Accounting principles & procedures Flashcards
What are the three types of financial statement you may come across relating to a company?
Balance Sheets, Profit and Loss Statement, Cash Flow Statement
What is an asset / liability?
Asset - what company owns - current assets (cash/cash equivalent, inventory, stock) & fixed assets (property, plant, equipment, tools/machinery)
Liability - what company owes - current liabilities (to be paid within present accounting year - accounts payable, taxes, wages, short term loans) & non current liabilities (mortgage, long term borrowings, securities)
What is the difference between financial and management accounts?
Management accounts are for internal management purposes and are not externally audited. Financial accounts are regulated and audited and provided to shareholders
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) are a set of accounting standards and principles that guide the preparation and presentation of financial statements, established by Financial Accounting Standards Board (FASB) in the United States and is widely recognized and used by accounting professionals globally.
How do companies know which reporting framework to comply with?
Companies typically determine which reporting framework to comply with based on a combination of legal requirements, industry standards, and stakeholder expectations.
Which reporting framework do public limited companies have to comply with?
The reporting framework that public limited companies (PLCs) have to comply with depends on the country in which they are located and the stock exchange on which their shares are listed.
For example, in the United States, PLCs are required to comply with the financial reporting requirements of the Securities and Exchange Commission (SEC), which typically require compliance with Generally Accepted Accounting Principles (GAAP).
In the European Union, PLCs are required to comply with the International Financial Reporting Standards (IFRS) as adopted by the EU, which provide a common set of accounting standards for financial reporting across the EU.
How would you assess the financial strength of an entity, e.g. for a valuation?
review financial statements, for example profit and loss statement, cash flow statements, analyze financial ratios
Can you tell me about a common financial measure?
Liquidity ratio - ability to pay off liabilities (current assets/current liabilities) less than 0.75 suggests insolvency
Return on equity (profit after tax/equity capital)
debt/equity
Return on Investment ROI
What is the acid test / ROCE / working capital ratio / gearing ratio / net assets per share?
Acid test (also known as the quick ratio): A measure of a company’s ability to pay its short-term obligations with its most liquid assets. It is calculated by dividing the sum of cash and accounts receivable by current liabilities.
Return on capital employed (ROCE): A measure of a company’s profitability relative to the amount of capital employed. It is calculated by dividing earnings before interest and taxes (EBIT) by the total capital employed (equity + debt).
Working capital ratio: A measure of a company’s ability to pay its short-term obligations. It is calculated by dividing current assets by current liabilities.
Gearing ratio: A measure of a company’s debt relative to its equity. It is calculated by dividing total debt by shareholder equity.
Net assets per share: A measure of the net asset value of a company per share of common stock. It is calculated by subtracting total liabilities from total assets and dividing by the number of outstanding shares.
Can you tell me what the role of an auditor is?
The role of an auditor is to independently examine and report on the financial statements of an entity
When are audited accounts needed and why?
Compliance with regulatory requirements, stakeholder requirements, legal requirements (public companies)
How do public limited company accounts differ?
Disclosure requirements: PLCs are required to comply with more extensive disclosure requirements than private companies. They must prepare and file annual reports and accounts with the Companies House, which must comply with various regulations, including the Companies Act 2006 and International Financial Reporting Standards (IFRS).
Aduit requirements
What is fair value?
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
What is the basis of valuation under IFRS 13?
Fair Value
What has changed in relation to lease accounting / IFRS 16?
Prior to the introduction of IFRS 16, lease accounting was governed by IAS 17. IAS 17 required lessees to classify leases as either operating leases or finance leases. Operating leases were not recognized on the balance sheet and were expensed in the income statement over the lease term, while finance leases were recognized on the balance sheet as assets and liabilities.
IFRS 16, which became effective for annual reporting periods beginning on or after January 1, 2019, introduced significant changes to lease accounting. Under IFRS 16, lessees are required to recognize virtually all leases on the balance sheet as assets and liabilities. This means that lessees must recognize a right-of-use asset representing the right to use the leased asset for the lease term, and a lease liability representing the obligation to make lease payments.
IFRS 16 eliminates the distinction between operating and finance leases for lessees. Instead, all leases are classified as finance leases, except for short-term leases (leases with a lease term of 12 months or less) and low-value leases (leases of assets with a value of $5,000 or less when new). Short-term leases and low-value leases can be recognized on the income statement as expenses without recognizing assets and liabilities.
