Accounting principles & Procedures Flashcards
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
Set of accounting rules and standards that govern financial accounting and reporting by businesses
Benefits of GAAP?
- Clear financial information reduces mistakes and confusion
- Improved comparability helps benchmark performance
Name 3 key UK GAAP principles
Name 3 accounting principles
Key principles
* Regularity – strictly adhere to GAAP
* Consistency – each period to compare
* Sincerity – accurate and impartial depicton
Key accounting principles
- Monetary unit (same currency)
- Time period (specific)
- Cost principles (recorded at cost)
Key difference between GAAP and IFRS
- The international financial reporting standards (IFRS), set by the International Accounting Standards Board (IASB), is an alternative to GAAP that is widely used worldwide.
- One difference is treatment of inventory. IFRS rules ban using last-in, first-out (LIFO) inventory accounting methods, GAAP permits it
Which framework must you use in the UK?
- Listed companies must use UK-adopted IFRS for consolidated accounts, but unlisted companies can choose between UK GAAP and IFRS
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.
- Demonstrates whether a business can meet its expenses - early identification of potential financial issues
What is a ‘balance sheet’, and what does it show?
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)
- Also helps understand liquidity and assess creditworthiness
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
- Liability = something a company / person owes i.e. overdrafts, loans
What is a ‘profit and loss account’?
Financial statement that summarizes the income, expenses, and profits/losses of a company during a specified period
- Demonstrates comapny’s ability to generate revenues, manage costs, and make profits.
- (Used for tax reporting)
What are the differences between income, balance sheet and CF statement?
- Income: details profitability over time
- Balance sheet: reflects financial position at a specific date
- CF: tracks cash movement during a period
What is a statutory account and what are the key features?
A set of financial statements required by law for companies to report their financial performance and position.
Prepared by Chartered accountant.
They provide a standardised financial overview for stakeholders and regulatory bodies
* Components: income statement, balance sheet and notes
What is a management account and what are the key features?
An internal financial report used by company management to make informed business decisions
* Provides detailed insights into financial performance, operations and trends to aid decision making
* Not audited
* Prepared monthly or quarterly – more frequent than statutory accounts
More detailed, typically show progress against KPIs eg revenue growth
What is included in a set of public limited company accounts?
- 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 a recent key accountancy change and what is its impact?
IFRS 16
- Full cost of leases must be accounted for on the balance sheet.
- An occupier’s obligation to pay rent has to be recognised as a liability.
- Service charge payments accounted for separately. (Exemptions exist for leases of 12 months or shorter).
What is an audit?
What is its purpose?
An independent examination of financial records to ensure they are accurate, complete, and compliant
- Provide assurance to stakeholders/investors
- Ensure transparancy.
When is an external audit required in the UK?
All public companies
Private Limited Companies if at least 2 of:
- turnover exceeding £10.2 million,
- total assets over £5.1 million,
- or employing more than 50 people
What is companies house?
The UK government department responsible for the registration, regulation, and dissolution of companies.
It serves as the official registrar of companies in the UK.
* Incorporate and dissolve limited companies
* Examine and store company information
* Make information available to the public
When would you need to use companies house?
- Determine Active Directors for AML checks
- Financial Health
- Ownership structure
What is a D&B report?
Credit report to assess the financial strength and creditworthiness of a business
How do you recieve, monitor and achieve internal approval on consultant’s contract sums?
- Review the Contract
- Check Against Budget
- Check Contract Terms and Scope
- Internal approval (PFRs)
- Monitoring (i.e deliverables & variations)
- Record and Approve Invoices
What is thedifference between gross and net profit?
Gross profit = revenue – COGS
* Gross Profit focuses on direct costs related to production or service delivery.
Net profit = gross profit – OPEX – interest – taxes + other income
* Net Profit includes all expenses and gives a comprehensive view of overall profitability.
