Accounting Principles & Level 1 Flashcards
What is a balance sheet
- Statement of the business’s financial position
- shows 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 in terms of legal requirements?
- Statutory accounts are required to be filed each year/period at Companies house
- Management accounts do not have this requirement.
What is difference between management and statutory accounts in terms of format?
- 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.
What is difference between management and statutory accounts in terms of 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.
What is difference between management and statutory accounts in terms of purpose?
- Statutory accounts present the financial position for a year just passed
- 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.
- Issued 2016
- Effective 2019
What is UK 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).
- 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. 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.
Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?
- for assessing the covenant strength of potential tenants and landlords
- for profits-method valuations (for leisure properties), and
- for assessing competition.
- for your own business accounts
What are the Experian credit score ratings?
Excellent: 961–999
Good: 881–960
Fair: 721–880
Poor: 561–720
Very Poor: 0–560
How does a credit report provide an indicator of covenant strenght?
- Payment history
- Credit score
- debt to income ratio
Difference between UKGAAP and IFRS?
Different sets of accounting standards that can apply to the UK
IFRS – international financial reporting standards
UKGAAP – body of accounting standards for accounting – is based on FRS 102 (a simplified version of IFRS
- UK companies can choose to use either IFRS or UK GAAP for their individual financial statements
- but some companies are required to use IFRS for their consolidated financial statements
How does Experian assess company’s covenant?
- Works on a scale of 1-100
- Predicts the likelihood that a business’s payment performance will become seriously delinquent
- or that the business will go bankrupt
– looks at total assets and liabilities, profit, direction of performance etc.
What are other methods of assessment of financial strength?
Profits method – profits should be 3 x a companies annual liabilities
What advice can you give on credit ratings / when do you need to refer?
- How the investment market would perceive the covenant
– caveating not qualified to give financial advice. Any detailed analysis I would need to refer
What is an asset / liability?
Asset – used to produce value (property)
Liability – legally responsible for something (mortgage)
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
- A set of standards for financial reporting.
- Company accounts must be prepared in this way if they are shared outside of the company.
How do companies know which reporting framework to comply with?
All companies need to use UK-adopted international accounting standards (IAS) – depends on the nature of their operations, international bound etc.
How would you assess the financial strength of an entity, e.g. for a valuation?
You would look at their covenant strength. You would do this by looking at for example either Dun and Bradstreet or Creditsafe.
Look at debt to equity ratio
Can you tell me about a common financial measure?
- Revenue – Profit and loss statement
Tell me what it means to prepare accounts in accordance with IFRS.
State how particular types of transactions and other events should be reported in financial statements
What is the basis of valuation under IFRS 13?
Fair Value measurement
Tell me three ways you ensure that clients’ money is handled properly.
I personally don’t deal with client’s money. However, if I did, I would
* Keep a separate client account
* Clearly named account
* Ensure that they have their monies on demand
What are the limitations on relying on Experian data?
Can use other credit checks such as
An auditor reviews financial records and ensures that a company complies with laws and regulations. Examples where IFRS 16 is exempt?
Short-term leases: Leases with a term of 12 months or less
Low-value assets: Leases where the underlying asset is not material to the company
What is an auditor?
An auditor reviews financial records and ensures that a company complies with laws and regulations.
What are the main differences between GAAP and IFRS or IAS?
GAAP
- primarily used in the US
- more rule bases and specific guidance
- less flexible in certain transactions
- generally restricts the use of Fair Value
IFRS
- used world-wide
- more principle based
- more flexible
- allows valuation of FV
Differences in the treatment of leases
What is companies house?
British government agency that maintains a register of companies in the United Kingdom
What information does companies house maintin?
Registered office addresses
Incorporation dates
Current and former officers
Document images
Mortgage charge data
Previous company names
Insolvency information
