Constructing and Interpreting company accounts Flashcards

Question

Efficient Ratio - Creditor Days ratio

Answer 1

Measures average time to pay suppliers = (Trade payables / Credit purchases) x 365 days

Answer 2

Measures average time taken to turn inventory into revenue

Answer 3

Using Ratios: - Only effective if compared - Consistency is important Accounting information: - Can be out of date - Does not reflect current market values - Subject to continuous review - Does provide certainty and isn't subjective Creative accounting: - Manipulation of financial numbers - Does not show a true and fair view - Example: paying bonuses instead of dividends, giving benefits instead of salaries, manipulating sales

Answer 4

- Key performance indicators (bank reports, mortgage applications, retail outlet reporting sales) - Value measures: -- Cost of capital -- Economic value added

Answer 5

Companies need to prepare an annual report and accounts each year (legal requirement) These are submitted to Companies House Annual report and accounts includes: - Narrative reporting (directors reports, ESG reports) ^ Includes summary company analysis, legislation/regulation/standards, directors reports, auditors reports - Financial statements (income statements) - Notes to the accounts (workings)

Answer 6

The official UK government agency responsible for the registration, administration, and regulation of companies

Answer 7

The basis of future financial decisions Is mainly concerned with the past, and providing accounts of how a company finances operations 2 types of accounts: - External accounts (for the benefit of external parties) - Internal accounts (designed to help internal parties, e.g. managers, monitor operations)

Answer 8

Company's Act: - Companies have to disclose their financial position. Specific requirements (directors report, auditors report, notes to accounts etc.) ^ Sole traders and partnerships do not have to comply, public limited and private limited and LLPs do

Answer 9

IASB, FRC - regulatory bodies IFRS - the governing standard for inventory FRC - UK reporting standard

Answer 10

Notes the key activities over the past 12 months and the coming 12 months Is a summary of key financial information, including director's information and interests

Answer 11

Report is to shareholders on published accounts Balance Sheet and Income Statement are prepared Auditors (elected by shareholders) need to be registered (with the Department of Business, Innovation and Skills) ^ Majority of company auditors are firms of chartered accountants They have to decide whether the accounts are a true and fair view of the company. If they are unhappy about the accounts, there are four ways to approach it - Emphasis of matter paragraphs (highlights uncertainty) - Qualified opinion (needed if there is a restriction on evidence or if there is a disagreement in treatment, states that it is a true and fair view except for the problem) - Disclaimer of opinion (unable to express an opinion, accounts not signed off, use sparingly) - Adverse opinion (extreme cases of disagreement, not a true and fair view, use sparingly)

Answer 12

Detailed disclosures required by UK legislation, designed to present a true and fair view Includes detailed information about accounting policies and calculations of the final figures Also covers - Details of events after the preparation of the statement of financial position - Detailed analysis of total figures (from the statement of financial position) - Detailed analysis of items (in the statement of income) - Detailed of the accounting policies used in preparing financial statements

Answer 13

All accounts and financial statements are prepared from items that are known with certainty, and items based on the accountant's fair judgement

Answer 14

- The cost concept: (non-current assets appear as their original cost less deprecation) - The money measurement concept: (statements are restricted to matters that can be measured monetarily) - The business entity concept (owners are separate from company when preparing accounts) - The realisation concept: (profit is recognised at the point it is sold, avoids fluctuations in reported income) - The accruals concept: (expenses are recognised when incurred) - The matching concept: (brings realisation and accruals together) - The dual aspect concept: (every transaction affects two figures) - The materiality concept: (can write off small differences that don't affect overall result) - The prudence concept: (do not include revenue/profit before they are earned, but do include losses) - The going concern concept: (reader is assured the company will continue to trade) - The consistency concept: (transactions are treated the same way)

Answer 15

- Accounting Concepts - Recording transactions - Component Statements ^ Statement of Financial Position (assets vs liabilities) ^ Income Statement (Profit and Loss Account) ^ Cash flow statement ^ Statement of changes in equity

Answer 16

- Ledger entries (book containing records of all transactions) - Double entry system (each entry is recorded twice as both sides of the transaction, based on the dual aspect concept) - Trial balance (ledger entries are totalled at the end of the accounting period and transferred across) ^ Is the basis of preparation of financial statements

Answer 17

Example of the matching principle Is about spreading the cost of assets over their period of use Recorded as an expense (even though no money changes hands) Two generally accepted methods of calculating deprecation: - Straight Line Method - Reducing Balance Method

Answer 18

Apportions cost of an asset equally over its useful life e.g. if an asset costs £10,000 and has a life expectancy of 4 years, it depreciates at a rate of 25% or £2,500 per year for four years

Answer 19

Assumes a constant rate of depreciation, applied to net book value of assets Is used when there are greater levels of depreciation in earlier years e.g. if an asset costs £10,000 and has a life expectancy of 4 years, it is expected to depreciate at a rate of 50% of its carrying amount each year (year 1 = £5000 left, year 2 = £2500 left etc.)

Answer 20

Inventory describes the goods a company has for eventual resale (AKA stock) Stock (including raw materials, work in progresses and finished goods) should be valued at accounting year end 3 Methods to value: - FIFO (First In First Out, where stock is valued at latest price) - LIFO (Last In First Out, where stock is valued at earliest price) - AVCO (Average Cost, where stock is valued at an average of FIFO/LIFO price)

Constructing and Interpreting company accounts Flashcards

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