Accounting principles & procedures - Level 1 Flashcards
What is the difference between a balance sheet and a profit and loss account?
The Balance Sheet reveals the entity’s financial position, whereas the Profit and Loss account discloses the entity’s financial performance.
A Balance Sheet gives an overview of the assets, equity, and liabilities of the company, but the Profit and Loss Account is a depiction of the entity’s revenue and expenses.
When would you use them?
The purpose of a balance sheet is to give interested parties an idea of the company’s financial position, in addition to displaying what the company owns and owes.
The purpose of the P&L statement is to show a company’s revenues and expenditures over a specified period of time, usually over one fiscal year.
How do you prepare a cashflow?
- Decide the period you want to plan for.
- List all your income.
- List all your outgoings.
- Work out your running cash flow.
- Additional information.
If actual was at variance to forecast what does this say?
Calculate variances by subtracting actual values from planned or forecasted values. For example, for budget variance, subtract actual expenses from planned expenses. Positive variances indicate under-spending, while negative ones imply overspending.
What action would you take?
All other over-spends will need to be resolved by identifying alternative sources of income/funds that could be used to cover the over-spend. Expenditure should then be transferred to the alternate source(s) to fix the over-spend.
How would you assess the financial standing of a contractor?
- History and references
- Audited accounts
- Tax returns
Other sources of information used to assess the financial standing of a contractor?
- Customer base and any specific dependencies
- Current contracts and values
- Senior management background and employee resources
- Current debt position
- Current subcontractors and suppliers
- Potential future work in tender or negotiation
- Current unaudited annual accounts
- Legal position Insurances in place
What do you understand by the acronym GAAP?
Generally Accepted Accounting Practice in the UK (UK GAAP) is the body of accounting standards published by the UK’s Financial Reporting Council (FRC)
Would you understand by the term ratio analysis?
Ratio analysis is a quantitative method of gaining insight into a company’s liquidity, operational efficiency, and profitability by studying its financial statements such as the balance sheet and income statement. Ratio analysis is a cornerstone of fundamental equity analysis.
Can you give me some typical ratio analysis examples?
An example of a key ratio analysis in the building context would involve obtaining the net to gross floor area ratio in order to assess the proportion of circulation required, which could then be compared to sector norms.
Can you tell the difference between a balance sheet and profit and loss account?
The balance sheet shows a snapshot of your assets and liabilities at a specific point in time. But you’ll notice it doesn’t show the amount of cash that was spent, nor the profit or revenue generated. This is because the balance sheet doesn’t show your actual financial activity across a period of time.
What are statutory accounts?
Statutory accounts – also known as annual accounts – are a set of financial reports prepared at the end of each financial year. In the UK, all private limited companies are required to prepare statutory accounts. Speed-up your statutory accounts with automatic financial reports in Debtor.
What are management accounts?
Management Accounts typically include detailed financial statements, such as Balance Sheets, Profit & Loss Reports, and Cash Flow Statements. These reports are essential but don’t always tell the full story.
What are the key differences between management and statutory accounts?
Statutory accounts present the financial position for a year just passed and are used to calculate corporation tax and can be viewed as historic information. Management accounts show current performance allowing management to make decisions and future planning.
In the UK where are statutory accounts for limited companies required to be filed?
Company Tax Returns and annual accounts must be delivered to HMRC no late than 12 months after the end of your company’s accounting period.
