Accounting Principles & Procedures

Question 1

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

Answer 1

Income statement, balance sheet, and statement of cash flows.

Question 2

What is an asset / liability?

Can you give me an example of each?

Answer 2

Assets are quantifiable things that add to a company’s value.
Liabilities are what your company owes to others.

Assets – Cash, Inventory, building.
Liabilities – Loans, accounts payable, debts.

Question 3

What is the difference between financial and management accounts?

Answer 3

Management accounting focuses on operational reporting to be shared within a company.
Financial accounting is focused on creating financial statements to be shared internal & external stakeholders & the public.

Question 4

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

Answer 4

Standards that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods & practices.

Question 5

How do companies know which reporting framework to comply with?

Answer 5

ASPE (Accounting Standards for Private Enterprises) is designed for private companies. IFRS (International Financial Reporting Standards) is to be applied by public companies and other publicly accountable enterprises. However, private companies may choose to use IFRS.

Question 6

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

Answer 6

IFRS – International Financial Reporting Standards

Question 7

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

Answer 7

Analyze the balance sheet, income statement and cash flow statement. Use financial ratio analysis.

Question 8

Can you tell me about a common financial measure?

Answer 8

ROI – Return on Investment
ROE – Return on Equity
EPS – Earnings per Share

Question 9

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

Answer 9

Acid test – A type of liquidity ratio to indicate whether a firm has the means to cover its short-term liabilities. A ratio of 1.0 or more is good.
ROCE – Return on Capital Employed – A financial ratio to assess a company’s profitability & capital efficiency.
Working Capital Ratio – The difference between the current assets and current liabilities. The ideal working capital ratio is between 1.5 & 2.0.
Gearing Ratio – Ratios that compare owner’s equity to debt. Gearing is a measurement of the entity’s financial leverage, demonstrating the degree a firm’s activity is funded by shareholder funds rather than creditors.
NAVPS – Net Asset Value per Share – an expression for net asset value that represents the value per share of a mutual fund, an exchange traded fund, or a close ended fund. It is calculated by dividing the total net asset value of the fund or company by the number of shares outstanding.

Question 10

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

Answer 10

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that included the auditor’s opinion.

Question 11

When are audited accounts needed and why?

Answer 11

The company’s annual accounts for the financial year need to be audited.

Question 12

How do public limited company accounts differ?

Answer 12

Public companies have 6 months to file their annual accounts, private companies have 9 months.

Question 13

Tell me something you understand from the Companies Act 2006.

Answer 13

It is the primary source of UK law that governs companies in the UK. The act simplifies administration, improves the rights of shareholders and updates & simplifies corporate law.

Question 14

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

Answer 14

IFRS requires that financial statements are prepared using 4 basic principles: clarity, relevance, reliability, and comparability.

Question 15

What is the difference between UK GAAP and IFRS?

Answer 15

IFRS allows companies to determine whether an intangible asset’s useful life is finite or infinite. However, the new UK GAAP establishes that these assets have a finite useful life. If the entity fails to give a reliable estimate if the useful life then life cannot exceed 10 years

Question 16

What is the basis of valuation under IFRS 13?

Answer 16

It defines share value as 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.

Question 17

What is fair value?

Answer 17

The estimated price at which an asset is bought or sold when both the buyer and seller freely agree on a price.

Question 18

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

Answer 18

IFRS is the lease accounting standard. The full cost of the lease have to be accounted for on the balance sheet. An occupier’s obligation to pay rent has to be recognised as a liability, though SC payments would be accounted for separately. Exemptions exist for leases of 12 months or shorter.

Question 19

When did the change come into effect?

Answer 19

January 2019.

Question 20

What is FRS 102?

Answer 20

The principal Financial Reporting Standard applicable in the UK & Republic of Ireland.

Question 21

What changes have been made to it?

Answer 21

• A new model for revenue recognition, aligned to IFRS 15.
• A new model of lease accounting (FRS 12)
• Various other incremental improvements & clarifications.
  An entity that rents investment property to another entity shall account for those properties either:
  a) At fair value with changes recognised in profit/loss or.
  b) By transferring them to property, plant as equipment & applying the cost model in accordance with section 17.

Question 22

What are statutory accounts?

Answer 22

Also known as annual accounts. A set of financial reports prepared at the end of each financial year.

Question 23

Why is good financial record keeping important to you?

Answer 23

You can make sound financial decisions and protect yourself from financial losses or threats.

Question 24

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

Answer 24

Keep client money accounts separately & clearly identifiable.
Money can only be withdrawn from a client account if properly required.
Ensure there are appropriate systems to ensure compliance.

Question 25

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

Answer 25

Client money handling, 2019 – An RICS professional standard
Client Money Protection Scheme (CMPS)

Question 26

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 26

A VAT procedure implemented in March 2021 for construction services. The buyer (contractor) accounts for the VAT rather than the supplier (subcontractor).
Essentially the end-customer pay VAT to HMRC.

March 2021

The supplier does not charge VAT on the invoice & the customer pays & deducts VAT simultaneously through the VAT return.

Question 27

Is VAT included in a balance sheet or a profit & loss account?

Answer 27

VAT is recorded on the balance sheet.
VAT is not on the profit & loss account

Question 28

How do you account for the impact of inflation when reporting to clients?

Answer 28

Inflation could increase or decrease costs. A contingency can account for this.