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Property Management APC > Accounting Principles & Procedures > Flashcards

Accounting Principles & Procedures Flashcards

1
Q

What are the 3 types of financial statements you might come accross relating to a company?

A

Balance sheets

Income statements

Cash flow statements

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2
Q

What is an asset?

A

A resource owned or controlled by a business entity conaining economic value

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3
Q

What is a liability?

A

Something a person or company owes

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4
Q

Give an example of an asset

A

Cash

Real estate

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5
Q

Give an example of a liability

A

Payroll expenses / wages

Money owed to suppliers

Bank debt

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6
Q

What is the difference between financial and management accounts?

A

Financial accounts is the collection of accounting data to create financial statements required by law

Managerial accounting is the interal processing used to account for business transactions

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7
Q

What do you understand about the term Generally Accepted Accouning Principles (GAAP)

A

Standards that encompass the details, complexities and legalities of business accounting

→ must be followed when compiliing financial statements

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8
Q

What is the purpose of GAAP?

A

To improve the clarity of the communication of financial information

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9
Q

Name 3 principles of GAAP

A
  1. Regularity - rules applied as standard practice
  2. Consistency - use same standards throughout
  3. Sincerity - provide objective and accurate info
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10
Q

How do companies know which reporting framework to comply with?

A

It is set out in FRS 100 Application of Financial Reporting Requirements

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11
Q

Can you tell me about a common financial measure?

A
  • Gross profit margin / net profit margin
  • Working capital ( Current assets minus current liabilities)
    • Debt-to-equity ratio (total debt/total equity)
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12
Q

What is a debt-to-equity ratio?

A

Solvency ratio which measures how much a company finances itself using debt as opposed to equity

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13
Q

What is the acid test?

A

Type of liquidity ratio

→ measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately

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14
Q

What is ROCE?

A

Return on capital employed

→ compares the relative profitability of a company after taking into account the amount of capital used

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15
Q

What is the working capital ratio?

A

Working capital ratio = current assets / current liabilities

→ assess companies liquidity

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16
Q

What is the gearing ratio?

A

Compares some form of owner equity (or capital) to funds borrowed by the company (debt-to-equity ratio - debt/shareholders equity)

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17
Q

What are net assets?

A

Value of a companies assets minus its liabilities

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18
Q

What is net assets per share?

A

An expression of net asset value that represents the value per share of a mutual fund or an exchange-traded fund

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19
Q

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

A

Inspect organisations’ financial accounts to ensure they’re correct and comply with the law

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20
Q

When are audited accounts needed and why?

A

All UK companies require an audit, except for ‘small companies’ with turnover below £10.2m or total assets below £5.1m (or less than 50 employees)

Needed because it is require by law and provides a high level of assurance to shareholders

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21
Q

Do public limited companies need an audit?

A

Yes, PLC must get their annual financial statements audited each year by independent auditors or accountants as prescribed in section 143 of the Companies Act 2013

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22
Q

Tell me something you understand from the Companies Act 2006

A
  • Replaced Companies Act 1985 and aims to improve shareholders rights, modernise and simplify corporate law

→ one of the largest acts in history with over 1300 sections

→ primary source of UK company law

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23
Q

What are the International Accounting Standards (IAS) ?

A

Previous accounting standards - replaced in 2001 by the IFRS

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24
Q

Why was IFRS introduced to replace IAS?

A
  • Easier to compare businesses around the world and increase transparency and trust in financial reporting
    • Foster global trade and investment
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25
Q

What is IFRS?

A

International Financial Reporting Standards

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26
Q

What is the difference between UK GAAP and IFRS?

A

FRS 102 is the most commonly used UK GAAP accounting standard and is more cost effective than IFRS

IFRS is internationally used

→ Differences in lease and investment property

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27
Q

What is the basis of valuation under IFRS 13?

A

Fair value

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28
Q

What is fair value?

A

The price that would be receieved to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

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29
Q

What is IFRS 16?

A

International accounting model that specifies how leases are recognised in financial statements

Single leaseholder accounting model - Leaseholders required to recognise leases as assets and liabilities in their financial statements

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30
Q

What is the objective of IFRS 16?

