Accounting Principles (Level 1)

Question 1

Using examples, could you please explain your understanding of SWOT analysis?

Answer 1

This is a business tool used to gain a focused understanding, at a given point in time, of the strengths and weaknesses in an organisation and external opportunities and threats – hence SWOT. These factors can help shape the business strategy, highlighting areas of concern or advantage for the business.

Question 2

Please tell me about cash-flow statements, with some examples of the factors that may affect cash flow.

Answer 2

Cash-flow statements show the inflows and outflows of cash within a business over a period.

Factors affecting cash flow include:

•	Staffing changes: hiring increases costs, while layoffs reduce them.
•	Salary reviews: higher-than-expected increases in salaries or bonuses raise costs, while smaller-than-expected increases reduce expenses.
•	Changes in revenue: delays in client payments decrease cash inflow, while early payments or increased sales improve it.
•	Operational costs: rising utility bills, rent, or material costs increase outflows, while savings on these expenses improve cash flow.

Question 3

What is a balance sheet?

Answer 3

Is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It shows the company’s:

1. Assets: What the company owns, such as cash, property, and equipment (current or fixed)
2. Liabilities: What the company owes, including loans, creditors, and other debts
3. Equity: The owner’s stake in the company, calculated as assets minus liabilities

Assets = Liabilities + Equity

This statement helps assess the company’s financial health and solvency

Question 4

What is a cash flow statement?

Answer 4

This shows cash moving into and out of a company for a specific period.

Broken down into cash relating to:

1. Operating Activities
2. Investment Activities
3. Financing Activities

Cash flow statement helps to assess the company’s liquidity, showing whether it can meet its short-term obligations and how effectively it is generating cash to sustain operations.

Question 5

What is a profit and loss statement?

Answer 5

Also known as an income statement shows a company’s revenues, expenses, and profit or loss over a specific period (e.g., quarterly or annually). It provides a summary of how the business has performed financially.

Key components include:

1. Revenue: Total income generated from sales or services
2. Cost of Goods Sold (COGS): Direct costs associated with producing goods or services
3. Gross Profit: Revenue minus COGS
4. Operating Expenses: Costs related to running the business, such as rent, utilities, and salaries
5. Operating Profit: Gross profit minus operating expenses
6. Net Profit (or Loss): Final profit after accounting for all expenses, including taxes and interest

The P&L statement shows whether the company is profitable or operating at a loss during the reporting period.

Question 6

What is the difference between a current asset and a fixed asset?

Answer 6

Current Assets: Short-term assets converted to cash within one year (e.g., cash, inventory)

Fixed Assets: Long-term assets used in operations, not easily converted into cash (e.g. property, equipment)

Current assets are more liquid, while fixed assets are held for the long term