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Ethan APC Summary of Experience Mock Questions > Accounting Principles and Procedures - Summary of Experience > Flashcards

Accounting Principles and Procedures - Summary of Experience Flashcards

1
Q

What is depreciation?

A

The reduction in value of an asset over its useful life. Applied to fixed assets which generally experience a loss in their utility over multiple years

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2
Q

What are the two types of asset?

A

Fixed (long term) - e.g. land
Current (short term) - e.g. cash/stock

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2
Q

What is amortisation?

A

An accounting method used to spread the cost of an intangible asset over its useful life

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3
Q

What are the two types of liability?

A

Fixed (long term) - e.g. not due soon
Current (short term) - e.g. those due within a year

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3
Q

What were the cash flow issues experienced by the tenant at Croxley Park (S11 B6)?

A
  • It was noted that their revenue wasn’t high enough to cover expenses whilst they were also receiving customer payments late
  • The service charge budget has also risen during that period and therefore their assets were struggling against liabilities
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4
Q

What is tenant covenant strength?

A

The ability of a tenant to comply with lease obligations

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5
Q

What is the efficiency ratio?

A

Evaluates how efficiently a company uses assets to generate sales

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6
Q

What is the profitability ratio?

A

Conveys how well a company can generate profit from its operations (profit DIVIDED by net sales)

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7
Q

What is the solvency ratio?

A

Compares a companys debt with its assets, equity and earnings

  • Suggests whether a company is solvent and can pay lenders debts
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8
Q

What is the liquidity ratio?

A

A ratio that determines a company’s ability to pay its short term debt obligations

Current assets / current liabilities

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9
Q

How is the liquidity ratio interpreted?

A

If ratio = 1 they can exactly pay off all liabilities with assets but if lower then they can’t

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9
Q

What are the main commercial credit rating agencies?

A
  • Dunn and bradstreet
  • Moody’s
  • Standard and poor (S&P)
  • Fitch Ratings
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10
Q

How was the 3-month rent free period documented with solicitors?

A

1) Was documented through a side letter (rent concession letter)
2) I inputted the information onto a data change form
3) Actioned by the data team
4) No accounting charges for rent raised for the period (inbetween two quarters)
5) Accounting team allocated correctly on next payment

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11
Q

What is a credit rating?

A

A numerical assessment of an organisations creditworthiness, based on previous dealings

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12
Q

What are the two parts of a Dunn and Bradstreet rating?

A

2A - Financial Strength (Based on tangible net worth)
4 - Risk Indicator (Derived from D&B failure score e.g. payment history, employee number, length of operation)

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13
Q

How did you note that the tenant at Croxley Park’s (B6 S11) financial position had weakened?

A

Firstly employed the profits test + also dunn and bradstreet
- Then confirmed this with the independent expert I instructed

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14
Q

What is a management account?

A

Internal process of accounting used to account for business transactions

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14
Q

What is a company account?

A

Documents prepared at the financial year end showing a companys performance over the account period - Legal requirement under the Companies Act 2006

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15
Q

What does it mean if a company goes into administration?

A

Company becomes insolvent and is put under the management of licensed insolvency practitioners

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16
Q

What is EBITDA?

A

Earnings before interest, tax, depreciation and amortisation
- Measure of company profitability

Shows how much cash flow a company has available to pay for long-term debt

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17
Q

What is bankruptcy?

A

A legal proceeding whereby a person/business is unable to repay outstanding debt and liabilities

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18
Q

What are the 3 tests of insolvency?

A
  • Cash flow test - check if able to pay bills in near future
  • Balance sheet test - check if assets are greater than liabilities
  • Legal action test - check if legal action has been taken against business for debt of £750 or more
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18
Q

What is liquidation?

A

A process where assets are used to pay off debts
- Leftover money goes to shareholders and company is closed

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19
Q

What is receivership?

A

A court appointed tool that can assist creditors to recover funds in default and help companies avoid bankruptcy
- Aims to return companies to profitability
- Independent receiver appointed by court - they manage companys business

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20
Q

What is the acid test ratio?

