Accounting Principles and Procedures (Level 1) Flashcards
Why should you keep accounts?
Track
Monitor profit/loss
Business planning
Submit financial statements to companies house
Company’s Act 2006 – year end accounts submitted as limited companys
Difference between management and company accounts?
Management accounts – internally
Company accounts ; required by law and audited by chartered accountant
What is meant by gross and net?
Gross = total
Net = minus tax
What is a balance sheet?
Statement showing business financial positon
Assets and liabilities
Assets: cash, property, debtors
Liabilities: borrowings, loans, creditors
What is a profit and loss account (income statement)
Summary of business income and expenditure
prepared on annual basis
Demonstrate how revenue is transformed into net income
What is a cash flow statement?
Actual receipts and expenditure and includes VAT
Can reveal shortfalls in cash balance
Review helps ensure businesses can afford to pay suppliers
Struggling companies should review cash flow daily
Healthier companies review weekly or monthly
What is meant by depreciation in relation to an asset?
Systematic reduction in recorded cost of fixed asset. E.g. IT equipment
What is the difference between a Sole Trader, Partnership, Limited and LLP
Sole trader = person exclusive owner of business to keep all profits
Partnership =two or more indivuduals who operate and manage.
Limited = liability limited to capital they originally invested. If insolvent, personal assets protected. Not offered to general public
Limited Liability Partnership = some or all partners have limited liabilities. One partner not responsible for another partners negligence.
How would you assess a contractors financial accounts?
Request contractors company accounts for last 3 years
. Include profit and loss statement
. balance sheet
. cash flow statement
Assess contractor is profitable
Calculate liquidity ratio – assets v liabilities – to asses if they can cover contract losses
Caveat advice given to client and recommend chartered accountant to review
What are Dun and Bradsheet?
Reports to provide scorings and ratings to help identifying credit score
Financial strength derived from net worth
Risk indicator
Limitations: historic and look at past performance, not future
Profit may be declining in recent years
Main types of ratio analysis to assess company financial strength?
Liquidity – assets/liabilities
Leverage – net debt/equity
Profitability
Gross Margin – gross profit/net sales
Why do chartered surveyors need to be able to understand company accounts?
Companies business accounts
Covenant strength
Assessing competition
What is insider trading?
Trading of public stock by individuals with access to non-public information
Construction Industry Scheme (CIS)?
HMRC scheme – minimise tax evasion from subcontractors
What is a balance sheet?
Financial statement of company’s assets, liabilities, equity
What does a balance sheet tell you?
How much owns (assets) and owes (liabilities)
What is a profit and loss account?
Compares revenue to expenditure and liabilities
What is include in a profit and loss account?
Revenue, expenditure, liabilities
Are profit and loss accounts current?
No, retrospective
What happens if company’s liabilities are greater than its assets?
Likelihood will go into administration
What does the term liabilities mean?
Outstanding cost, yet to be paid
What does the term assets mean to you?
A) Owned assets with value attached
How can you analyse company accounts/
A) Liquidity
B) Profitability
C) Leverage
What is corporation tax?
A) Tax levied on company profits
What does corporation tax apply to ?
A) All limited companies
What profits do companies pay corporation tax on?
A) Trading profits
What is VAT
A) Value added tax on goods and services
B) Charged on companies with turnover over £82k
What are capital allowances?
A) Tax relief on certain items bought for business (tools, IT etc)
Who can claim capital allowances?
A) Limited companies
B) Sole traders
What are sinking funds?
A) Set aside revenue for future expenses or long term debt (service charge works)
What is revenue expenditure?
A) Cost of maintaining existing assets
What is capital expenditure?
A) The cost of purchasing or upgrading an existing asset, the cost of which are spread over the useful life of the asset, and shown on the balance sheet.
What is a cash flow?
A) Incoming and outgoings of cash within a business
What procedures can you implement to improve cash flow?
A) Negotiate shorter payment terms with client
B) Negotiate longer payment terms with suppliers
Who requires auditing?
A) Public companies
B) Companies with turnover more than £6.5m
C) Companies providing financial services
Where can you find information on a company’s financial status?
A) Companies house
What is debt ratio analysis?
A) Debts compared to assets
What is insolvency?
A) Where a company is unable to pay debts
What are the types of insolvency?
