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Alice’s APC > Accounting Principles + Procedures > Flashcards

Accounting Principles + Procedures Flashcards

1
Q

What are the main 5 accounting concepts?

A
  1. Business identity – only record business transactions, not personal ones, unless they involve adding or withdrawing business resources
  2. Growing concern – record assets at their original cost, not at liquidation prices
  3. Monetary period – only record transactions that can be measured in money
  4. Accounting period – choose a specific time period to complete the accounting cycle
  5. Accrual – record income when earned + expenses when incurred, regardless of when cash is received or paid
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2
Q

What are assets?

A

What the company owns - economic resources

Current + non-current assets

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3
Q

What are current assets?

A

Cash + other assets expected to be converted to cash within a year

E.g. trading properties, prepaid expenses, accounts receivable

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4
Q

What are non-current assets?

A

Purchased for long-term use + are not likely to be converted into cash in less than 1 year

E.g. property + long-term property investment, plant, property + equipment (PPE)

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5
Q

What are liabilities?

A

What the company owes to banks/trade creditors

Current + non-current liabilities

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6
Q

What are current liabilities?

A

Amounts owed within 1 year

E.g. short-term borrowings + overdrafts

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7
Q

What are non-current liabilities?

A

Long-term financial obligations which are owed later than 1 year

E.g. debentures + loans

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8
Q

What is equity?

A

Value that would be returned to shareholders or owners if all the assets were liquidated and all the company’s debts were paid off

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9
Q

What is owners’ equity?

A

Amount of value that owner has in business

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10
Q

What is shareholders’ equity?

A

Amount of value that shareholders have in business

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11
Q

What is net worth?

A

Overall value of business

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12
Q

What are net assets?

A

Assets minus liabilities

Measure of company’s net worth

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13
Q

What is revenue?

A

Total amount of money company earns from normal business activities

‘Top line’ - appears at top of income statement

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14
Q

What is net income?

A

Amount of money left after all expenses, taxes + costs have been subtracted from revenue

‘Bottom line’ - appears at bottom of company’s income statement)

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15
Q

What is gain?

A

An increase in value of an asset or property

If sell something for more than you paid for it, the difference is your gain

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16
Q

What is Net Asset Value (NAV)?

A

Value of an entity’s assets minus liabilities, divided by number of shares

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17
Q

What are retained earnings?

A

Amount that company will keep to support future operations

Earnings that are not distributed as dividends

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18
Q

What are dividends?

A

Payment from company’s profits to investors

Only distributed if earnings are positive + there is enough cash to do so

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19
Q

Why should businesses keep accounts?

A

To keep track of money coming in + out so know they can pay bills + suppliers etc.

To monitor profit + loss + company performance

Use the information for future business planning

Use the information to highlight any problem areas so can be investigated/solved

So can submit annual financial statements to Companies House

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20
Q

What are the differences between financial and management accounts?

A

Management accounts are for internal use of management team

Financial accounts are company accounts required by law

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21
Q

What are the three main financial accounts?

A

Balance sheet

Income statement

Cash flow statement

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22
Q

What is a balance sheet also known as?

A

Statement of financial position

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23
Q

What is a balance sheet + what does it show?

A

Summarises financial position of company for one specific point in time

Shows assets, liabilities (owned v owed) + shareholder’s/owner’s equity

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24
Q

Does a balance sheet relate to a period in time or a specific date (snapshot in time)?

A

Snapshot (given date)

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25
Q

What is an income statement also known as?

A

Profit + loss account

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26
Q

What is an income statement?

A

Summary of income + expenditure to show net profit/loss during a set period of time

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27
Q

Can you draw comparisons between income statements for different years?

A

Yes – they relate to a set period of time (1 year usually)

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28
Q

What is the difference between a statement of comprehensive income + a statement of financial position?

A

Statement of comprehensive income shows income, expenditure + profit or loss of company

Statement of financial position shows what a company owns (assets) + what it owes (liabilities) at any given point in time

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29
Q

What is a cashflow statement?

A

Merges balance sheet + income statement to show actual receipts + expenditure including VAT

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30
Q

What is a cashflow statement split into?

A

Core operations
Investing activities
Financing activities

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31
Q

Name some assets to a business

A

Land
Property
Machinery
Stock
Debtor’s cash
Other investments

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32
Q

Name some liabilities to a business

A

Borrowings
Overdrafts
Loans
Creditors
Shareholder’s funds

33
Q

Who are audited accounts prepared by?

A

Accountant

34
Q

Under which Act may audited accounts be required?

A

Companies Act 2006

35
Q

What is the role of an auditor?

A

Responsible for checking if financial statements comply with adopted accounting principles + examine company’s accounting control systems

Confirms reported values + identifies any material errors in the financial statements

36
Q

Why are audited accounts beneficial?

A

Confirms no material misstatements

Identifies weaknesses

Facilitates access to finance

Better supplier terms

Required if business sold

To ensure financial statements are true + fair

Enables people to make accurate decisions based on financials

37
Q

Name some typical UK company types

A

Sole trader
Partnership
LLP
Limited Company
Public limited company

38
Q

What are some common financial measures?

A

Acid test
Return on capital employed
Working capital ratio
Gearing ratio
Net assets per share

39
Q

What is the acid test (quick ratio)?