A

Liquidity ratio that measures ability of company to use its quick assets to extinguish its current liabilities immediately

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21
Q

What are the account KPIs related to the 7 day markers?

A

Rent collection
- Day 7 - 90%
- Day 14 - 92%
- Day 21 - 95%
- Day 28 - 98%

SC
- Get budget to accounts 2 months before SC period begins
- Recs get finalise 2 months after period ends

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22
Q

What is IFRS and what did it replace?

A

International Financial Reporting Standards
- Replaced international accounting standards in 2001

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23
Q

What is IFRS16?

A

International accounting model that specifies how leases are recognised in financial statements (Effective from 01/01/2019)
- Results in an increase in assets, liabilities and net debt where leases are brought on to the balance sheet
- Lease has to be longer than 12 months

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24
Q

What are the goals of IFRS 16?

A
  • Ensure that leaseholders provide relevant info that represents their lease
  • Assess the effect that leases have on financial position, financial performance and cash flows of an entity
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25
Q

What is the result of IFRS 16?

A
  • Affects key accounting and financial ratios impacting a companies attractiveness and ability to raise finance
  • Might result in entities taking shorter leases to reduce debt on the balance sheet
  • Increase in assets, liabilities and net debt where leases are brought onto the balance sheet
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26
Q

What governs the format of company accounts?

A

The Companies Act 2006

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27
Q

What is included in company accounts as laid out in Companies Act 2006?

A
  • Cover page
  • Information and contents
  • Directors report
  • Statutory profit and loss account
  • Balance sheet
  • Notes to the accountant
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28
Q

What is a balance sheet?

A

Outlines a companys assets and liabilities - Shows a sign of their worth

29
Q

What is a cash flow statement?

A

Statement providing data regarding all cash flows received from ongoing operations and investments - includes cash outflows that pay for operations/investments

30
Q

What is a profit and loss account?

A

Summarises a companys revenues, costs and expenses during a specific period (These are retrospective)

31
Q

What is GAAP?

A

Generally Accepted Accounting Principles

32
Q

What is the difference between GAAP and IFRS?

A

FRS102 - Most commonly used UK GAAP accounting standard (more cost effective that IFRS)

GAAP is more legally based
IFRS is more principal based

33
Q

What are the 10 principles of GAAP?

A
  • Regularity
  • Consistency
  • Sincerity
  • Permanence
  • Non-compensation
  • Prudence
  • Continuity
  • Periodicity
  • Materiality
  • Utmost good faith
34
Q

What are the 3 types of financial statements you might come across?

A
  • Balance sheets
  • Income statements
  • Cash flow statements
35
Q

What are assets on the balance sheet?

A

Items the company owns and can provide economic benefit to them

36
Q

What are the liabilities on the balance sheet?

A

Funds owed to other parties

37
Q

What can be concluded from a balance sheet?

A

Whether a company is solvent and if it is likely they will still be in business in a year

38
Q

What are 3 parts of balance sheet?

A
  • Assets
  • Liabilities
  • Owners equity
39
Q

What are the international accounting standards

A

Older accounting standards replaced by IFRS in 2001

40
Q

Why were IFRS introduced to replace IAS?

A

Made it easier to compare businesses globally and increase transparency and trust in global financial reporting

41
Q

What is taxation?

A

Amount of money or % owed to HMRC based on company profit

42
Q

What is directors remuneration in a profit and loss account?

A

How directors are paid for their services - e.g. fees, salary or dividend

43
Q

Why do surveyors need to be able to interpret company accounts?

A

To assess the covenant strength of tenants

44
Q

When must a company be VAT registered?

A

If company turnover for last 12 months was over £85k or is expected go over 85k in next 30 days

45
Q

What is VAT?

A

Consumption tax on goods and services
- Levied at each supply chain stage where value is added
- 20%, 5% (reduced rate for some goods), 0%

46
Q

Why do companies keep accounts?

