Chapter 6 Flashcards
What is book keeping
The actual record making process of accounting
Who would be interested in a company’s financial information
Stakeholders
Andy: What do quoted limited companies have to do on the companies act 2006 in respect of accounting
Provide an annual accounts return which must be audited by an independent auditor. Audited accounts or a true selection of a company state to the outside world
What 4 things are included in the account of quoted companies
Narrative report from the chairman and CEO executive
A strategic report
Financial accounts for the period
Other legal requirements such as a details of a directors remuneration
The companies act 2006 include regulations on accounting such as The: 
- Requirement to keep adequate accounting records
- Directors duty to prepare account for a company
- Directors duty to prepare accounts for a group of companies and the consistency of financial reporting within a group
- Requirement to prepare accounts that show a true and fair view
Account include the company’s financial statements which comprise of what
The income statement
The balance sheet
Cash flow statements
What is an income statement
It shows the profit and loss
What is a balance sheet
A statement of financial position of the business at a point in time
What is a cash flow statement
Show the sources and uses of cash and a useful indicator of a company is liquidity
What is the substance over form concept
The financial statement to show the economic substance of transactions rather than the legal form
Andy: the annual accounts will include what financial statement showing:
Income statement
Balance sheet
Cash flow statements
Narrative reports of a chief executive and directors
The companies plan for the future
Other legal requirements such as a directors remuneration
(Optional) Chairmans report
Andy: Who uses a company’s financial information
Stakeholders. Quoted Companies have shares available to the public
Andy: What is an income statement
Shows the results of trading and is done on a accrual basis- it counts the money in if you’ve done the work and the money is an actually in
Andy: What basis or cash flow statement done
An actual basis
Andy: What are balance sheets
Balance sheet or a snapshot of the account at a particular moment in time to show what the company owns what it owes and what it is worth
Andy: what should income statement, balance Street and cash flow statement show
They must show a true and fair view
Which stakeholders will Have an interest in organisations financial information
Owners Directors and managers Employees The public Tax authorities Financial analysts Creditors and lenders Competitors Brokers Customers PRA and FCA
What is profitability
It is a companies ability to make a profit. Is there is a positive amount of money left over we’re all costs and expenses or subtracted from the organisations income than organisation has made a profit
Who want to know if a company has been profitable
Managers
Employees
Existing and potential shareholders
In profitability if your mouth left over when all costs and expenses are subtracted from organisations income is zero what does that mean
They have broken even
What is the cash position (liquidity)
The amount of cash which a business has, or has access to, is known as its liquidity
 what is Working capital
The difference between current assets and current liabilities
What is solvency
Solvency is a measure of the excess of an organisations assets compared with liabilities. If a company liabilities exceed its assets it’s so said to be technically insolvent And will be required to cease trading
andy: What is income
All amounts earned.
Sales, revenue, turnover
Andy: What is expenditure
All the money out incurred to pay for goods or services
Andy: what is profit
Money in minus money out
andy: what is assets
Things that are owned
Andy: what are liabilities
Owed
Andy: what are shareholders equity
Stake shareholders have in the company
Andy: what is capital (shareholders equity)
Assets minus liabilities
Andy: what is cash
Anything in the bank accounts
Andy; What is a tangible asset
Something is physical such as cash, land, buildings, machinery or investments
Andy: What is an intangible asset
Something that is not physical such as a trademark, a copyright, or Goodwill
Andy: What is a creditor
You owe them money. Until it is paid off in remains a liability on the companies balance sheet
Andy: what is a debtor
An organisation or person who owes a debt to a company. Can be considered as part of a company’s current assets and is shown as such in the balance sheet
Andy: what is depreciation
It reduces the value of an asset (can be things such as buildings and machinery) 
Andy: what is liquidity
The ability to turn assets into cash
Andy: what is solvency
Assets greater than liabilities
Andy: what is a regulatory capital
Governed under solvency 2- money held for a regulator
Andy, what is the formula a straight line depreciation
Cost of asset minus residual value (if any) divided by the life of the asset

Example:
A company buys a machine for 6 K and the perceived shelflife of the machine is four years after which it will be 1200 residue value:
£6k - 1.2k / 4 years = 1.2k a year
IMPORTANT: The 1200 goes in a profit and loss not the 6000 remember this!
