Chapter 6 Flashcards
Is the income statement and a profit loss account the same thing?
Yes
At law, when you are doing financial accounting what three things do you need to present
An income statement, a balance sheet and a cash flow
What basis is a cash flow done on?
On an actual basis
What basis is an income statement/ Profit loss account done
On an accrual basis
What does ‘on an accrual basis’ mean?
You account for money in even if you haven’t been paid it. You’ve invoiced it but may not have been paid it. if you have a bill that you still haven’t settled, it’s counted as money out and accrual.
A broker raises a new business premium on a 60 business credit date. Even though the insurer won’t receive the money for 60 days they will include the income under what basis
an accrual basis
What does ‘on an actual basis’ mean?
When you only count money when it actually goes out/ You only count money in when it actually comes in
What does the income statement/ profit loss account and cash flow show?
It enables you to see how well the company is trading/ how well the credit department is working
What is a balance sheet?
A snapshot of what the company owns (an asset), what it owes (a liability) and what is worth (equity)
What does it mean when it has to be a true and fair view on the balance sheet?
When you assess the the view of the value of the asset you must do it true and fairly.
How does a balance sheet ‘balance’
By balancing net assets with equity
What are net assets? (Important)
What you own minus what you owe. NOT TOTAL ASSETS!
What are assets?
What we own
What is a liability?
What we owe
How are assets split?
Into non- current assets (also known as fixed) and current assets
What are non-current (fixed assets)
Something that you keep for more than 12 months (buildings, computers, cars, machinery etc)
Can non- current assets be depreciated against tax?
Yes, when we purchase them we don’t take the entire amount against tax for one year. You do bit by bit over it’s life time
What is the depreciation formula of depreciating non current assets (important)
The asset value minus the residual value divided by the years it’s going to be kept
ASSET VALUE - RESIDUAL VALUE / YEARS IT’S GOING TO BE KEPT
Deprecation non current asset example: A car you buy for £20,000 Residual value: £4,000 Years you keep car: 4 What is the depreciation value?
Asset value (£20k) - residual value (£4k) / Years you are keeping it for (4)
Depreciation will be £4k per year.
What is a straight line depreciation?
The same as depreciating non current assets. Same amount is deducted every year. Doesn’t matter if first year or second year or third.
Brian buys a company car for £20,000. He is going to keep it for 4 years and in 4 years time the residual value is estimated to be £4,000 what depreciation will be in year two only?
£4,000.
Will always be the same figure. It is a straight line depreciation. This will ALWAYS be the case for every question on the exam. Will always be the same figure every year.
Are all non-current assets depreciated (go down in value each year)
Yes, unless they can’t lose value such as land.
What are the big three current assets? (IMPORTANT)
Stock, Cash (money in your bank account) and Debtors (debt- to you: people that owe you money)
If an exam asks you what stock, cash and debtors is are these non-current assets or current assets?
CURRENT ASSETS NEVER NON-CURRENT ASSETS
What does it mean by assets can be divided by intangible and tangible assets?
Tangible - almost all assets. If you can put a value on it it will be tangible- buildings, cars, IT, cash, Debtors, stock (the big three current assets)
Intangible- ALWAYS NON -CURRENT ASSETS- the things hard to put value on. GOODWILL AND BRAND. Most companies don’t put intangible in the accounts
Why would you put intangible assets in the accounts?
Only when your selling the business as goodwill and branding are part of purchasing the business.
Most assets are what
Tangible including the big three current assets (stock, cash and debtors) which will be depreciated.
What are the big three for current liabilities (IMPORTANT)
- overdrafts
- Bank loans less than 12 months
- Creditors
What does it creditors mean?
Bills that you havent been paid
What is a debtor
Debt- to -you. Where you are owed money
What are non current liabilities (IMPORTANT)
Anything you owe for over 12 months such as mortgages and loans over 12 months. NEVER PRO RATA
If a loan is 11 months what sort of liability is it?
A current liability
If a loan is 14 months what sort of liability is it?
A non current liability
What three profits are in a profit and loss account (also known as income statements) NEED TO KNOW
- Gross profit
- Net profit before tax
- Net profit after tax
What is the gross profit on a profit and loss account/ income statement formula?
Used by companies with stock (shops/ warehouses)
Income - cost of sales
How do you calculate the cost of sales?
Opening stock (what you start with) + Purchases (what you purchase throughout the year) MINUS the closing stock (what is left at the end of the year)
What is the difference between income and cost of sales?
The income is what you sold the goods for including profit margin. Cost of sales is what it cost to buy in the goods. The difference is the gross profit.
Income - cost of sales =Gross profit
Does a broker/ an insurer show a gross profit?
No, because they don’t have stock. Only companies that have stock calculate gross profit.
If you are a shop, you would calculate the gross profit first then what take off what?
All other expenses (staff salary, electic, rent, bank loans, depreciation) which will then get you the net profit before tax.
Do you need to calculate depreciation in the expenses of net profit before tax
YES. ALWAYS included.
If you are a company without stock, you don’t have gross profit you have what?
Net profit before tax.
What is net profit before tax?
You put your income in, you take off all your expenses and what you’ve got left is your net profit before tax.
What is net profit after tax
Once you’ve calculated your net profit before tax. The government then deduct corporation tax and your left with net profit after tax.
When you hear the term ‘bottom line’ it means what?
