Accounting principles & procedures (Level 1) Flashcards
What is the difference between a balance sheet and a profit and loss account?
Balance sheet is a snapshot of the company’s financial position at any given time. It reports on assets, liabilities and ownership equity.
Profit and loss show income, expenditure and profitability over a particular period.
When would you use balance sheets and P&L statements?
Balance sheet would be used at the end of a reporting period to present a summary of the company’s financial stability.
P&L statement to calculate financial position over a period of time, helping make informed business decisions
How do you prepare a cashflow?
Track incoming and outgoing cash over a specific period and categorise them. This will determine net cashflow.
If actual was at variance to forecast what does this say?
Forecast was incorrect and/ or unknown activities occurred within the period.
What action would you take if the forecast was different to actual?
- Analyse the cost data to identify the variance.
- Assess if changes are to be made to the forecast.
- Implement a plan to do so.
How would you assess the financial standing of a contractor?
DUN AND BRADSTREET
Carry out D&B check which provides a credit report.
What other sources of information to check the financial standing of a contractor?
Companies house detailing annual accounting figures.
What do you understand by the term ratio analysis?
Procedure of obtaining a look into a firm’s financial performance to assess its health such as its
- Liquidity
- Revenues
- Profitability
What do you understand by the acronym GAAP?
Generally accepted account principles – set of rules and standards governing the accounting profession
Can you give me some typical ratio analysis examples?
- Profitability ratio (determines a businesses ability to profit against its operating costs, balance sheet assets and shareholder equity)
- Liquidity ratios (assess likelihood that a firm can pay outstanding debts).
What are statutory accounts?
Set of financial reports that companies prepare at the end of each financial year to file with Companies House.
What are management accounts?
Financial reports produced for business owners and managers.
What are the key differences between management and statutory accounts?
While statutory accounts break down the financial position for a year, management accounts are prepared for internal decision making.