Accounting Principles & Procedures

Question 1

What are the 5 basic accounting concepts?

Answer 1

Business Identity
Going Concern
Monetary Period
Accounting Period
Accrual

Question 2

What are the 3 types of business transaction?

Answer 2

Operational (E.g. Sale of meals by a restaurant)
Investing (associated with the acquisition or disposal of long-term assets)
Financing (E.g. loans, shares, dividends)

Question 3

What are the 5 elements of financial statements?

Answer 3

Assets
Liabilities
Expenses/Losses
Income/Revenue/Gain
Owners’ Equity or Capital

Question 4

What is a Contra-Account?

Answer 4

Accounts used to offset some part of the value of another account.

Question 5

What are the 3 common types of Contra-Account?

Answer 5

1. Allowance for Bad Debt - estimate of how much of the accounts receivable, i.e. outstanding invoices, the business expects may not be paid by the customers.
2. Sales returns and allowances - This account offsets the revenue account and reports merchandise returned by a customer and allowances made for defective items.
3. Accumulated depreciation - depreciation allows the purchaser to spread the cost of purchasing properties over multiple periods. Accumulated depreciation is the contra-account that offsets property, plant, and equipment (PPE) account.

Question 6

What are retained earnings?

Answer 6

The amount that the company will keep in the company to support future operations and as the name suggests, are the earnings that are not distributed as dividends.

Question 7

What are dividends?

Answer 7

The amount that is distributed to the owners of the business if retained earnings are positive and there is enough cash to do so.

Question 8

What % of property rental income do Real Estate Investment Trusts (REITs) have to payout to shareholders to maintain tax-exempt status?

Answer 8

90%

Question 9

What are the two main company account financial statements?

Answer 9

1. Balance Sheet
2. Profit and loss income statement

Question 10

What is the purpose of a Balance Sheet?

Answer 10

To present a company’s financial position at a particular point in time.

Question 11

What is the purpose of a profit and loss income statement?

Answer 11

To present the performance of a business for a specific period of time.

= Revenue - Expenses

Question 12

What is a cash flow statement?

Answer 12

To provide information about the changes in cash and cash equivalents of an entity for a reporting period (net cash flow).

Question 13

What is an example of a management account?

Answer 13

Cash Flow Statement

Question 14

What are the two most used types of accounting framework?

Answer 14

1. US Generally Accepted Accounting Principles (US GAAP)
2. International Financial Reporting Standards (IFRS)

Question 15

Real Estate classified under GAAP?

Answer 15

1. No specific definition of Investment Property, therefore all held as PPE
2. Properties are recognised as cost and depreciated

Question 16

Types of Cash Flow?

Answer 16

1. Operating
2. Investing
3. Financing

Question 17

What is IFRS 16?

Answer 17

Lease accounting standard stating that full cost of leases must be accounted for on the balance sheet.

Question 18

When can there be an exemption of IFRS 16?

Answer 18

When the lease is 12 months or shorter.

Question 19

What is the profits test?

Answer 19

A typical profits test would be for the tenant to provide 3 years’ audited accounts showing a net profit of 3 times the annual rent.

Question 20

Example of when a profits test is used?

Answer 20

When a landlord is looking for a tenant.

Question 21

Where must company accounts be submitted?

Answer 21

Companies house

Question 22

When did the new UK GAAP come into effect?

Answer 22

1st January 2015

Question 23

How do companies know when to use IFRS or UK GAAP?

Answer 23

• If the company is listed on the stock exchange, the have to follow IFRS according to EU regulations
• Non-listed companies have the option to use UK GAAP or IFRS.
• Subject to change due to brexit.

Question 24

Difference between GAAP and IFRS?

Answer 24

GAAP is rules based & provides more detail
IFRS is principles based and subject to more interpretation.