Accounting Principles & Procedures (Checked) Flashcards
What is accounting?
- Requirement by GAAP
- Collection, analysis and communication of economic information used to make business decisions
What is the difference between Company Accounts and Management / Financial Accounts?
Company Accounts are used by the management team to make business decisions.
Management / Financial accounts include a cash flow statement, profit and loss account, balance sheet, director’s report and audit confirmation and have to be sent to HMRC yearly.
What are the three forms of management/financial reports?
- Cash flow statement
- Profit and loss statement
- Balance sheet
What does a cash flow statement show?
Cash movements occurred during a given period (3 months)
What additional information can you gain from a cash flow?
- Construction works follow an S shape
- Determines the short term viability of a business and its ability to pay bills
- For a firm it would show EBITDA, returns on investments, taxation at the end of financial year, capital expenditure on fixed asserts and receipts from disposal of old assets, equity dividend payments.
What is a balance sheet?
- Shows accumulated wealth of business during a given moment
- Shows assets and liabilities at a given date
bALance = A&L
What is a profit and loss statement?
- Shows level of profit generated by a business during a given period
- Firm’s income and expenditure transactions
What else does a profit and loss statement show?
- Indication of financial health
- Reveals profit or loss
- Details gross profit over a year, used as a KPI for comparing with previous performance
- Shows investors how profitable a firm is
How does a profit and loss statement relate to a balance sheet?
- Net profit and loss is added to capital on a balance sheet (basically profit treated as an asset)
- However, P&L shows profit over time. BS shows assets and debts on a precise date.
- Best to have together for analysis.
What types of profit are there?
- Net before tax
- Net after tax (available for shareholders)
- Unallocated (after paying shareholders)
What should a set of a public company accounts include?
- Chairman’s statement
- Cash flow statement
- Profit and loss account
- Balance sheet
- Director’s report
- Audit confirmation (report is true and fair)
What is IFRS 16?
- A new lease standard
- Most firm’s have a lease for their office so will be affected
- Full cost of lease should be on balance sheet as a liability
- Came into effect January 2019
- Exempt if lease is under 12 months
What are the IFRS?
- Founded in 2001
- Introduced a global language for financial statements
Example of how you handle accounts in your role?
Oracle
- Provide PO number for invoice
- Receive invoice and send to account’s team who raise it on the system
- Receipt it on the system
Another example of how you handle accounts in your role?
Managing budgets
- Set budget
- Cash flow out
- Record expenditure
- Review regularly to ensure not exceeding
- Record transactions
How do Lendlease prepare their company accounts?
- Must deliver accounts every year to Companies House, even if the company if dormant
- Non-compliance with this could lead to the UK Government assuming the company no longer undertakes business / is in operation. It could strike it from the register.
- If struck off register, the assets become property of The Crown.
What are the legal requirements Lendlease should have to adhere to?
- Profit and loss account
- Balance sheet (signed by director on behalf of the board)
- Not to the accounts
- Group accounts (if appropriate)
- Director’s report signed by secretary or director
- Business review if the company does not qualify as small
- Auditor’s report stating the name of the auditor and signed and dated by them (unless the company is exempt from audit)
What are accounting records?
Records that show:
- All money received and spent
- Record of assets and liabilities
What if your company deals in stock?
- Records of stock at the end of each financial year
- Record of all goods sold (unless to retail sellers)
- Include buyers and sellers
How long must accounting records be kept for?
Private companies must keep accounting records for 3 years from the date they were made
Public companies must keep accounting records for 6 years from the date they were made
How can records be kept?
Paper / digital format
Do companies have to use professional accountants?
No, can be done themselves
Professional advice will help meet legal requirements
E.g. Institute of Chartered Accountants in England and Wales (ICAEW)
What standards are behind accounting theory?
International Financial Reporting Standards (IFRS)
Set of common rules fo that financial statements can be consistent, transparent and comparable
Issued by the International Accounting Standards Board (IASB)
Who issues the IFRS?
Issued by the International Accounting Standards Board (IASB)
What standards are used in the UK?
UK GAAP
Generally Accepted Accounting Practise
This is the body of accounting standards published by the UK’s Financial Reporting Council (FRC)
What is a profit and loss statement?
Summarises revenues and costs and expenses incurred during a fiscal quarter
What is gross profit?
Revenue - Cost of Goods Sold / Cost of Service = Gross profit
What is net profit / net earnings?
Total Revenue - Total Expenses - Net profit
What is financial auditing?
Auditors come in behind accountants and verify their work
Examine the financial statements prepared by accountants and ensure they represent the company’s financial position accurately
What companies are exempt from auditing?
Small and micro businesses:
- Annual turnover must not be more than £10.2m
- Balance sheet total must be not more than £5.1m
- Average number of employees must be not more than 50
What do you look for when analysing consultant fee proposals?
- Total fee and how it was calculated
- Level of resource, seniority, experience and availability
- Fee drawdown
- T&Cs
- Exclusions
- Assumptions (e.g. programme)
How are fee proposals calculated?
- Based on a percentage of construction cost or a lump sum
- Smaller consultants may use an hourly or daily rate due to limited involvement on project
- Others may invoice based on deliverables (e.g. issue of a report)
How do you review the financial viability of tenderers?
Their financial reports (level of profitability, liquidity, solvency)
In the RfP ask for:
- Insurances and liability limits
- Confirm they’ve met all obligations to pay creditors and staff during the last year
- If they have any claims pending against them from the last three years
- To sign a permission form to ask their bank for a reference
- Due diligence (credit check, market rumours, research)
What is an asset?
Property owned by a person or company, regarded as having value and available to meet debts or commitments.
(Anything that can be converted into cash)
E.g. cash, property, plant, new equipment
What is a liability?
An obligation to or something that you owe somebody else. They are settled over time through the transfer of money / goods / services.
E.g. Long term debt, loans, creditors
How could a financial audit of a contractor be carried out?
- Company accounts
- Companies House
- D&B Report