Company voluntary arrangements
Administration
Administrative receivership
Company compulsory liquidation
Voluntary liquidation
What are the signs of insolvency?
A) Front loading
B) Overvaluing interim valuations
C) Asking for upfront payment
Who is employed when a company becomes insolvent?
A) Administrator, who will try and keep the company going
B) Liquidator who will wind up the company and sell assets
What options are available to company that has gone insolvent?
A) Administration
B) Company Voluntary Agreement
C) Compulsory Liquidation
What is administration
A) A method of holding a business together, whilst plans to form restructure or sell assets put in place
What to do if contractor goes insolvent?
A) Stop payments
B) Inform client
Types of insolvency
A) Cash flow insolvency
B) Balance sheet insolvency
What is cash flow insolvency?
A) Company has enough assets but not enough cash/equity
What is balance sheet insolvency?
A) Not enough assets to pay debts
Difference between management accounts and financial accounts?
A) Management accounts = internal
B) Financial accounts = required by law, follow pre-determined format
Consolidated set of accounts
Number of accounts of individual subsidiary accounts for a company
What financial checks may you undertake on a company before entering into contract?
A) Checked published accounts
B) Check credit ratings
C) Check references from previous clients
Profitability test
A) 3 years of audited accounts showing net profit of 3x annual rent.
ESCROW accounts
A) A separate account owned by 3rd party
B) Neutral account before transferred to another account
When do you use ESCROW accounts?
Puurchasers
Rental deposits
Company Act 2006
A) Legislation that regulates all aspected of private and public companies.
B) General practice on accountancy obligations, return accounts annually
International Financla Reporting Standards (IFRS)
Accounting rules for financial statements of public companies
RICS Valuation – Global Standards: UK National Supplement 2018 includes valuation practice guidance – application (VPGA) 1 relating to valuations for financial reporting.
This sets out the two financial reporting frameworks adopted by UK companies: the IFRS and UK Generally Accepted Accounting Practice (GAAP).
PLCs must follow the IFRS when preparing their group company accounts, but may adopt either these or UK GAAP for individual parent company account
IFRS 16
IFRS 16 brings almost leases (more than 12 months long) onto the balance sheet, where they are treated as finance leases. This makes it easier to assess an entity’s lease commitments and to compare different entities, using their financial statements.
The full cost of leases have to be accounted for on the balance sheet
Occupiers liability to pay rent has to be recognised as liability
Exemptions for 12 months or shorter
What did you learn from your CPD seminar on analysing balance sheet?
Assets / liabilities
Company stability
Debt
What did you learn from your CPD seminar on profit and loss accounts?
Income / expenditure
Profitability
How well money is managed
What did you learn from your CPD seminar on financial statements?
Income statement (profit and loss)
Balance sheet (financial position)
Cash flow statement
What are the key financial statements that all companies must provide?
Profit & loss account
Balance sheet
Cash flow
What is bankrupcy?
The insolvency of an individual
How would you assess the financial standing of a contractor
CreditSafe/D&B financial credit check - establish credit limits, recommended contract value, failture score, submitting accounts in a timely manner, review T/o and profitability.
Request copy of accounts
Companies House check
Internet search
What is GAAP
General Accepted Accounting Procedures
Clear, consistent comparable method of accounting …. To ensure financial reportin is transparent and consistent
In the UK where are statutory accounts for limited companies required to be filed
Companies house & HMRC
Is VAT incl in a balance sheet or profit and loss?
In Balance sheet only
Hurdle Rate
in accounting, this is the minimum rate of return required on an investment.
A company may have a minimum hurdle rate that it wants to achieve on projects or investments, compared to the potential or actual rate of return.
Joint Venture
a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control’
Net Asset Value (NAV)
financial ratio that shows the net value of an entity’s assets minus its liabilities, divided by the number of outstanding shares.
Quarter days
in England, these are:
25 March
24 June
29 September and
25 December
What is a yield?
rate of return on investment
What is your company’s current turnover and profit?
7.5m turnover
1m profit
What’s the difference between IFRS and UK GAAP?
IFRS is international accounting standards and UK GAAP is usually meaning UK.
APAM reports under UK GAAP and Catella reports under IFRS
Do you provide financial advice?
I am not a qualified accountant.
I am aware of accounting ratios, I do not claim that I am analysing companies accounts to client!
ETHICS!!