A
  • Regulatory
  • Keep track of incomings/outgoings
  • Compare performance and plan future growth
47
Q

Why is cash flow statement believed to be the most intuitive of all financial statements?

A

Follows cash made by business in operations, investment and financing (sum of these is net cash flow)

48
Q

What is the difference between depreciation and amortisation?

A

Amortisation focuses on intangible assets (e.g. patent/copyright)
Depreciation focuses on fixed assets

49
Q

What are liabilities?

A

What a company owes to other parties

50
Q

What is the gearing ratio?

A

Compares some form of owner equity (capital) to funds borrowed by the company (debt to equity ratio)

50
Q

Can you give me an example of a liability?

A

Bank loan, unpaid bill

51
Q

What are net assets?

A

Value of a companys assets minus its liabilities

51
Q

What is the difference between financial and management accounts?

A

Management accounts internal
Financial accounts required by law and must follow format (year end)

52
Q

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

A

Inspects organisations financial accounts to ensure they are correct and comply with the law

53
Q

When are audited accounts needed and why?

A

All companies require an audit except for small companies with turnover below £10.2m or total assets below £5.2m or under 50 employees

  • Required by law and provide assurance to shareholders
54
Q

Do public limited companies need an audit?

A

Yes - By independent auditors or accountants (section 143 of Companies Act 2013)

55
Q

What is the basis of valuation under IFRS 13?

A

Fair value

56
Q

What is fair value?

A

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

56
Q

What is FRS 102?

A

Financial reporting standard applicable to UK and Ireland
- Applys to general purpose financial statements and financial reporting of entities that are not constituted as companies (not for profit)

57
Q

When did IFRS 16 changes come into effect?

A

1st Jan 2019

58
Q

Why is good financial record keeping important to you?

A
  • Easier budgeting
  • Important for tax purposes
  • Prevents fraud/theft
  • Manage cash flow better
58
Q

Tell me 3 ways you ensure that Client money is handled properly?

A
  • Money is kept in a separate account - Identifiable
  • Ensure I provide account details to client if they need money immediately
  • Have in writing from bank that client money is not to be transferred/combined
59
Q

What RICS guidance or schemes do you adhere to in relation to Client money?

A

RICS Client Money Handling, 2019 (professional statement)

RICS Client Money Protection Scheme, 2019

60
Q

How is gross profit calculated?

A

Turnover (value of a companys sales) minus the cost of sales

61
Q

What can be interpreted from gross profit?

A

Provides an idea of company performance year-on-year when comparing with previous gross profit

62
Q

What is a better indicator of profit than gross profit?

A

EBITDA - Calculated by subtracting administrative expenses from gross profit

63
Q

What is the difference between assets and liabilities known as?

A
  • Equity
  • The net assets
  • Net worth
  • Capital of the company
64
Q

What is revenue?

A

Income generated by the sale of products or services

65
Q

What is capital expenditure?

A

Money spent by business in acquiring/maintaining fixed assets

66
Q

Are profit & loss accounts current?

A

No - Retrospective

67
Q

What is the VAT threshold?

A

£85k before tax

68
Q

What is the Limitations Act 1980?

A

Outlines a time limit which a creditor can chase a debtor for outstanding debts - Only applies when there is no contact between parties for specific period

69
Q

What is the meaning of misappropriation of funds?

A

Happens when a person entrusted to manage someone elses money or property, steals all or part of that for their own gain (can be internal or external)

70
Q

What is a financial bond?

A

Fixed income instrument that represents a loan made by an investor, to a borrower

71
Q

What is the result of IFRS16?

A
  • Increase in assets, liabilities and net debt as leases brought onto balance sheet
  • Impacts companys attractiveness and ability to raise finance
72
Q

Consequences of insolvency?

A
  • Business may go into liquidation and stop trading
  • Business may go into administration and be sold
73
Q

Statutory profit?

A

Company’s earnings calculated according to UK GAAP

Ethan APC Summary of Experience Mock Questions (16 decks)

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