Accounting Principles & Level 1 Flashcards
What is a balance sheet
- Statement of the business’s financial position showing its assets and liabilities at a given date, usually end of financial year.
- Assets can include cash, property, debtors
- Liabilities can include borrowings, overdrafts, loans, creditors and leases.
What is an income statement (P&L account)
- Summary of the business’s income and expenditure transactions, prepared usually on an annual basis.
What is a cashflow statement?
Shows all the actual receipts and expenditure to include VAT.
What is IFRS 16?
About lease accounting standards, which all companies must comply with.
i.e. full cost of leases must be accounted for on balance sheet and occupier obligation to pay rent must be considered as a liability.
What does IFRS stand for?
International Financial Reporting Standards
What is difference between management and statutory accounts?
- Legal requirement – Statutory accounts are required to be filed each year/period at Companies house whereas Management accounts do not have this requirement.
- Statutory accounts are required to follow a set format and include a profit & loss account, balance sheet and associated notes, these must comply with relevant accounting standards such as IFRS. Management accounts can be prepared in any format management decides, which services their purposes.
- Audience – Statutory accounts are prepared for external purposes, such as Companies House, HMRC and shareholders. Management accounts are purely for internal purposes, but often banks will require them when a company is applying for a loan or other finance.
- Purpose – Statutory accounts present the financial position for a year just passed and are used to calculate corporation tax and can be viewed as historic information. Management accounts show current performance allowing management to make decisions and future planning.
What is new?
- IFRS 16 (International Financial Reporting Standard – lease are now counted as a liability due to the rent.
What is GAAP?
UKGAAP – body of accounting standards for accounting
How does a credit report provide an indicator of a clients covenant strength?
Experian Reports – give an indication to the strength of the covenant by giving a credit score out of 999.
What is stated in a set of public limited company (plc) accounts?
- Chairman statement
- Independent auditors report
- Income statement (profit and loss account)
- Statement of financial position (balance sheet)
- Corporate governance report
- Remuneration report
What are management accounts?
Accounts prepared for internal use by a business and are not audited.
What are audited accounts?
Accounts prepared by Chartered/Certified Accountant.
What are consolidated set of accounts
They comprise of a number of individual subsidiary accounts for a company within a single set of accounts.
What are the main types of ratio analysis used to assess a company’s financial strength?
- Liquidity – the ability of the company to pay its way (solvency). More companies fail due to cash flow than any other reason.
- Investment/shareholders – information to enable decisions to be made on the extent of the risk and the earning potential of a business investment.
- Gearing – information on the relationship between the exposure of the business to loans as opposed to share capital.
- Profitability – how effective the company is at generating profits given sales and/or its capital assets.
- Financial – the rate at which the company sells its stock and the efficiency with which it uses its assets.
Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?
- for your own business accounts
- for assessing the covenant strength of potential tenants and landlords
- for assessing the financial strength of contractors and those tendering for contracts
- for profits-method valuations (for leisure properties), and
- for assessing competition.