Accounting Principles & Procedures - Level 1 Flashcards
What are the three types of financial statement you may come across relating to a company?
Income (profit and loss) statement - revenues, expenses and net income/loss over a specific period
Balance sheet - assets, liabilities and equity
Cash flow statement - cash inflows and outflows
What is an asset/liability? Give an example of each
Assets = resource that a company owns or controls that will provide future benefit to the company e.g. cash / investments
Liability = obligation that a company owes to another party e.g. accounts payable
What is the difference between financial and management accounts?
Financial accounts are prepared primarily for external stakeholders and provide a summary of financial performance over a specific period of time. These include income statements, balance sheets and cash flow statements.
Management accounts are for internal stakeholders and are used to inform decision-making, measure performance and monitor cash flow.
What do you understand by the term Generally Accepted Accounting Principles?
Set of accounting standards and procedures that companies use to present their financial statements in accordance with accounting principles and industry practices.
How do companies know which reporting framework to comply with?
Based on industry practices, legal and regulatory requirements and stakeholder expectations.
How would you assess the financial strength of an entity e.g. for a valuation?
Reviewing financial statements using metrics to determine its overall financial health and stability.
Metrics:
Liquidity ratios - ability to meet short-term obligations
Solvency ratios - ability to meet long-term obligations
Profitability ratios - ability to generate profit
Efficiency ratios - how efficiently resources are used to generate revenue
Can you tell me about a common financial measure?
Profitability ratio measures a company’s ability to generate profit as a percentage of its revenue or investment.
What is the acid test / ROCE / working capital ratio / gearing ratio / net assets per share?
Acid test = financial liquidity ratio that measures whether a company has enough short-term assets to cover its current liabilities
Return on Capital Employed = operating profit divided by total capital employed to represent a percentage return on capital invested in the company
Working capital ratio = measure of short-term liquidity by dividing current assets by current liabilities
Gearing ratio = determine extent to which a company is using debt to finance operations, relative to the amount of equity in the business
Net assets per share = measures value of company assets per outstanding share of its common stock
Can you tell me what the role of an auditor is?
Responsible for reviewing a company’s financial statement and verifying whether they are accurate and reliable. The auditor also checks whether the company has complied with accounting standards and laws and regulations.
When are audited accounts needed and why?
Required by law for companies to file with a regulatory authority such as Companies House.
How do public limited company accounts differ?
Subject to additional financial reporting requirements that are outlined in the Companies Act 2006,
Tell me something you understand from the Companies Act 2006
Sets out legal requirements for companies in the UK. Primary legislation governing company law.
Tell me what it means to prepare accounts in accordance with IFRS
Following a set of global accounting standards developed and maintained by the International Accounting Standards Board.
What is the difference between UK GAAP and IFRS?
One of the main differences if their scope. UK Generally Accepted Accounting Principles (GAAP) applies to companies registered in the UK whilst IFRS is used in over 100 countries.
If a company operates in more than one country, it may choose to use IFRS to ensure consistency across financial statements.
What is the basis of valuation under IFRS 13?
Fair value
