Accounting Principles & Procedures

Question 1

Describe a balance sheet

Answer 1

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

Question 1

What’s included in a public limited company’s accounts?

Answer 1

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

Question 2

Define assets

Answer 2

Assets are resources owned by a company that have economic value and can be converted into cash or used to generate future economic benefits.

Question 3

What are examples of assets on a balance sheet

Answer 3

Current Assets - cash, debtors, inventories
Fixed Assets - property, plant and equipment

Question 4

What is the difference between current and fixed assets

Answer 4

Current assets are generally highly liquid, supporting immediate business operations, while fixed assets are longer term investments essential for ongoing business activities

Question 5

What are examples of liabilities on a company’s balance sheet?

Answer 5

Accounts payable (i.e. money owed to suppliers), loans, overdrafts

Question 6

What does a profit and loss statement show?

Answer 6

It provides a summary of a company’s revenues and expenses over a given period (usually a year)

Question 7

How are leases treated on balance sheets and has this changed?

Answer 7

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.

Question 8

Are there any exemptions to IFRS 16?

Answer 8

If a lease is 12 months or shorter it is exempt from IFRS 16

Question 9

What are the main differences between management accounts and audited accounts?

Answer 9

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

Question 10

What are Generally Accepted Accounting Principles (GAAP)?

Answer 10

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.

Question 11

With which accounting frameworks must UK companies comply?

Answer 11

Either IFRS or UK GAAP

Question 12

What is covenant strength?

Answer 12

It refers to a tenant’s ability to comply with and observe the obligations outlined in their lease, including the payment of rent

Question 13

How can you assess covenant strength?

Answer 13

You can do the profits test and use third party financial reporting services including S&P and Dun & Bradstreet reports

Question 14

What is the role of an auditor?

Answer 14

To provide a professional and independent opinion of a business’ financial statements

Question 15

When are audited accounts needed and why?

Answer 15

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

Question 16

When is a UK company exempt from auditing on an annual basis?

Answer 16

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

Question 17

What are the principles of the International Financial Reporting Standards (IFRS)?

Answer 17

Clarity
Relevance
Reliability
Comparability

Question 18

Why is good financial record keeping important?

Answer 18

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

Question 19

What is a cash flow statement?

Answer 19

Cash flow statements show the actual receipts and expenditure and include VAT.

Question 20

What is meant by tax depreciation?

Answer 20

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.

Question 21

What is an escrow account and why is it used?

Answer 21

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.

Question 22

What are the three different types of accounting ratios?

Answer 22

Liquidity, profitability and gearing

Question 23

What is working capital?

Answer 23

Current assets - current liabilities (i.e. the current capital of a business used in day-to-day trading operations