Accounting principles and procedures (Level 1)

Question 1

What are the three types of financial statement you may come across relating to a company?

Answer 1

The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement

Question 2

What is an asset / liability?

Answer 2

An asset is generally any useful thing or something that holds value.
A liability is something that is owed to somebody else.

Question 3

Can you give me an example of each? assets & liability

Answer 3

Assets can be property, machinery, equipment
Liability can be taxes, bills, rent/mortgage, loan interest

Question 4

What is the difference between financial and management accounts?

Answer 4

Financial accounting is essential for confirming the actual value of an organization, including its assets and liabilities. In contrast, managerial accounting is important for understanding these assets’ and liabilities’ value on the organization’s productivity and profits.

Question 5

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

Answer 5

GAAP (generally accepted accounting principles) is a collection of accounting rules and standards for financial reporting.

Question 6

How do companies know which reporting framework to comply with?

Question 7

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

Question 8

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

Question 9

Can you tell me about a common financial measure?

Answer 9

Return on investment (ROI) allows one company to compare performance with other companies. ROI lets managers assess an organization’s competitive advantage.

Question 10

What is the acid test

Answer 10

compares short-term assets to short-term liabilities
to see if it has enough cash to pay its immediate liabilities, such as short-term debt

Question 11

What is the ROCE

Answer 11

shows if a company is generating profits from its capital

Question 12

What is the working capital ratio

Answer 12

Working capital ratio is current assets as a proportion of its liabilities.

provides an overview of financial health and liquidity, indicating whether current liabilities can be paid by existing assets.

Question 13

What is the gearing ratio

Answer 13

tells us how a company manages its debt and how well it’s performing

Question 14

What is the net assets per share?

Answer 14

Net assets per share is
net assets / the number of equity shares in issue

Question 15

Can you tell me what the role of an auditor is?

Answer 15

Auditors inspect organisations’ financial accounts to ensure they’re correct and comply with the law.

Question 16

When are audited accounts needed and why?

Answer 16

turnover £10.2 million
assets £5.1 million
employ 50 people

An audit is important as it provides credibility to a set of financial statements and gives the shareholders confidence that the accounts are true and fair. I

Question 17

How do public limited company accounts differ? filing accounts

Answer 17

public companies have 6 months, private companies which have 9 months to file accounts.
public companies are required to hold an annual general meeting whereas this is generally not a requirement for private companies.

Question 18

Tell me something you understand from the Companies Act 2006.

Answer 18

The Companies Act 2006 is legislation that governs companies in the UK in just about every way a company is managed, run and financed.

Question 19

Tell me what it means to prepare accounts in accordance with IFRS.

Answer 19

make them consistent, transparent, and easily comparable around the world.

Question 20

What is the difference between UK GAAP and IFRS?

Answer 20

Enforcement. GAAP is rule-based, IFRS is standard-based,

Source and scope. GAAP is national, while IFRS is used worldwide.

Question 21

What is the basis of valuation under IFRS 13?

Answer 21

IFRS 13 defines fair value as 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 22

What is fair value?

Answer 22

IFRS 13 defines fair value as 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 23

What has changed in relation to lease accounting / IFRS 16?

Answer 23

IFRS 16 takes a totally new approach to accounting for leases, called the ‘right-of-use’ model. This means that if a company has control over, or right to use, an asset they are renting, it is classified as a lease for accounting purposes and, under the new rules, must be recognised on the company’s balance sheet.

Question 24

When did the IFRS 16 change come into effect?

Answer 24

22 September 2022,

Question 25

What is FRS 102?

Answer 25

applies to financial statements that are intended to give a true and fair view of a reporting entity’s financial position and profit or loss for a period.

Question 26

What changes have been made to it? FRS 102

Question 27

How has this impacted upon investment property?

Question 28

What are statutory(annual) accounts?

Answer 28

a set of financial reports prepared at the end of each financial year.

Question 29

Why is good financial record keeping important to you?

Answer 29

make sound financial decisions,
stay organised,
protect yourself from potential losses or threats,
look for opportunities, and
build trust with customers and investors.

Failure to keep the records updated can mark your business as a fraud at worst and end up paying penalties.

Question 30

Tell me three ways you ensure that clients’ money is handled properly.

Answer 30

Only a Principal or appropriate staff independent of accounting staff open incoming post;
Procedures exist to ensure all clients’ money is banked within three working days;
All cash and cheques received by post or by hand are promptly recorded

Question 31

What RICS guidance or Schemes do you adhere to in doing so? money

Answer 31

Client money handling
1st edition, October 2019
Effective from 1 January 2020

provides clear rules for RICS members and regulated firms to have the appropriate controls and procedures to keep client money safe. It provides confidence to clients and consumers that RICS-regulated firms are operating to high standards.

Question 32

Explain your understanding of the VAT domestic reverse charge for building and construction services.

Answer 32

the buyer (contractor) accounts for the VAT rather than the supplier (subcontractor).

Question 33

When do changes to the reverse charge apply from?

Answer 33

1st March 2021

Question 34

What is the impact of the reverse charge on VAT accounting?

Answer 34

With reverse charge VAT, the contractor is responsible for reporting both sales and purchase VAT on their VAT return. The subcontractor does not report the VAT from their sales. If you’re a subcontractor, you do not include VAT on the sales invoice.

Question 35

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

Answer 35

VAT is recorded as a liability on the company’s balance sheet until it is remitted to the tax authority.

Question 36

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