Accounting Principles & Procedures

Question 1

What are the two main finanical reporting frameworks in the UK?

Answer 1

• IFRS (International Financial Reporting Standards)
• GAAP (Generally Accepted Accouting Principles)

Question 2

What is the main difference between GAAP and IFRS?

Answer 2

GAAP - there are no Current Value or Existing Use Value for operational assets - only basis is Fair Value (akin to Market Value)

Question 3

What is a balance sheet?

Answer 3

A statement of financial position, showing assets and liabilities at a given date (usually end of financial year).

Question 4

What is included within a balance sheet?

Answer 4

• Assets including cash, property, other investments.
• Liabilities include borrowings, overdrafts, loans.

Question 5

What is IFRS 16?

Answer 5

IFRS 16: relates to accounting on leases on the balance sheet of a company, shown as a liability. Service charge is accounted for separately. Exemptions exist for leases of less than 12 months.

Question 6

What is IFRS?

Answer 6

IFRS: Principles based set by International Accountancy Standards Board how transactions and events should be reporting in financial statements.

Question 7

Management accounts…

Answer 7

Provides information to people within an organisation and is not required by law. Used for decision making - planning for future and forecasting.

Question 8

Financial accounting…

Answer 8

mainly for those outside the organisation, such as shareholders, and is requried by law. Mandatory for all plc’s to send audited financial accounts (profit and loss) to HMRC.

Question 9

Primary difference between profit and loss statement and balance sheet?

Answer 9

*Their respective treatments of time. *
Balance sheet: shows value of everything a company owns, owes or is owed on the last day of the financial year.
P&L statement: shows company sales, running costs and the profit and loss that it has made over the financial year.

Question 10

What is a profit and loss statement?

Answer 10

Shows revenues and expenses during a set period of time and prepared usually on an annual basis.

Question 11

What is a cash flow statement?

Answer 11

Shows all actual receipts, including VAT.
It complements the balance sheet and P&L statement, and records the amount of cash and cash equivalents entering and leaving a company.

Question 12

How is a cash flow statement useful?

Answer 12

It allows investors to understand how a company’s operations are running, where its money is coming frome, and how it is being spent.

Question 13

What are the two main types of cash flow forecast?

Answer 13

Organisational cash flow - cash flow forecast of a company.
Project cash flow - cash flow forecast of a particular construction contract or project.

Question 14

What can a company cash flow tell you?

Answer 14

• Is the business viable?
• What size overdraft/borrowings are needed?
• Early warning sign of downturn in business?
• Incentive to “get money in” asap.
• Do you have excess cash available that might be better used?
• Are your customers taking too long to pay?
• Are you paying your bills to quickly?

Question 15

What is a budget?

Answer 15

Estimates the amount of revenues and expenses a company may incur over a future period. A financial plan for a defined period, often one year.

Question 16

What is a company forecast?

Answer 16

A fiscal management tool that presents estimated information based on past, current, and projected financial conditions.

Question 17

GAAP

Answer 17

Rules based. Standard accouting rules that accountants must follow when compiling financial statements. Generally used by SMEs.

Question 18

What are overheads?

Answer 18

Refers to the ongoing costs to operate a business but excludes the direct costs associated with creating a product or service.
e.g. Rent and utilities, admin costs, insurance, employee perks.

Question 19

What does a budget include?

Answer 19

• Planned sales volumes and revenues
• Resourced quantities
• Costs and expenses
• Assets, liabilities and cash flows

Question 20

What are the three key financial statements?

Answer 20

1. Balance Sheet
2. Profit and Loss statement
3. Cash Flow Statement

Question 21

What does the cash flow statement show?

Answer 21

The net-flow position, which help assess liquidity and shows changes in asset. liabilities and equity.

Question 22

What is auditing?

Answer 22

A report prepared by an auditor as an independent party confirms that the financial accounts of a company are fair and true.

Question 23

What are the filing deadlines for Companies House?

Answer 23

Nine months from the Accounting Reference Date (ARD) for private companies and six months for PLCs.

Question 24

What are the financial penalties for late accounts to companies house?

Answer 24

• From £150 for private company or limited liability partnership (LLP) accounts up to a month in arrears.
• to £7,500 for PLC accounts more than 6 months in arrears.
• Penalities are doubled if accounts are filed late in two consecutive financial years.
• If accounts are not filed at all, a company may be struck off the register or dissolved, which can lead to company assets becoming property of the crown.

Question 25

What is equity?

Answer 25

aka owners equity. The value than an owner - such as a company director - has in the business. Can be calculated by deducting total liabilities from total assets on a company balance sheet.

Question 26

Filing of fiancial accounts…

Answer 26

All private limited companies and PLCs in the UK must file annual accounts with Companies House, in line with the requirements of the Companies Act 2006.

Question 27

What is a Ratio Analysis?

Answer 27

A fundamential analysis that links together the three financial statements commonly produced. Ratios provide figures comparable across industries and sectors.

Helps when analysing a company’s capital structure and fiancial leverage.
High gearing ratio 50%, low is below 25% - optimal is somewhere between.

Question 28

What is a hurdle rate?

Answer 28

The minimum rate of return required on an investment. Can inform investment decisions, and could be established using a DCF model or appraisal for development/refurbishment projects.

Question 29

What does Red Book UK supplement say about valuations for financial reporting?

Answer 29

VPGA 1 - sets out two financial reporting frameworks adopted by UK companies: the IFRS and UK GAAP.
PLCs must follow IFRS when preparing group company accounts, but may adopt either these or UK GAAP for individual parent company accounts.