Accounting Principles & Level 1 Flashcards

1
Q

What is a balance sheet

A
  • 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.
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2
Q

What is an income statement (P&L account)

A
  • Summary of the business’s income and expenditure transactions, prepared usually on an annual basis.
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3
Q

What is a cashflow statement?

A

Shows all the actual receipts and expenditure to include VAT.

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4
Q

What is IFRS 16?

A

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.

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5
Q

What does IFRS stand for?

A

International Financial Reporting Standards

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6
Q

What is difference between management and statutory accounts?

A
  • 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.
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7
Q

What is new?

A
  • IFRS 16 (International Financial Reporting Standard – lease are now counted as a liability due to the rent.
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8
Q

What is GAAP?

A

UKGAAP – body of accounting standards for accounting

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9
Q

How does a credit report provide an indicator of a clients covenant strength?

A

Experian Reports – give an indication to the strength of the covenant by giving a credit score out of 999.

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10
Q

What is stated in a set of public limited company (plc) accounts?

A
  • Chairman statement
  • Independent auditors report
  • Income statement (profit and loss account)
  • Statement of financial position (balance sheet)
  • Corporate governance report
  • Remuneration report
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11
Q

What are management accounts?

A

Accounts prepared for internal use by a business and are not audited.

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12
Q

What are audited accounts?

A

Accounts prepared by Chartered/Certified Accountant.

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13
Q

What are consolidated set of accounts

A

They comprise of a number of individual subsidiary accounts for a company within a single set of accounts.

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14
Q

What are the main types of ratio analysis used to assess a company’s financial strength?

A
  • 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.
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15
Q

Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?

A
  • 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.
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16
Q

What are the Experian credit score ratings?

A

Excellent: 961–999
Good: 881–960
Fair: 721–880
Poor: 561–720
Very Poor: 0–560

17
Q

How does a credit report provide an indicator of covenant strenght?

A
  • Payment history
  • Credit score
  • debt to income ratio
18
Q

Difference between UKGAAP and IFRS? What is IFRS 16?

A

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

IFRS13 = fair value requirements
IFRS 16 = is all the lease accounting standards with which companies have to comply with when using International Financial Reporting Standards (IFRS). The full cost of leases have to be accounted for on the balance sheet
Also additional IFRS reporting standards

19
Q

How does Experian assess company’s covenant?

A
  • Works on a scale of 1-100 and 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.
20
Q

What are other methods of assessment?

A

Profits method – profits should be 3 x a companies annual liabilities

21
Q

What advice can you give / when do you need to refer?

A
  • How the investment market would perceive the covenant
    – caveating not qualified to give financial advice. Any detailed analysis I would need to refer
22
Q

Have there been any recent accountancy changes in relation to the profession?

A

Changes regarding IFRS 16 = impact on how occupiers regard their property liabilities.
An occupiers obligation to pay rent has to be recognised as a liability.
Exemptions exist for leases of 12 months or later

23
Q

Are you competent to comment on Tenant covenant strengths?

A

I use covenant strength to guide my opinion on yields and can give advice on the markets perception of the covenant, however I am not a chartered accountant nor qualified to read financial accounts.

24
Q

What is an asset / liability?

A

Asset – used to produce value (property)
Liability – legally responsible for something (mortgage)

25
Q

What do you understand by the term Generally Accepted Accounting Principles (GAAP)?

A

Generally Accepted Accounting Principles are a set of standards for financial reporting.

Company accounts must be prepared in this way if they are shared outside of the company.

26
Q

How do companies know which reporting framework to comply with?

A

All companies need to use UK-adopted international accounting standards (IAS) – depends on the nature of their operations, international bound etc.

27
Q

How would you assess the financial strength of an entity, e.g. for a valuation?

A

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

28
Q

Can you tell me about a common financial measure?

A
  • Revenue – Profit and loss statement
29
Q

Tell me what it means to prepare accounts in accordance with IFRS.

A

International Finance Reporting Standards state how particular types of transactions and other events should be reported in financial statements

30
Q

What is the difference between UK GAAP and IFRS?

A

GAAP
* rule based
* required if accounts go outside of company
* Allow for first-in, first-out
IFRS
* principles based
* Do not allow last-in, first-out (typically lowers net income)
* Allow for last-in, first-out

31
Q

What is the basis of valuation under IFRS 13?

A

Fair Value measurement

32
Q

Tell me three ways you ensure that clients’ money is handled properly.

A

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

33
Q

What are the limitations on relying on Experian data?

A

Can use other credit checks such as