Accounting Principles and Procedures - Level 1

Question 1

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

Answer 1

1. A P&L accounts shows the incomes and expenditures of a company resulting in profit or loss.
2. A balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time.

Question 2

What are the key financial statements that all companies must provide? What are company accounts

Answer 2

The key financial statement are a profit and loss statement, balance sheet, and cash flow statement. These are the company accounts produced annually and filed at Companies House.

Question 3

What is a cashflow statement?

Answer 3

It is a summary of actual or anticipated income or outgoings of a firm over the accounting period. It is broken down into operating, investing, financing activities.
It measures a firm’s short term ability to pay off its debts.

Question 4

Why do Chartered Surveyors need to understand and be able to interpret company accounts?

Answer 4

1. For reviewing own firms accounts
2. Assessing the financial strength of a contractor and those tendering for a contract
3. For reviewing profitability and sustainability

Question 5

What is the purpose of a profit and loss account?

Answer 5

1. To monitor profit and loss. Significant problems can arise if information is inaccurate, either through incompetence or fraud.
2. Compare current to past performance, compare to the budget and other businesses
3. Assisting with budgeting and taxation

Question 6

What is the difference between creditors and debtors

Answer 6

1. Creditors - Firm owe them

2. Debtors - Owe the firm

Question 7

What are financial statements?

Answer 7

Analysis of income and expenditure which can be used as an analytical tool to identify shortfalls and surpluses

Question 8

What are profit and loss accounts?

Answer 8

Shows the company’s income and outgoings over a financial period.

Question 9

What is a balance sheet?

Answer 9

A balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time.
It values the business at a given time.

Question 10

What are signs of insolvency in company accounts/credit checks?

Answer 10

• Low credit rating
• A current ratio below 0.75.
• A falling working capital ratio suggesting a company has taken on more than it can finance

Question 11

What looking for a contractor what should you look at in their accounts?

Answer 11

• Credit rating
• Working capital ratio = total assets/total liabilities
• Profitability

Question 12

What are statutory accounts?

Answer 12

1. These accounts must be filed at Companies House.

2. They include a balance sheet, P&L account, cashflow statement and notes to the accounts and a directors report.

Question 13

What are management accounts?

Answer 13

Management accounts are financial reports used by a business owner for day to date management and strategic decision making.
Produced monthly or quarterly, provide an insight in to the financial health of a company.

Question 14

What is the difference between management accounts and statutory accounts?

Answer 14

Management - internal use to measure day to day performance

Statutory - professionally produced accounts which are filed at Companies House

Question 15

What are IFRS?

Answer 15

International Financial Reporting Standards - provide common accounting language to increase transparency in the representation of financial information

Question 16

Why are the IFRS relevant for company accounts?

Answer 16

they specify how companies must maintain and report their accounts.

Question 17

How can you use company accounts to assess covenant strength?

Answer 17

You can look at the profitability and net assets in the accounts to determine the company’s ability to pay of debts.

Question 18

What is covenant strength?

Answer 18

A way of assessing a tenant’s financial strenght before they lease a property.