Accounting Principles & Procedures Flashcards
Why should you keep accounts?
to pay suppliers
legally
to manage costs
manage projects budget
What is profit and loss account?
Financial statement that summarizes the income, expenses, and profits/losses of a company during a specified period
These records provide information about a company’s ability to generate revenues, manage costs, and make profits.
(used for tax reporting)
What are management accounts
Financial reports providing detailed analysis of a business’s performance. For internal use only and not audited.
Who creates audited accounts?
Chartered or certified accountant
What is a consolidated set of accounts?
Comprises a number of individual subsidiary accounts for a company within a single set of accounts
What does a cash flow statement show and what is its purpose
financial report that shows a business’s cash inflows (receipts) and outflows (expenditure) over a period of time. Includes VAT.
to help show whether a business can meet its expenses
What is a balance sheet
A statement of the business’s financial position showing its assets, liabilities and shareholder equity at a given date, usually at the end of the financial year
Shows Financial Health - whether the company is solvent (able to pay its debts) and how much equity shareholders have.
Also heps understand liquidity and assess creditworthiness
What are examples of assets
What are examples of liabilities
Cash, property, debtors and other investments held
Borrowings, overdrafts, loans, creditors
What must a set of public limited company accounts include
- Chairman’s statement
- Independent auditor’s report
- income statement
- Statement of financial position (balance sheet)
- Corporate governance report
- Remuneration report
- Other statutory information
What is an important accountancy change that will have an impact of how occupiers regard their property liabilities?
IFRS 16
What is IFRS 16? (International Financial Reporting Standard)
The lease accounting standard with which all companies have to comply when using the International Financial Reporting Standards (IFRS).
What does the implementation of IFRS16 mean?
The full cost of leases have to be accounted for on the balance sheet. An occupier’s obligation to pay rent has to be recognised as a liability.
Service charge payments would be accounted for separately.
Exemptions exist for leases of 12 months or shorter.
What is gross and net profit?
Net profit reflects the £ you have left after paying all your business expenses. Gross is the amount of £ left after deducting the cost of goods from revenue.
What is meant by depreciation?
How an item goes down in value over time, eg a car
Sole trader?
A type of enterprise owned and run by one person, there is no legal distinction between the owner and the business entity
Partnership?
A separate legal entity from its members, who are only liable for the amount of money that they invest.
What is the difference between financial accounts and management accounts?
Financial accounts = the collection of accounting data to create financial statements
Management accounts = the internal processing used to account for business transactions
What are the three types of financial statement you may come across relating to a company?
Balance sheet = statement of the businesses financial position showing its assets and liabilities at a given date usually at the end of the financial year
Profit and loss statement / income statement = a summary of the businesses income and expenditure, transactions, prepared usually on an annual basis
Cash flow statement = shows all actual receipts and expenditure to include VAT. It is not included in the annual accounts but is prepared for management purposes
What is an asset / liability? Can you give an example of each?
Asset = anything of value or resource of value that can be converted into cash i.e. cash, property, debtors, other investment held
Liability = something a company / person owes. Settles over time through transfer of economic benefit i.e. money, goods, services, borrowings, overdrafts, loans and creditors
What is the difference between financial accounts and management accounts?
Authoritative standards and rules that govern financial accounting and reporting by businesses
How do companies know which reporting framework to comply with? Which reporting framework do public limited companies have to comply with?
Public listed companies are required to apply IFRS in preparation of group accounts
Public listed companies may be required to choose between IFRS and UK GAAP for the preparation of individual parent accounts
Under The Companies Act 2006, SMEs can use simplified FRS 102
Other entities have free choice but in practice larger unlisted entities now adapt IFRS
How would you assess the financial strength of an entity, e.g. for a valuation?
Analyse liquidity, solvency, profitability and operating efficiency
Liquidity - cash or easily converted assets measured using acid test
Solvency - companies’ ability to meet debt obligations over long term. Debt to equity ratio measure
Operating efficiency - operational profit after deducting variable costs of producing and marketing
Profitability - net margin % of net profit to revenue (higher better)
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
Authoritative standards and rules that govern financial accounting and reporting by businesses
How do companies know which reporting framework to comply with? Which reporting framework do public limited companies have to comply with?
Public listed companies are required to apply IFRS in preparation of group accounts
Public listed companies may be required to choose between IFRS and UK GAAP for the preparation of individual parent accounts
Under The Companies Act 2006, SMEs can use simplified FRS 102
Other entities have free choice but in practice larger unlisted entities now adapt IFRS
Can you tell me what the role of an auditor is?
Auditors assess financial operations, track cash flow and verify that funds are accounted for
Audits assess public companies to check that GAAP are followed
Auditors findings are presented in a report that appears as a preface in a financial statement
LLP? Limited liability partnership
A separate legal entity from its members, who are only liable for the amount of money that they invest.
How would you go through a final account?
Request a copy of the contractors company accounts for the last three years. I would then be able to asses
if the contractor was profitable in the last few years
calculate their liquidity ratio
What are the international financial reporting standards? IFRS?
A set of accounting rules for the financial statement of the public companies that are intended to make them consistent.
IAS
International accounting standards - international standards
What is your understanding of tax depreciation?
Where the declining value of an asset is offset against a companies taxable profi
What are overheads
The operating costs of the business that are incurred on an ongoing process
What is a fixed and variable overhead example?
Fixed - insurance
Variable - tend to fluctuate on the activity eg delivery fees
Whats an escrow account?
Contractural agreement that are used as financial instruments
The asset being transferred between two primary parties is held by an intermediary third party.
Name the three types of accounting ratios?
Liquidity
Profitability
Gearing ratios
Liquidity ratio?
Consider an organisations ability to pay their debt obligations and asses its margin of safety by looking at their operating cash against short term debt
Profitability ratio?
Assess an organisations ability to generate profits from its sales operations and shareholding equity. It indicates how well a company is generating profit
Gearing ratios?
Compare a capital within the company against its debts. A measure of companies financial leverage and sets out what proportion of the firms activities are funded by shareholders.
What is financial leverage?
The concept of using burrowed funds in the form of debt to enhance business operations and increase the companies profitability and rate of return
What are capital allowances?
Allow taxpayers to gain tax relief by using expenditures to be deducted from their taxable income
Current vs fixed asset?
Current - normally can be converted into cash within one financial year and are regarded as assets that allow day to day operations eg services
Fixed - typically cannot be converted into cash within one year. These assets are recorded on a company’s balance sheet as fixed assets the company owns on a long term basis. E.g vehicles
What are the key financial statements that all companies must provide
Profit and loss, balance sheet and cash flow statement
What is the purpose of profit and loss?
to monitor and measure profit and loss
to compare past performance
to assist in forecasting future performance
to calculate tax
What’s the difference between debtors and creditors?
Debtors are the one to whom goods have been sold on credit, whereas creditors are the parties who sold the goods on credit
What are financial statements
A forecast of income and expenditure can be used as an analytical tool to identify potential shortfalls or surpluses
How does IAS vary from National GAAP and how property is treated in an entity’s accounts prepared under IAS
International Accounting Standards (IAS) differ from National GAAP by offering a more standardized and principle-based approach to accounting, while National GAAP often have more detailed, rules-based regulations that can vary significantly between countries; under IAS, property (considered as “Property, Plant, and Equipment” under IAS 16) is typically recorded at its initial cost and can be depreciated using either the cost model (carrying value at cost less accumulated depreciation) or the revaluation model (fair value at the date of revaluation less subsequent depreciation) depending on the entity’s choice.