A

How well are current liabilities covered by cash/liquid assets

40
Q

What is return on capital employed?

A

How profitable is capital invested in a business

41
Q

What is working capital ratio (liquidity)?

A

Ability of a company so pay (solvency) / how quickly can assets be turned into cash to pay short-term obligations

42
Q

What is gearing ratio?

A

Exposure of business to loans as opposed to share capital

43
Q

What is net assets per share?

A

Price which shares can be bought + sold at

44
Q

What is the most common reason for business failure?

A

Cash flow issues

45
Q

Which are the two financial reporting frameworks recognised by UK company law?

A

IFRS
UK GAAP

46
Q

What is the difference between UK GAAP + IFRS?

A

UK GAAP – for UK companies
IFRS – for international companies

47
Q

What does UK GAAP stand for?

A

UK General Accepted Accounting Principles

48
Q

What is UK GAAP?

A

Financial reporting framework for how company accounts are prepared

Adopted by some companies in UK

Issued by Financial Reporting Council + has 6 FRS – 100, 101, 102, 103, 104, 105

FRS provide guidance on the way financial reports are set out, with FRS 102 covering how property included in accounts is to be valued

49
Q

What is FRS 102?

A

Main financial reporting standard for most entities

Used by small + medium sized businesses as part of UK GAAP

50
Q

What does FRS 102 say about investment property?

A

Investment properties must be measured at fair value, with any changes in fair value recognised in profit or loss

51
Q

Why might the fair value measurement for investment property accounting in FRS 102 problematic?

A

Can affect key profitability ratios (with the potential to breach loan covenants)

52
Q

When was FRS 102 last updated and when will changes come into effect?

A

Last updated in March 2024

Changes will come into effect on 1 January 2026

53
Q

What are some of the key changes to FRS 102?

A

A new model for companies to report sales, helping show exactly when + how they earn money

Companies must show leases on their balance sheets, making it clear what they owe + what they are renting (this makes financial statements more transparent)

Enhanced guidelines to ensure consistency + comparability in how companies measure the fair value of their assets

Clearer instructions on how to handle situations where unsure about how much tax companies owe

54
Q

What is FRS 105?

A

Financial reporting standard

Provides simplified accounting requirements for very small businesses (micro-entities)

55
Q

What is IFRS + what does it stand for?

A

International Financial Reporting Standards

Internationally adopted + the required standard by EU companies

56
Q

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

A

Following a set of global accounting rules to ensure financial statements are transparent, comparable + consistent across different countries

57
Q

Which type of entity must use IFRS?

A

Listed companies

58
Q

Can companies choose between IFRS and UK GAAP?

A

Publicly listed companies must use IFRS for financial statements

Other companies can choose + should seek advice from accountant

59
Q

Why is an annual report important for a public limited company?

A

Explains performance to shareholders + investors

Helps potential investors in decision making

60
Q

What is the benefit of being a Public Limited Company (PLC)?

A

Audited accounts are publicly available – public + suppliers can check financial performance

61
Q

What is the valuation basis for financial reporting under IFRS?

A

Fair value

62
Q

What is the Red Book definition of fair value?

A

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

63
Q

What does IFRS 16 relate to?

A

Lease accounting

64
Q

What is IFRS 16?

A

International accounting standard for leases

Effective from 1 January 2019

Aim of IFRS 16 – to ensure accurate reporting of lease transactions + to allow more accurate analysis of related cash flows

65
Q

When did IFRS 16 come into force?

A

1 January 2019

66
Q

What are the impacts of changes to IFRS 16?

A

Eliminated off balance sheet lease accounting

Affected financial metrics, e.g. gearing ratio, EBITDA

Encouraged short-term arrangements as leases under 12 months are exempt

67
Q

When would you want to assess financial strength of an entity as a surveyor?

A

Prospective tenants
Contractors/tenders
Profits valuation

68
Q

Name some typical credit check reports

A

D&B
Experian
Creditsafe

69
Q

What would you look for in a credit check report?

A

Risk assessment rating (e.g. D&B risk assessment)
Failure risk score
Delinquency score
Financial ratios

70
Q

For a typical credit check report, what would be the best financial rating?

A

A/1

71
Q

What else would you ask to assess financial strength of an entity, e.g. prospective tenant?

A

References – bank, trade, landlord and accountant, Accounts (3 years’ audited), Profits Test and business plan (if a new business)

72
Q

What is the profits test?

A

Net profit for proposed business must be 3x rent for 3 consecutive years or NAV of business must be 5x rent

73
Q

Why is it important to check financial strength of entities you deal with?

A

Assess risk of default and impact on investment security

74
Q

What is Corporation Tax?

A

Tax company pays when they make a profit

75
Q

Do LLPs pay Corporation Tax?

A

No

76
Q

What is insolvency?

A

When company can’t pay debts
Potential consequences are liquidation

77
Q

What are some causes of insolvency?

A

Reduced cashflow
Increased expenses
Unexpected costs

78
Q

What are the IAS?

A

International Accounting Standards

Set of guidelines for preparing financial statements

79
Q

What is the difference between IAS and IFRS?

A

Both accounting standards adopted by different boards

Different adoption timelines + requirements throughout different countries

Alice’s APC (22 decks)

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