A
  • Ensure that leaseholders provide relevant information that represents their lease
  • Assess the effect that leases have on the financial position, financial performance and cash flows of an entity.
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31
Q

What is the result of IFRS 16 accounting?

A
  • Increase in assets, liabilities and net debt where leases are brought onto the balance sheet
  • Affects key accounting and financial ratios impacting a companies attractiveness and ability to raise finance
  • Might result in entities taking shorter leases to reduce nebt debt on the balance sheet
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32
Q

WHat has changes in relation to lease accounting / IFRS 16?

A

CHanges the accounting substantially for lessees → eliminates a lessees classificaiton of leases as either operating leases or finance leases

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33
Q

When did IFRS 16 changes come into effect?

A

1st January 2019

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34
Q

What is FRS 102?

A

The financial reporting standard applicable in UK and Ireland

→ designed to apply to the general prupose financial statements and financial reporting of entities including those that are not constitutes as companies and those that are not-profit orientated

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35
Q

What changes have been made to FRS 102?

A

Changes in the definition of intangible assets → greater range of intangible assets recognised

Companies required to account for holiday and sick pay liabilities at each year end → for example, employees carrying over holiday recognised as a liability on the balance sheet

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36
Q

How have FRS 102 changes affected investment property?

A

Investment property is measured at fair value at each reporting date with changes in fair value recognised in profit or loss

→ will require a valuation exercise in practice → instruction of a valuation expert

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37
Q

What are statutory accounts?

A

Also known as financial statements or year-end accounts

→ Drawn up to report various financial measures and related disclosures for filing with companies house

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38
Q

Why is good financial record keeping important to you?

A
  • Makes budgetting easier
  • Important for tax purposes
  • Prevents fraud and theft
  • Helps to efficiently manage cash flow
    • Makes management easier
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39
Q

Tell me 3 ways you ensure that Client money is handled properly?

A
  • Kept in a seperate account with word ‘client’ in the account name and distinct identifier of client
  • Have in clear writing, confirmation from the bank that client money in the account is not to be transferred or combined
    • Ensure account details are provided to clients and that money is immediatley available
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40
Q

What RICS guidance or schemes do you adhere to in relation to Client money?

A

RICS Client Money Handling, 2019 (professional statement)

RICS Client Money Protection Scheme, 2019

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41
Q

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

A

The VAT domestic reverse charge procedure is an anti-fraud measure designed to counter criminla attacks on the UK VAT system

→ customers are able to charge themselves VAT and pay it directly to HMRC, rather than the supplier sending them an invoice at a later date

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42
Q

When do changes to the reverse charge apply from?

A

1st March 2021 - to include Building and Construction Services

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43
Q

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

A
  • Subcontractor impact on cashflow, losing 20% of income ahead of quarterly VAT return
    • Boost to main contractors cash flow
44
Q

What governs the format of company accounts?

A

The Companies Act (2006)

45
Q

What is included in company accounts as laid out in the Companies Act (2006)?

A
  • Cover page
  • Information and contents page
  • Directors report
  • Statutory profit & loss account
  • Balance sheet
  • Notes to the accountant
46
Q

What is a profit & loss account?

A

A summary of business income and expenditure transactions on an annual basis

→ gives an overall profit and loss figure

47
Q

What is taxation?

A

Amount of money or % that is owed to HMRC based on company profit

48
Q

What is directors renumeration in a profit & loss account?

A

Refers to how directors of a company are compensated for their services, usually fees, salary, use of company property or benefits

49
Q

How is gross profit calculated?

A

Turnover (value of a companys sales) minus the cost of sales

50
Q

What can be interpreted from gross profit?

A

Provides an idea of company performance year-on-year when comparing with previous gross profit

51
Q

What is a better indicator of profit than gross profit?

A

EBITA - Earnings Before INterest, Tax, Depreciation and Amortisation

→ Calculated by subtracting administrative expenses from gross profit

→ good indicator on whether company has a future

52
Q

What is depreciation?

