Chapter 6 Flashcards
What is included in the accounts of quoted companies?
narrative reports from the chairman and chief executive
- a strategic report
- the financial statements
- other legal requirements, such as details of the directors’ remuneration
What does the Companies Act 2006 regulations on accounting include?
The Companies Act 2006 includes regulations on accounting such as the:
- requirement to keep adequate accounting records;
- directors’ duty to prepare accounts for a company;
- directors’ duty to prepare accounts for a group of companies and the consistency of financial reporting within a group; and
- requirement to prepare accounts that show a true and fair view
What do company’s financial statements include?
Income statement
Balance sheet
Cash flow statement
What is an income statement?
shows the results of the company as a consequence of transactions during the accounting period. It sets out the income, expenses, tax and the profit or loss.
What is a balance sheet
is a statement of the financial position of the business at a point in time (‘as at’ a particular date), i.e., the end of the accounting period or year-end date. It is a ‘snapshot’ of the company’s position at a particular point in time, listing all the company’s assets and liabilities – what is owned and what is owed. What is owed by the company includes the shareholders’ equity, which is the total of the assets less the total of the liabilities.
What is a cash flow statement?
Cash flow statements show the sources and uses of cash and are a useful indicator of a company’s liquidity.
What are the two aspects of accounting?
Financial and management
What is financial accounting?
Concerned with historic information
Recording of company’s transactions for outsiders who are interested in it (shareholders)
Shows company’s performance
Shows financial position primarily on the balance sheet and the performance on income statement
Have a framework – UK corporate governance
Legal requirement to produce under companies act 2006
Have to be audited
What is management accounting?
Non-monetary information
Concentrates on processes and individual departments
Focused on the future
No framework
No audit required
No legal requirement to produce
Why do owners need financial information?
They will need to know how the business is performing financially in order to make decisions about continuing, or increasing, their capital investment.
Why do directors and managers need financial information?
They will need to know whether or not the organisation has met its strategic objectives and has been making the best use of its resources.
In addition, they will need to know whether the organisation has enough capital and liquidity to enable it to carry out its plans
Why do employees need financial information?
Employees are usually concerned to know how secure their jobs are.
Why do the public need financial information?
potential investors or shareholders in the organisation, pressure groups that may want to monitor aspects of the organisation’s activities, and people who might be considering applying to work for the organisation.
Why do Tax authorities need financial information?
Tax authorities will want to know that the organisation is paying the appropriate level of tax.
Why do financial analysts need financial information?
They use financial information to track the organisation’s performance. ADVISE SHAREHOLDERS TO BUY OR SELL
Ratings agencies have analysts that assess insurance companies’ financial strength, which is a measure of the companies’ ability to meet their obligations to policyholders.
Why do creditors and lenders need financial information?
Creditors are other businesses or individuals who might extend credit to an organisation, such as its bank, its suppliers or its landlord. They will need to make a judgment about whether they should extend credit to an organisation and, if so, what limit they should set.
Why do Competitors need financial information?
An organisation’s competitors can use financial information about it to help them readily understand its strengths and weaknesses
Why do brokers need financial information?
From an insurance point of view, brokers will want to know whether companies, with whom they deal, are financially strong
Why do customers need financial information?
Similarly, potential and existing customers of insurance companies want to know that they are insured with a reputable organisation which is able to pay its claims
Why do PRA & FCA need financial information?
The PRA and FCA are the regulatory bodies for the UK financial services industry. Insurance companies are regulated for prudential issues by the PRA, and for conduct of business by the FCA
What is profitability?
ability to make a profit
What is meant by cash position?
The amount of cash which a business has, or has access to, is known as its liquidity. Cash is vital to the existence of a business since it is needed to pay for the organisation’s costs and expenses.
A company has to be able to meet its liabilities when they fall due in order to continue to trade.
What is meant by income and expenditure?
Income – money made during the years from sales and services.
