Accounting Principles and Procedures Level 1

Question 1

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

Answer 1

Balance sheet is more of a snapshot in time, shows assets, liabilities like debts and shareholder equity - shows the value of business at a certain point
Profit and loss account summarises income, revenues, costs and expenses over a period of time resulting in a profit or loss at the end, can be used to calculate taxation

Question 2

When would you use a balance sheet and a profit and loss account?

Answer 2

Balance sheet to show what company owns and owes and long term investments
Profit and loss statement answers “is the company profitable?” where revenue is strong or expenses are weak

Question 3

How do you prepare a cashflow?

Answer 3

Financial statement showing all company cash inflow and cash outflow. provides net cashflow and amount of money at hand

Question 4

If actual was at variance to forecast what does this say?

Answer 4

An assumption was incorrect

Question 5

What action would you take?

Answer 5

Find out what varied from forecast and either eliminate variable or alter forecast

Question 6

How would you assess the financial standing of a contractor?

Answer 6

Companies house, credit checks, check their bank account, see how many contracts they have

Question 7

What do you understand by the acronym GAAP?

Answer 7

Generally Accepted Accounting Practice, accounting standards by UK Financial Reporting Council

Question 8

Would you understand by the term ratio analysis?

Answer 8

Method of gaining insight into companies liquidity, efficiency and profitability by looking at its financial statements

Question 9

Can you give me some typical ratio analysis examples?

Answer 9

profitability ratios, efficacy ratios, liquidity ratios, solvency ratios, coverage ratios, market ratios, gearing ratios

Question 10

What are statutory accounts?

Answer 10

End of each financial year to report and disclose for filing with Companies House

Question 11

What are management accounts?

Answer 11

produced for owners and managers, monthly or quarterly to inform decision making or business planning

Question 12

What are the key differences between management and statutory accounts?

Answer 12

Don’t have to meet statutory requirements, can just be what managers request

Question 13

In the UK where are statutory accounts for limited companies required to be filed?

Answer 13

Companies House

Question 14

What is Tax depreciation?

Answer 14

Assets declining value is offset from company taxable profit, can be recorded as expense i.e. vehicles, computers, buildings

Question 15

Overheads?

Answer 15

ongoing operating costs of business, fixed i.e. rent or building insurance, don’t change every month,
variable i.e. delivery or utility charges

Question 16

Escrow account?

Answer 16

Intermediary third account to hold money until the time to transfer

Question 17

Company accounts are for?

Answer 17

Recording profitability, tax calculations, business growth, monitoring.
Legislation requires accurate accounts.

Question 18

Financial leverage?

Answer 18

using borrowed funds i.e. a loan to spend on the business / increase profit and operations

Question 19

Capital allowance?

Answer 19

Tax relief based on expenditure of certain categories, plant lift maintenance, R&D

Question 20

Current asset?

Answer 20

Can be converted to cash in a year

Question 21

Fixed asset?

Answer 21

Cant be added to cash in a year

Question 22

Creditor?

Answer 22

Company owes money to them

Question 23

Debtor?

Answer 23

Owe money to the company

Question 24

Signs of insolvency?

Answer 24

low credit rating, falling working capital

Question 25

What current challenges is Covid and/or Brexit bringing to Accounting Principles?

Answer 25

Covid brought about grants and loans which complicated company accounts. Also losing income due to industry uncertainty.
Business operating outside of the UK might have been affected by Brexit.