Chapter 6 - Accounting Princples And Practices Flashcards
What is financial accounting?
Business discipline which consists of a series of techniques and procedures that are used to identify, measure, record and communicate information including financial information to a range of people who may be interested in the information.
Included in the statutory accounts of quoted companies will be?
- Narrative reports from the chairman and chief executive giving an overview of the governance activities and performance of the company in the previous period.
- A strategic report setting out the strategy, business model, a fair review of the business, future developments, kpi’s, principal risks and uncertainties and corporate and social responsibility matters.
- Financial accounts for the period including the balance sheet, income statement, cash flow position and
- Other legal requirements such as details of directors remuneration.
What does the income statement show?
Results of a company as a consequence of transactions during the accounting period. It sets out income, expenses, tax and most importantly to remember, profit or loss.
What does the balance sheet show?
Statement of financial position of the business at a point in time. I.e the account period or year end date. It is a snap shot of the company’s position at a particular point in time. It lists all the companies assets and liabilities, what is owed and what is owned. What is owed by the company includes the shareholders equity, which is the total of the assets less the total of the liabilities.
What do cash flow statements show?
Recognises that accounting, profit or loss, is not the only indicator of a company’s performance. Cash flow stamens show the sources and use of cash and are a useful indicator of a company’s liquidity.
Cash flow statements are a useful indicator of?
Liquidity
Financial statements are intended to show?
A true and fair view of the economic activities of the organisation, scalable not only to the stakeholders but any one who wishes to review them.
Record making process of accounting is known as?
Book-keeping
Give 3 examples of non monetary information used in management accounting?
- Labour hours
- Raw material used
- Electricity consumed
Whereas financial accounting looks at and records the financial impacts of events on the organisation as a whole, management accounting is naturally segmented and concentrates on…
Processes, individual departments and other areas of responsibility, in terms each manager can understand.
Which type of accounting looks at the historical information and which type of accounting looks at the future?
Financial accounting looks at historical information whereas management accounting is largely concerned with the future.
Companies are not required by law to produce what type of accounts?
Management accounts
Companies are legally required under the companies act to produce what accounts?
Financial accounts
What two types of information beginning with q will the different stakeholders need in regards to financial information of companies?
Quantitative and qualitive
A company will have made a profit if?
There is a positive amount of money left over when all costs and expenses are subtracted from all of the organisations income.
When does a company “break even”?
If the amount left over when all costs and expenses are subtracted from a companies income is exactly zero (expenditure matches income exactly).
Managers will want to know if the company is profitable so they know…
How well they have managed the business.
Why is cash position (liquidity) important?
Cash is vital to a business as this is what pays its costs and expenses. If it cannot manage its liquidity then by running out of cash it will not be able to pay its bills. This can lead to difficulty in trading leading to failure of the business. This can happen even if a business is profitable.
Give examples of how a company’s wealth may be held
Non current assets such as property, equipment and investments, and in current assets such as its debtors and cash.
Working capital is?
Difference between current assets and current liabilities.
Whereas liquidity is a measure of the cash available to a company, solvency is a measure of?
The excess of an organisations assets compared to its liabilities.
If a company’s liabilities exceed its assets it is technically…
Insolvent, and with some exceptions be required to cease trading.
The PRA require insurance companies in the UK to meet a solvency margin, this is the amount…
The value of the insurers assets should exceed the amount of its liabilities.
What is the difference between a trading company to an insurance company regulated by the PRA in terms of becoming insolvent?
In a trading company, if it’s liabilities exceeds it assets, it is technically insolvent, however in an insurance company regulated by the PRA, if the insurance company’s net assets falls below its solvency margin, that can also be classed as insolvent.