporting Standards (IFRS)?
- Clarity
- Relevance
- Reliability
- Comparability
What is the difference between IFRS and UK GAAP?
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
What is the basis of value under IFRS 13?
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)
What are statutory accounts?
Also known as financial statements or year end accounts that report financial measures and disclosures to companies house on an annual basis
Why is good financial record keeping important to you?
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
Give me 3 ways you ensure that client’s money is handled properly.
- Ensure that the firm I am working for is signed up to an RICS Money Protection Scheme
- Ensure all client money is paid into a client money account upon receipt
- 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
Is VAT included on a balance sheet or an income statement?
- 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)
How do you account for the impact of inflation when reporting to clients?
Inflation is not considered in accounting, only those transactions which can be measured in terms of money can be recorded in the financial statements.
What does EBITDA stand for?
Earnings Before Interest, Taxes, Depreciation and Amortisation - it is a measure of profitability
What guidance does the RICS have relating to IFRS 16?
RICS Practice Information IFRS 16: Principles for UK Real Estate Professionals
What are the key changes that IFRS 16 has brought in?
- 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
Who regulates the financial sector in the UK?
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
