Accounting Principles & Procedures Flashcards
Describe a balance sheet
It is a statement of a business’ financial position at a specific point in time (usually at the end of the financial year). It shows the company’s assets, liabilities and equity
What’s included in a public limited company’s accounts?
Chairman’s statement
Independent auditor’s report
Income Statement (Profit & Loss account)
Statement of financial position (Balance Sheet)
Corporate Governance Report
Remuneration Report
Other Statutory Information
Define assets
Assets are resources owned by a company that have economic value and can be converted into cash or used to generate future economic benefits.
What are examples of assets on a balance sheet
Current Assets - cash, debtors, inventories
Fixed Assets - property, plant and equipment
What is the difference between current and fixed assets
Current assets are generally highly liquid, supporting immediate business operations, while fixed assets are longer term investments essential for ongoing business activities
What are examples of liabilities on a company’s balance sheet?
Accounts payable (i.e. money owed to suppliers), loans, overdrafts
What does a profit and loss statement show?
It provides a summary of a company’s revenues and expenses over a given period (usually a year)
How are leases treated on balance sheets and has this changed?
As of 2019, when IFRS 16 was introduced, rent payments are treated as a liability on the balance sheet. Previously, rent payments were recorded as an expense on the income statement, which affected profit.
Are there any exemptions to IFRS 16?
If a lease is 12 months or shorter it is exempt from IFRS 16
What are the main differences between management accounts and audited accounts?
Management accounts are prepared for internal use within a company and are not audited or subject to accounting standards. Audited accounts are prepared by a chartered or certified accountant and must comply with accounting standards
What are Generally Accepted Accounting Principles (GAAP)?
A set of standardised guidelines and rules used for preparing and presenting financial statements, introduced by the Financial Accounting Standards Board (FASB). They ensure consistency, reliability and comparability in financial reporting.
With which accounting frameworks must UK companies comply?
Either IFRS or UK GAAP
What is covenant strength?
It refers to a tenant’s ability to comply with and observe the obligations outlined in their lease, including the payment of rent
How can you assess covenant strength?
You can do the profits test and use third party financial reporting services including S&P and Dun & Bradstreet reports
What is the role of an auditor?
To provide a professional and independent opinion of a business’ financial statements
When are audited accounts needed and why?
UK companies have to have their accounts audited once a year unless they are exempt.
The purpose of an audit is to form a view on whether the information presented in the financial report reflects the financial position of the company
When is a UK company exempt from auditing on an annual basis?
Small companies are exempt if they meet two of the following criteria:
Annual turnover of less than £10.2m
Balance sheet total of less than £5.1m
50 or fewer employees on average
What are the principles of the International Financial Reporting Standards (IFRS)?
Clarity
Relevance
Reliability
Comparability
Why is good financial record keeping important?
Regulation - part of the regulatory process in the UK
Management - allows companies to keep track of their financial performance
Transparency - allows all parties access to financial information so they can assess who they are doing business with
Crime - helps to prevent crime and corruption
What is a cash flow statement?
Cash flow statements show the actual receipts and expenditure and include VAT.
What is meant by tax depreciation?
It is where the declining value of an asset is offset against a company’s taxable profit.
The depreciation in value can be recorded as an expense in order to reduce the amount of taxable income. Depreciation could be applied to plant, tools, buildings etc.
What is an escrow account and why is it used?
It is a financial arrangement whereby a third party holds and manages funds or assets on behalf of two other parties involved in a transaction. The purpose is to ensure that the terms of an agreement are met before the funds or assets are transferred.
What are the three different types of accounting ratios?
Liquidity, profitability and gearing
What is working capital?
Current assets - current liabilities (i.e. the current capital of a business used in day-to-day trading operations
