Accounting principles & procedures

Question 1

What are the three types of financial statement you may come across relating to a company?

Answer 1

Balance sheet
Cash flow statement
Income statement/ Profit & Loss

Question 2

What is an asset / liability?

Can you give me an example of each?

Answer 2

Asset: Item that a company owns with the expectation that it will yield future financial benefit. e.g. Cash, patents, buildings, inventory

Liability: What you owe to other people/businesses.
e.g. wages owed, bank or mortgage debt

Question 3

What is the difference between financial and management accounts?

Answer 3

Managerial accounting focuses on an organisations internal financial processes but Financial accounting focuses on the companies external financial processes.

Question 4

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

Answer 4

In UK. UK GAAP is the body of accounting standards published by FRC (UKs Financial Reporting Council)
aims to regulate and standardise to ensure companies are transparent and honest in their reporting.

Question 5

How do companies know which reporting framework to comply with?

Answer 5

FRS 100 Application of Financial Reporting Requirements:
sets out 5 framework options.
Depending on size of the business -turnover/assets/number of employees

Question 6

Which reporting framework do public limited companies have to comply with?

Answer 6

TBC

Question 7

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

Answer 7

Analyse: Balance sheet
Income statement
Cash Flow Statement
Financial Ratio Analysis

Question 8

Can you tell me about a common financial measure?

Answer 8

TBC

Question 9

What is the acid test / ROCE / working capital ratio / gearing ratio / net assets per share?

Answer 9

Acid test ration: compares a companies quick assets (cash and accounts receivable) to its current liabilities
ROCE: Return on capital employed= Earning before interest & TAX / Capital employed
Working capital ratio = current assets/ current liabilities
Gearing Ratio = Long-term liabilities / capital employed
Net Asset per share: Indicates the value of a mutual fund or exchange traded fund. Net asset value / number of outstanding shares.

Question 10

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

Answer 10

After accountants have been in to verify their work:
Examine the financial statements prepared by the accountants to ensure that they represent the companies financial position accurately following the UK GAAP principles.

Question 11

When are audited accounts needed and why?

Answer 11

For any companies that are not small or micro businesses.
Provides credibility to a set of financial statements and gives the shareholders confidence that the accounts are true and fair

Question 12

How do public limited company accounts differ?

Answer 12

The shares of a PLC can be transferred freely on the stock exchange to anyone so accounts must be made available for public viewing.

Question 13

Tell me something you understand from the Companies Act 2006.

Answer 13

Primary source of UK Company law which aimed to modernise and simplify corporate law and to improve shareholders rights - can take action against the directors for alleged breach of their duties to the company.
Companies are required to prepare and publish a business review as part of their annual accounts and report.

Question 14

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

Answer 14

Set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent and easily comparable around the world.

Question 15

What is the difference between UK GAAP and IFRS?

Answer 15

GAAP is rules-based and IFRS is principles-based.
Companies Act 2006 requires UK businesses to prepare statements either to standards set by UK GAAP or the IFRS. UK GAAP FRS 102 is less complex and therefore quicker however if in a wider group may chose to use IFRS so can compare to other business strands.

Question 16

What is the basis of valuation under IFRS 13?

Answer 16

FAIR VALUE MEASUREMENT:

Market approach, cost approach and income approach

Question 17

What is fair value?

Answer 17

The 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 (an exit price)

Question 18

What has changed in relation to lease accounting / IFRS 16?

Answer 18

The new Standard eliminates a lessee’s classification of leases as either operating leases or finance leases. Instead, almost all leases are ‘capitalised’ by recognising a lease liability and right-of-use asset on the balance sheet

Question 19

When did the change come into effect?

Answer 19

Issued in January 2016 and effective for annual reporting starting on 1 January 2016

Question 20

What is FRS 102?

What changes have been made to it?

How has this impacted upon investment property?

Answer 20

The new UK GAAP standard is FRS 102. It is based on the IFRS for SMEs

Changes that they apply to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022

Investment property: must be remeasured to fair value at each balance sheet date with fair value gains and losses going through profit and loss

Question 21

What are statutory accounts?

Answer 21

Drawn up by the Directors or Members of an entity to report various financial measures and related disclosures for filing with Companies House.
including: balance sheet, income/P&L statement, cashflow statement, notes to the accounts & directors report.

Question 22

Why is good financial record keeping important to you?

Answer 22

Maintaining accurate financial records is imperative for all firms, but especially for those that are just starting out. Not only does it make budgeting so much easier, but it is also vital for tax purposes. Failure to keep on top of the financial records can quickly lead to disaster for many firms.

Question 23

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

What RICS guidance or Schemes do you adhere to in doing so?

Answer 23

RICS Client money handling Professional statement (1st Ed. 2019)

RICS Clients money Protection Scheme: as a last resort which Regulated firms are unable to repay a clients money.

Question 24

Explain your understanding of the VAT domestic reverse charge for building and construction services.

When do changes to the reverse charge apply from?

What is the impact of the reverse charge on VAT accounting?

Answer 24

1st March 2021:
VAT-registered business supplies construction services to another VAT-registered construction business, they will be required to issue a VAT invoice saying that the service is subject to the domestic reverse charge, but no VAT will be added to the invoice. The reverse charge is intended to cover labour and not building materials
Missing trader fraud is where a subcontractor charges VAT to its customers but disappears after a few months of trading. As a result HMRC lose out on the VAT it is owed from the subcontractor.

Question 25

Tell me about the Government-approved deposit schemes.

Answer 25

Landlord must put deposit in govt-approved tenancy deposit scheme if you rent on an AST basis post 2007. TO legally safeguard their tenants deposits.
Deposit Protection service, MyDeposits or Tenancy Deposit scheme.
Must be put into a scheme within 30 days of receiving.

Question 26

Explain the relationship of Countrywide Ltd and Connells Group.

Answer 26

Countrywide was acquired by the Connells Group in March 2021.
Connells Group is a subsidiary of the Skipton Building Society,

Question 27

Why are annual and interim statements published?

Answer 27

Provide public disclosure of a company’s operating and financial activities over the past year. Shareholders and other stakeholders who use it to evaluate the firm’s financial performance and to make investment decisions.
Interim statements over shorter period of times are not audited and provide information about a company’s revenue, expenses, profitability, and debt.

Question 28

Why does Countrywide Ltd report to FRS102 and UK GAAP?

Answer 28

TBC

Question 29

What do Connells Group report to?

Answer 29

TBC