*EP APC Accounting Flashcards
What does a set of public limited company accounts include (statement, report, account, sheet, c report, r report, other)?
- Chairman’s statement
- Independent auditor’s report
- Income statement (profit and loss account)
- Statement of financial position (balance sheet)
- Corporate governance report
- Remuneration report
- Other statutory information
What do you expect to see in a published set of accounts?
These should be prepared conforming to the Companies Act 1985 (As amended 1989)
They would include names of the company directors and secretary, a record of the company’s assets and liabilities, entries of profit and loss, as well as details of stock held at the end of the year and any dividends paid.
What does a balance sheet (statement of financial position) show, and what are typical assets (4), and liabilities (4), when typically dated?
Statement of the business’s financial position showing its assets and liabilities at a given date, usually at the end of a financial year
- Assets: cash, property, debtors and other investments
- Liabilities: borrowings, overdrafts, loans and creditors
What does a profit and loss account (income statement) show/demonstate, when/where found?
- Profit and Loss statement (P+L = I+E) – A summary comparing a business’s income (revenue) and outgoings (expenditure) statements (usually annual)
Demonstrate how the revenue is transformed into the net income - how the actual income the business receives transfers into profit for the year.
- On statutory accounts
What does the cash flow statement show, what used for, prepared for what purposes, depth compared to P+L?
• Cash Flow Statement (CFS = ACE) Statement showing actual receipts and expenditure (including vat)
- Used for budgeting/business plans (reviewing cash flow can identify potential shortfalls in cash balance i.e. where you may not have enough cash in the business to pay suppliers etc.)
- Shows whether a company generated cash
- Management accounts (prepared for management purposes)
- More detail than P+L
What are the three primary types of financial accounts?
- Balance Sheet
- Profit and Loss Account
- Cash flow statement
& Statement of Shareholders Equity
What are management accounts?
Prepared for internal use by the business and are not audited.
Management accounts form a financial report used by business owners and management for day-to-day and strategic decision making. They are produced, usually, on a monthly or quarterly basis, and provide insight into the current financial health of a business by tracking various key performance indicators.
Who are audited accounts prepared by?
Chartered or Certified Accountant
What is the difference between current and non-current assets (balance sheet)?
(Assets – cash, property, debtors, other investments)
Current = to be converted to cash within 1 year, e.g. a property sold soon.
Non-current = not likely to be converted to cash within 1 year e.g. trademarks, property, plant and equipment
What is the difference between current and non-current liabilities (balance sheet)?
(Liabilities – borrowings, overdraft, loan and creditors)
Current = amounts owed within 1 year, e.g. overdrafts, short-term loans
Non-current = long-term financial obligations e.g. deferred payments, long-terms loans
What is the difference between Management Accounts and Audited (Company) Accounts, and what are Statutory Accounts?
Management – prepared for internal use by a business and are NOT audited
Company accounts are a summary of an organisation’s financial activity over a 12 month period. They are prepared for Companies House and HM Revenue & Customs every year and consist of the Balance Sheet, the Profit and Loss Statement, and the Cash Flow Statement.
Audited – prepared by a Chartered Accountant
Often management accounts reflect a more accurate reflection of business performance.
Statutory – mandatory for limited companies, generically formatted, requested by HMRC
What is UKGAAP?
Generally Accepted Accounting Practice in the UK (UK GAAP) - body of accounting standards published by UK’s Financial Reporting Council (FRC).
The financial reporting framework in the UK is effective from 1 January 2015. (The Red Book was updated with valuations under UK GAAP effective from 1st January 2015).
Valuations for inclusion in financial statements are prepared in accordance with this.
Under UK GAAP an owner occupied property must be valued under EUV or DRC (has this been changed to Fair Value?)
Does JT uses UK GAAP?
Where is the Net Profit found in the financial accounts?
On the profit and loss accounts (income statement)
What is an Asset?
Asset - things the business owns that you get a future benefit from e.g. physical assets like property and non-physical assets like brand and goodwill.
What is a liability?
Liability - amounts a business owes due to past transactions e.g. wages and loans
Which reporting framework do public limited companies have to comply with?
UK public listed companies adopt IFRS as their financial reporting standard. (Some listed companies are requirement to adopt this).
IFRS 16 from 1st January 2019
What’s the difference between GAAP and IFRS?
Basic accounting fundamentals the same
GAAP is rules based, IFRS principles based.
GAAP much more detailed
IFRS is used primarily by businesses reporting their financial results anywhere in the world except the United States.
Generally Accepted Accounting Principles, or GAAP, is the accounting framework used in the United States.
What is the acid test?
Acid Test – compares a company’s most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt. The acid test ratio disregards assets that are difficult to liquidate quickly such as inventory.
Can you tell me what the role of an auditor is?
Auditor’s responsibility is to express an independent, objective opinion on the financial statements of a company. Ensure the validity and legality of their financial records.
When are audited accounts needed (exemptions) and why?
Under the Companies Act 2006 private limited companies are required to have their accounts independently audited on an annual basis. This is subject to an existing exemption for small businesses.
What is revenue (profit and loss account)?
Income the business receives from its business activities e.g. money from things it sells
What are expenses (profit and loss account)?
Outgoings that arise as the entity performs its business activities e.g. costs incurred in order to provide their service.
What is meant by depreciation in relation to an asset?
Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are furniture and IT equipment.
What is a sole trader, and what liability?
A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses (unlimited liability).
What is a partnership, and what liability?
A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business.