Expenditure – wages, raw materials, rent or company cars.
What is meant by organisation wealth?
Current and non-current assets, current and non-current liabilities and working capital
What is solvency?
Solvency is the measure of the excess of an organisation’s assets compared to its liabilities.
Solvency margin needs to be met by law
What is shareholder equity?
Shareholders’ equity is the stake shareholders have in the company. It is calculated as the total value of all the assets in the business less the total value of all the liabilities.
What is a tangible asset?
physical, i.e., ‘real’, such as cash, land, buildings,
What is an intangible asset?
not physical, such as a trademark, a copyright, or goodwill.
What is a liability?
a liability is an amount owed by an organisation.
What is a creditor?
A creditor is any individual or organisation to whom a debt is owed (Bank)
What is a debtor?
A debtor is any organisation or person who owes a debt to a company (customer)
What is depreciation?
Depreciation represents how much of an asset’s value has been used up.
What is straightline depreciation?
Where you spread the cost of the asset over the period of its useful life
Formula is = cost of asset -scrap value / the life of asset
What is the accounting equation?
Assets = equity + liabilities
Equity = assets – liabilities
What is bookkeeping?
Recording financial transactions like receipts and payments.
What are non-current assets?
Intends to keep for more than 12 months - Intangible assets such as good will, property, investments.
What are current assets?
Intends to use within next 12 months - Cash, stock, debtors
What is a non-current liability?
Not to be paid within 12 months - Share capital, reserves
What is a current liability?
To be paid within 12 months – Bank loans, mortgages, overdrafts
How do you calculate gross profit?
Subtract cost of sales from turnover
What is revenue?
The total value of all sales excluding VAT
What is gross written premium?
Amount payable by the insured which the insurer is contractually bound for example, renewal premiums
What is outward reinsurance premium?
Reinsurance purchased
What is net earned premium?
Premiums actually earned. For example, a policy is not cancelled midterm.
What is net investment return?
Realised gains and losses and investment income such as dividends, interests and rents receivables.
Outline the distinctions between financial and management accounting in the areas of structure and sources.
Financial accounting involves the day-to-day recording of the company’s transactions and presenting this information in financial statements for external consumption for those outsiders who have an interest in the company.
Management accounting can be formulated in different ways to suit many purposes. As well as using the source day-to-day transactional data captured for financial accounting information, management accounting will also incorporate a variety of other different information sources to enable managers to fulfil their responsibilities
What accounting standards must a company listed on the London Stock Exchange use to prepare its consolidated accounts?
A company listed on the London Stock Exchange must use the UK-adopted International Financial Reporting Standards (IFRS) when preparing its consolidated accounts
What is working capital?
Working capital is the difference between current assets and current liabilities.
How are assets employed calculated?
Assets employed are calculated by adding non-current assets to working capital.
Give three examples of non-current liabilities.
- bank loans;
- mortgages; and
- bond issues
Explain briefly what reserves are.
Reserves are the accumulated profits of the business that have been reinvested into the business.
How is gross profit calculated?
Gross profit is calculated by subtracting cost of sales from turnover
What classes as non current asset
Goodwill and other intangible assets
Property
Investments
What does the income statement show?
The income statement shows the amount of profit (or loss) made by the business in the last financial year.
Profit is the difference between total income and total expenses
What do you need to achieve profit for the year?
Finance income
finance costs
overheads
taxation
What is management accounting concerned with?
Internal Planning
What is financial planning concerned with?
Historical information
What is the double entry principle?
Shows that the business receives and gives value in each transaction for example:
earning and income and balancing by the increase in cash
What can you find on a balance sheet?
Current assets/non-current assets - current liabilities/non-current liabilities.
What does an income statement show?
Profit or loss in the last financial year
What does a cash flow statement show?
movements of cash in and out of the business in the last financial year.
What does a cash flow statement analyze?
operating activities, investing activities, and financing activities.