A

Planned, gradual reduction in recorded value of a tangible assset over its useful life

→ applied to fixed assets, which generally experience a loss in their utility over multiple years

53
Q

What is Amortisation?

A

The process of incrementally charging the cost of an intangible asset to expense over its expected period of use, which shifts the asset from the balance sheet, to the income statement

→ reflects the consumption of an intagible asset over its useful life

54
Q

What is the difference between Amortisation and Depreciation?

A

Amortisation charges off the cost of an intangible asset and depreciation does so for tangible assets

55
Q

What is a balance sheet?

A

Outlines a companys assets and liabilities

→ tells how much a company is worth

56
Q

What are assets on the balance sheet?

A

Items that the comapny owns and can provide economic benefit

57
Q

What are the two types of asset?

A

Fixed (around for a long time, such as land)

Current (shorter life span, such as stock)

58
Q

What are liabilities ?

A

What a company owes to other parties

59
Q

What are the two types of liability?

A

Long term (not due in the next year)

Current (due within the year)

60
Q

What key information can be concluded from a balance sheet?

A

Whether a comapny is solvent

How likely it is that the company will still be in business in a year

61
Q

What is the liquidity ratio?

A

Ability to pay short-term debt obligations

62
Q

How is liquidity ratio calculated?

A

Current assets / current liabilities

63
Q

How is the liquidity ratio figure interpreted?

A

Ratio of 1 = can exactly pay off all current liabilities with current assets

64
Q

What is Net Asset value (NAV)?

A

Total assets minus total liabilities

→ if share price is higher than NAV per share, market expects company to make future profits

65
Q

What are the 3 parts of a balance sheet?

A

Assets

Liabilities

Owners equity

66
Q

What is the difference between assets and liabilities known as?

A
  • Equity
  • The net assets
  • Net worth
  • Capital of the company
67
Q

What is the cash flow statement?

A

Statement providing data regarding all cash flows received from ongoing opertations and investments

→ includes cash outlflows that pay for operations and invesments

68
Q

Why is the cash flow statement believed to be the most intuitive of all financial statement?

A

It follows the cash made by the business in 3 ways

→ operations

→ investment

→ financing

The sum of these three segments is called the net cash flow

69
Q

What is a credit rating?

A

A numerical or quantified assessment of an organisations creditworthiness, based on previous dealings.

→ shows the ability for an organisation to fulfill their financial commitments or lieklihood of defaulting on its debt obligations

70
Q

What are the main commercial credit rating agencies

A
  • Dunn and Bradstrees (D&B)
  • Moody’s
  • Standard and Poor (S&P)
  • Fitch Ratings
    • Creditsafe
71
Q

Why do companies keep accounts?

A
  • Regulatory purposes
  • Keep track of outgoing and ingoings
  • Compare performance and plan future growth
72
Q

What are the two parts of a Dunn and Bradsheet rating?

A

Financial Strength indicator (5A - HH)

→ indicator of size of tangibles and net worth based on recent balance sheet

Composite credit appraisal/risk indicator (1,minimum → 4, high risk)

→ overall evaluation of creditworthiness and takes several factors into account: financial condition, payment history, length of operation, employee numbers etc

73
Q

What is covenant strength?

A

Tenant ability to comply with lease obligations

74
Q

What is revenue ?

A

Income generated by the sale of products or services

75
Q

What is capital expenditure?

A

Money spent by a business on acquiring or maintaining fixed assets (land, real estate, equipment)

76
Q

What is a financial audit?

A

Objective examination/evaluation of financial statement to ensure they are fair and accurate

77
Q

What is ratio analysis?

A

Method of gaining insight into a companys liquidity efficiency and profitability by studying its financial statements

78
Q

What are profitability ratios ?

A

Convey how well a company can generate profit from its operations

→ Gross profit ratio (gross profit/net sales)

→ Net profit ratio (Net profit/net sales)

→ operating profit ratio (EBITA/net sales)

79
Q

What are solvency ratios?

A

Compare a companys debt levels with its assets, equity and earnings

→ suggest whether a company is solvent and can pay debt

  • Debt equity ratio
  • Interest coverage ratio
  • Equity ratio
80
Q

What are efficiency ratio?