Andy - what is the accounting equation? (Formula) if you have equity left over
Equity = assets - liabilities
What does assets equal
Equity + liability
Look at example page 6/13 for accounting equation
See above
What is a balance sheet
Is a statement of the net wealth of a business at a particular time
What is the difference between a businesses total assets and its total liabilities are called
Its shareholders equity and it belongs to the owner of the business
Andy - what is non-current assets
Assets intended to be kept for more than 12 months
Andy - What’s our current assets
Assets intended to be used within 12 months
Andy - What are tangible assets
Could be current or non-current. Relatively easy to measure
Andy - What are intangible assets
These are non-current assets. Not easy to measure
Andy - What are current liabilities
To be repaid within 12 months
Andy - What are non-current liabilities
To be repaid for a period of longer than 12 months
Andy: what are current assets
Assets intended to be used within 12 months
Andy: what are current liabilities
To be repaired I paid in 12 months
What is goodwill and other intangible assets
The difference between the amount paid for acquiring a business and a value of an net Assets of that business one acquired
Is property a non-current asset
Yes freehold and leasehold property and land used for the business for trading
Andy: What are three examples of non-current assets
Goodwill, property, investments
Andy: what are examples of current assets
Cash, stock, debtors
Andy: What are two examples of current liabilities
Bank overdraft creditors or loans less than 12 months
Andy: What are examples of non-current liabilities
Bank loads , mortgages and bond issues
Andy: What are examples of tangible assets
Buildings, stock, debtors or cars
Andy, what are examples of intangible assets
Brand, trademark or Goodwill
What is share capital
Where are limited liability businesses can sell shares in order to raise long-term finance. The amount raised its always owed to the business shareholders
Andy what is sources of long-term capital
Noncurrent liabilities such as loans and mortgages
Andy In sources of long-term capital equity comprises of what
Share capital and reserves
Andy What are reserves in sources of long-term capital
Retained profit at a trading and tax
Andy What is Working capital
Working capital = ( current assets - current liabilities )
Andy What sits on the same side of the balance sheets as liabilities
Equity due to the fact that it is money owed to the shareholders
Andy what are reserves under
Equtity Important for the exam
Why do share capital reserves differ from a liability
In a normal course of trading there are no requirement to repay these amounts
Andy: what are reserves
Reserves of accumulated profits of the business that I’ve been reinvested into the business
Andy, What is working capital
Is a money used to finance day-to-day trading activity.
Andy: what is working capital used for
To pay for wages and raw materials and for overhead such as utility bills
Andy: how is working capital calculated on the balance sheet
Current assets minus current liabilities. Working capital is known as net current assets
Andy: what is working capital also known as
Net current assets
What are assets employed
They are calculated by adding non-current assets to working capital
Andy: what does an income statement show
The amount of profit or loss made by the business in the last financial year
Andy: what is profit
Profit is the difference between total income and total expenses
Andy: how is gross profit calculated
What subtracting cost of sales from turnover
Andy: under gross profit is the value of unsold stock including As a cost on the income statement
No
Andy how many prophets are there
4
Andy What are the four profits
Gross profit, operating profit, net profit before tax and net profit after tax
Andy what is gross profit
Income - cost or sales
Andy. What is cost of sales
Opening stock + purchases - closing stock
Andy what is operating profit
Gross profit - expenses
Andy: if a company For 200 units of stock or £2 each and sold 150 units for £4 pound each during the financial year what is the profit made
Turnover equals £600 (150 x 4)
Cost of sales equals £300 (150 x 2)
Gross profit equals £300
Andy. Who dors not require operating profit to be shown
IFRS
Andy: What is revenue
The total value of all sales excluding VAT invoice During the year it can include both cash and credit sales
Andy: what is cost of sales
The cost of a stock bought in during the yesr that has been subsequently sold doesn’t include money spent on stock that has yet to be sold
Andy what is bet profit before tax
Operating profit minus financial cost minus one expenses plus one off/other income
Andy What is net profit after tax
Net profit before tax minus corporation tax
Andy What is paid part of a whole into dividends to the shareholders, the reminders put into reserves
Net profit after tax
To achieve the profit for the year which items will be added or subtracted on the income statement
Finance income, finance costs, overheads, taxation
Andy What are the main things on an income statement
Shows the results of trading over a period of time usually 12 months
Income statements are on an accured basis
Start with sales
Deductions are shown in brackets
Then the four profits