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Accounting Principles > General Qs > Flashcards

General Qs Flashcards

1
Q

What are financial statements?

A

Written records that convey the financial activities of a firm

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2
Q

What are the key financial statements that companies provide?

A

P&L
Balance sheets
Cash flow statements

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3
Q

What is the difference between management and company/financial accounts?

A

Managed accounts are for internal use of management team (informal but recent)
Company accounts are accounts required by UK law submitted every 9 months

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4
Q

What governs the format of company accounts? 

A

Companies Act 2006

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5
Q

What is included in company accounts, as laid out in the Companies Act 2006? 

A
  1. Cover page
  2. Information/contents page
  3. Directors report
  4. Accountant report
  5. Statutory profit and Loss
  6. Balance sheet
  7. Notes to the accounts
  8. Detailed P&L
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6
Q

What is a profit and loss account? (also known as INCOME STATEMENT, STATEMENT OF COMPREHENSIVE INCOME)

A

Summary of business income prepared on annual basis
(best for determining covenant strength as shows breakdown of turnover)

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7
Q

What is a balance sheet?

A

Shows a companies assets, liabilities and equity at a current time
Shows whether company solvent

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8
Q

What is a cashflow statement?

A

Statement summarising movement of cash into and out of a company
It measures short term ability of a firm to pay off bills

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9
Q

What are two types of assets and give examples?

A

Fixed asset - property
Current asset - stock

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10
Q

What are two types of Liability and give examples?

A

Fixed/long term liability - mortgage
Current - salaries

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11
Q

How to get Net Asset Value?

A

Total assets-total liabilities

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12
Q

What is a ratio analysis?

A

Method of gaining insight into company’s liquidity, efficiency and profitability by studying its financial statements

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13
Q

What are liquidity ratios?

A

-Used to determine a companies ability to pay it’s short term debt obligations
- Current assets/current liabilities=liquidity ratio
- Ratio of exactly 1 - company can pay exactly off

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14
Q

What is Acid Test Ratio?

A

Evaluates a company’s ability to meet its short-term liabilities with its most liquid assets

(Current Assets-Inventory)/Current liabilities

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15
Q

What are probability ratios?

A

Measures the performance of a company in generating its profits
Turnover - (cost of sales/turnover)

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16
Q

What are financial gearing ratios?

A

Gearing is the amount of debt - in proportion to equity capital - that a company uses to funds its operations
High gearing = relying on debt to fund operations
Low gearing = Reliance on equity funding to operate

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17
Q

What is the difference between debtors and creditors?

A

Creditors: entities which are owed money by another entity
Debtors: entities which owe money to another entity

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18
Q

Where have you used company accounts in your work?

A
  • Assess tenants covenant strengths following applications to assign
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19
Q

How do you analyse a companies accounts?

A
  • Client accounts will carry out detailed analysis
  • I can look for warning signs by calculating ratios such as such as liquidity ratio
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20
Q

How would you carry out a credit check? Give an example.

A
  • My client account would carry out a credit check via Credit safe
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21
Q

What is GAAP? 

A

Generally Acceptable Accounting Practices

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22
Q

What is the benefit/purpose of GAAP? 

A

Common set of accepted accounting principles standards and procedures when compiling financial statements

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23
Q

What are the 10 principles of GAAP?  

A
  1. Regularity
  2. Consistency
  3. Sincerity
  4. Permanence of Methods
  5. Non-compensation
  6. Prudence
  7. Continuity
  8. Periodicity
  9. Materiality
  10. Utmost Good Faith
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24
Q

What are the International Accounting Standards?  

A

Old accounting standards replaced by IFRS 2001

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25
Q

What is FRS?

A

Financial Reporting Standards

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26
Q

What is IFRS? 

A
  • International Financial Reporting Standards set
  • Maintained by International Accounting Standards Board
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27
Q

Why were IFRS introduced to replace IAS?

A

Easier to compare businesses around the world

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28
Q

What is IFRS 16? 

A
  • Effective Jan 1st 2019
  • Enhances visibility of liabilities globally
  • Requires lessees to recognise assets and liabilities for all leases with a term of more than 12 months
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29
Q

What is the objective of IFRS 16? 

A

Ensure that lessees recognise assets and liabilities for their major leases

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30
Q

What is the result of IFRS 16 accounting reporting? 

A

Leads to increase in assets and liabilities and net debt when leases are brought onto balance sheet
Can affect key accounting and financial ratios - impact a company’s attractiveness to investors

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31
Q

What is a major way in which IFRS differs from GAAP?

A

GAAP is rules based IFRS is principle based
IFRS is mandatory if on London stock exchange

32
Q

What is a major way in which IFRS 16 differs from GAAP?

A

All leases appear on IFRS whereas only finance leases show on GAAP balance sheet (also operating leases treated as off balance sheet)

33
Q

Definitions for a profit and loss account

A

Sales - invoices amounts to costumers excluding VAT
Directors Remuneration - How directors are paid for their services
Expenses - must be business related
Cooperation tax - only tax stated in company accounts
Dividends - Tax efficient drawing from directors

34
Q

How is gross profit calculated? 