A

Evaluate how effective a company uses its assets to generate sales and maximise profits

→ also called activity ratios

81
Q

What is credit control?

A

Strategies employes by businesses to accelerate sales of products or services through the extension of credit to potential customers and Clients

→ Process of checking their creditworthiness to ensure that credit is only given to parties able to pay it

82
Q

What is profitability?

A

Determines the scope of a companys profit in relation to the size of the business

→ measure of efficiency

83
Q

What is insolvency?

A

When an individual or company can no longer meet their financial obligations to lenders as debts become due

→ can arise from poor cash management, reduction in cash inflow, and increases in expenses

84
Q

What is VAT?

A

Consumption tax on goods and services, levided at each supply chain stage where value is added

  • 20%
  • 5% (reduced rate for some goods and services)
  • 0% (zero rate)
85
Q

Where might you find information on comapnys assets?

A

On the balance sheet

86
Q

What is a cash flow statement?

A

A statement that summarises the movements of cash and cash equivalents that come in and go out of a company

→ measures how well a company manages its cash posittion

87
Q

Whats the difference between a profit and loss statement and a balance sheet?

A

Balance sheet reports the assets, liabilities and shareholder equity at a specific point in time

A profit & loss statement summarises a companys revenues, costs and expenses during a specific period

88
Q

Are profit & loss accounts current?

A

No - retrospective

89
Q

What are management accounts?

A

Reports produced for the business owners and managers

They are for internal use and personalised to the users requirements → usually balance sheets or profit & loss statements

90
Q

What are company accounts?

A

Documents prepared at the end of the financial year showing a companys performanec over the accounting period

→ legally required from all companies under the Companies Act 2006 → must be preared in accordance with the Act

91
Q

What is capital expenditure?

A

Money spent by a business to acquire, upgrade and maintain physical assets

92
Q

When must a company be registered for VAT?

A

Total VAt taxable turnover for the last 12 months was over £85,000

or

The turnover is expected to go over £85,000 in the next 30 days

93
Q

What is the VAT threshhold?

A

Amount of money a company can earn before registering for VAT → £85,000

94
Q

What is EBITA?

A

Earnings Before Interest, Taxes and Amortisation

→ measure of a companys profitability

95
Q

What is Goodwill?

A

An intangible asset that is associated with the purchase of one company by another

→ Portion of the purchase price that is higher than the sum of the net fair value of all assets purchasd in the acquisition and the liabilities assumed in the process

→ the value of a companys name, brand reputation, loyal customer base represents aspects of goodwill → this is why one company may pay a premium for another

96
Q

What does it mean for a company to go into administration?

A

A company becomes insolvent and it is put under the management of licenced insolvency practicioners

97
Q

What is insolvency?

A

The state that a company or individual enters when they are not able to pay their debts

98
Q

What is bankruptcy?

A

A legal proceeding initiated when a person or business is unable to repay its outstanding debts and liabilities

→ makes sure any assets are shared amongst creditors and allows the party to make a fresh start from debt, with restrictions

99
Q

What is receivership?

A

A court appointed tool that can assist creditors to recover funds in default and can help companies avoid bankruptcy

→ aims to return companies to profitability

→ court appoints an independent receiver who manages the comapnys business

100
Q

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

A

TO assess the covenant strength of tenants

To assist with building operations

101
Q

Where can you find information on a companys financial status?

A

Companies House

Credit check from credit agencies

102
Q

What is liquidation?

A

A process where assets are used to pay off its debts

Leftover money goes to shareholders and the company is then clsoed / de-registered

103
Q

What is the differennce between management and financial accounts?

A

Management accounts are internal

Financial accounts are required by law and must follow a pre-determined format

104
Q

What is the Limitations Act 1980?

A

Outlines the time limit which a creditor can chase a debtor for outstanding debts

→ Only applies where no contact between creditor and debtor has been made in a specific period

105
Q

What is the meaning of misappropriation of funds?

A

Occurs when a person entrusted to manage someone elses money or property, steals all or part of that for their own gain

→ can be internal, such as a employee or external, such as targeted infiltration

Property Management APC (14 decks)

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