The net profit after tax- what the shareholder invests in the company in the first place. Want the figure to be as big as possible
What happens with the net profit after tax?
Usually you split it.
New dividends given to shareholders (unless mutual)
The rest you reinvest in the business as reserves
What are reserves in accounting? IMPORTANT
Retained profit
Reserves in a balance sheet go in as what (IMPORTANT)
An equity and not an asset!!
What the four different ways of calculating money in?
Turnover, income, revenue, sales
When anything is in brackets in accountancy what does it mean?
The figures are a minus
If net profit before tax is in brackets on an income statement what does that mean?
You have made a loss.
A balance sheet balances what?
Non- current assets (always depreciated) Current assets (the big three) Add them together = TOTAL ASSETS. NOT NET ASSETS
Then
Current liabilities: Big three
Non- current liabilities: mortgages and long term loans
You then minus the liabilities of the assets which equals the NET ASSETS not TOTAL ASSETS
When you need to calculate the net assets on a balance sheet how do you do that?
Total Assets - Total liabilities = net assets
What is net assets the same as?
The equity. Equity is the capital (what the shareholders put in) and reserves (retained profit).
Is retained profit an asset?
NO its an equity
Shareholders capital + retained profit is what?
An equity and its the same as your net assets.
What is the difference between a cash flow statement and an income statement?
Cash flow statement is on an actual basis. Income statement on an accural basis
What sort of accounting system is your own bank account statement?
A cash flow statement. Shows the money in and money out.
Assuming we are in December 2020
Money invoiced in 2020 but not yet paid goes into what?
Income statement but not cash flow
Assuming we are in December 2020
Money that was invoiced in 2020 and was paid in 2021 goes into what?
The cash flow and not income statement as you’ve already counted it in the income statement in 2020
Does depreciation of assets go into a cash flow statement
NEVER EVER IN A CASH FLOW.
Only income statement
Depreciation never goes in a cash flow.
Would expenses incurred in the previous year but paid this year go in the cash flow statement?
Yes but not income statement.
Would expenses incurred this year but not yet paid go in the cash flow statement?
Go in the income statement and not the cash flow.
If you have a large profit but nothing in your bank account what does that indicate
Issue with cash flow. could go bust because some of customers are in big trouble and not paying. Counted the money in (accrual basis) but not actually got it (actual basis)
Insurance company accounts
What is gross written premium
What the premium is before IPT. If you are a broker its what you pay the insurer. If you are a direct insurer its what the client pays you.
Insurance company accounts
What is outward reinsurance premium
Is what you pay the reinsurers on the account
Insurance company accounts
What is net written premium
Gross written premium - outward reinsurance and any costs
Insurance company accounts
What is net earned premium (the most important thing to insurer)
Where you deduct your net written from your unearned premium
Net written premium - unearned premium = net earned premium
Insurance company accounts
What is unearned premium?
The premium isn’t earned until the end of the year. Not earned until the final day. If charged £12k but only been paid £6k.
Insurance company accounts
What is your net investment return
Money you make/ money you hold. Sitting in shares normally. Government bonds etc.
Insurance company accounts
What is included under the total income
The net earned premium and the net investment returns
Insurance company accounts
What is gross claims incurred
What you pay the policyholder
Insurance company accounts
What is reinsurers share
They give you back some money where they are liable to pay for claims
Insurance company accounts
What is claims incurred net of reinsurance
Gross claims inccured - reinsurers share
Insurance company accounts
What is acquisition costs
Broker commissions
Insurance company accounts
What are operating expenses
Salaries, office bills, heating, lighting.
Insurance company accounts
How to work out the total expenses. Look at page 6/21 if required.
You total your claims incurred net of reinsurance, your broker expenses and acquisition and operating expenses
Insurance company accounts
How do you calculate profit before tax
Total income - total expenses = Profit before tax
Insurance company accounts
How do you calculate the profit for the period
Total income - total expenses = Profit before tax
Profit before tax - corporation tax = Profit for the period
Insurance company accounts
What are three headings purely for insurance balance sheets?
Assets
Liabilities
Equity
Insurance company accounts
What is an intangible asset for an insurer on a balance sheet?
The brand. Think Churchill. Think red phone for direct line
Insurance company accounts
What is an investment on a balance sheet?
AN ASSET: The shares/ bonds
Insurance company accounts
What is a reinsurers share of insurance contract liabilities on a balance sheet?
AN ASSET:Where the reinsurer owes you money but you haven’t settled the claim yet
Insurance company accounts
What is deferred acquisition costs on a balance sheet
AN ASSET: The commission that you’ve already paid to the broker on the unearned premium.
Policy incepts on 1st July with 6 months to run. Unearned premium is £6k. Commission on risk is £600. Broker is paid commission immediately.
Insurance company accounts
What is a provision of unearned premium on a balance sheet
A LIABILITY.
Insurance company accounts
What is a provision for losses and loss adjustment expenses on a balance sheet
A LIABILITY- Claims reserves.
Tends to be largest liability on balance sheet
Insurance company accounts
What is a insurance liabilities on a balance sheet
A LIABILITY- what you owe the reinsurers and not yet paid them
Insurance company accounts
What is a Debtor on a balance sheet
AN ASSET - Debt to you
Insurance company accounts
What is a Creditor on a balance sheet
A LIABILITY- You owe money