A

Turnover - cost of sales

35
Q

What can be determined from gross profit? 

A
  • Using multiple years gross profit you can make rough estimates on trajectory of a business
36
Q

What is depreciation?  

A

Reduce in value of asset over time (wear and tear)

37
Q

What is amortisation? 

A

A reduction in the value of an intangible asset over time e.g. spreading out loan payments over time 
- Loans - amortisation refers to the process of repaying a loan through regular payments over time
- Intangible assets - systematic allocation of the cost of an intangible asset (like patents, trademarks, or goodwill) over the period in which it is expected to generate economic benefits.

38
Q

What is the difference between depreciation and amortisation? 

A

Depreciation focuses on fixed assets, amortisation deals with intagible asstes

39
Q

 Why is cash flow statement believed to be the most intuitive of all financial statements? 

A

Show all movement of cash in and out of a company, how well company is manging its cash and growth

40
Q

What is a credit rating? 

A
  • Assessment of an organisations creditworthiness
  • Shows ability to fulfil financial commitments
41
Q

What are the main commercial credit rating agencies? 

A
  • Dunn & Bradstreet
  • Standard and Poor
  • Credit safe
42
Q

What are the two parts of a Dunn and Bradstreet rating? 

A
  1. Financial Strength Indicator
  2. Financial risk indicator
    - rates companies 1-4 (1 is best)
    - 5A1 reflects financial strength over £50m
43
Q

Why do companies keep accounts?

A
  • For regularity purposes so managers can monitor and measure performance over time and manage appropriately
44
Q

What is revenue? 

A
  • Income generated by sales
45
Q

What is capital expenditure? 

A

-Expenditure by businesses or organisation on acquiring or maintaining fixed assets like land & buildings

46
Q

What is a financial audit? 

A
  • Objective examination and evaluation of financial statements to ensure they are fair and accurate
47
Q

What are profitability ratios?

A

How well company can generate profits from its operations

48
Q

What are solvency ratios? 

A
  • Extent to which assets cover liabilities
49
Q

What are efficiency ratios? 

A
  • How efficient companies uses its assets to generate sales
50
Q

What is credit control? 

A
  • Ensuring debtors do not take to long to pay
51
Q

 What is VAT? 

A

Value added Tax
Consumption tax on goods and services
Standard rate 20%, sometimes 5% & 9%

52
Q

Where might you find information on a company’s assets? 

A

On their balance sheet

53
Q

Are profit and loss accounts current?

A

No retrospective (cover previous fiscal year)

54
Q

When must a company be VAT registered? 

A

Turnover exceeds 90k in last 12 months
Turnover is expected to go over 90k in next 30 days

55
Q

What is EBITDA? 

A

Earnings before interest, tax, depreciation , amortisation
Measure of companies profitability

56
Q

Where can you find information on company’s financial status? 

A

Companies house

57
Q

What is Limitations Act 1980? 

A

Outlines time within which creditor can chase debtor of outstanding debt (6 years after due date)

58
Q

What is misappropriation of funds? 

A

Illegal use of another person’s money

59
Q

What is a financial bond? 

A

Fixed income instrument that represents loan made by an investor to a borrower

60
Q

What are the 3 tests of insolvency? 

A
  • Cash Flow test - bills can be paid in near future
  • Balance sheet test - check if assets greater than liabilities
  • Legal action test - check if legal action has been taken against business of debt of £750 or more
61
Q

Consequences of insolvency? 

A

Business may go into liquidation and stop trading
Business may go into administration and be sold

62
Q

What is statutory profit? 

A

A companies earnings according to GAAP

63
Q

What are prelists?

A

A documenting listing charges to be raised so checks can be carried out to verify the charges are correct prior to raising them onto the accounts system to produce tenant invoices.

64
Q

What is a statement of account and what’s included?

A

A document that reflects transactions on a particular account, including any overall remaining or credit balances.

65
Q

What is a copy invoice and what does it include?

A

An invoice is a request sent to the debtor for payments of goods or services. It includes the amount due and the preferred method of payment.

66
Q

What are remittances?

A

Money sent from one party to another

67
Q

What is turnover?

A

Amount of money taken by business in a specified turnover period

68
Q

What is a turnover certificate?

A

Details of turnover and specified turnover period

69
Q

What does turnover include and exclude?

A

Stipulated in turnover clause
- Normally gross turnover
- excludes discounts and VAT

70
Q

What is a turnover top-up ?

A

Top up on base rent when turnover has exceeded specified threshold in set period

71
Q

Please provide an example of a standard turnover clause/ calculation?

A

check GTR

72
Q

What is the profits test?

A
  • Tenant provides 3 years of audited accounts showing net profit x3 annual rent
73
Q

Why request three years’ worth of P&L?

A

To carry out profits test and compare over period

74
Q

What is service charge reconciliation?

A

A comprehensive comparison of income demanded against all service charge expenditure (including accruals and prepayments for a given service charge accounting period

75
Q

Why check that invoices are applied to the correct code/schedule?

A

So cost are correctly apportioned to those who benefits from those services, thsi is a transparent approach and assist in resolving an disputes

Accounting Principles (1 decks)

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