H&S Summaries Flashcards
GAAP
Generally Accepted Accounting Principles
Common set of accepted accounting principles, standards and procedures
Aims to improve clarity of communication of financial information
10 principles of GAAP
Regularity
Consistency
Continuity
Sincerity
Non-compensation
Prudence
Permanence
Periodicity
Good faith (materiality)
Utmost good faith
International Accounting Standards
older accounting standards
replaced by IFRS in 2001
IFRS
International Financial Reporting Standards
Why did IFRS replace IAS?
aim to make it easier to compare businesses around the world
aim to increase transparency and trust in global reporting
IFRS 16
effective 1 January 2019
lease accounting standard
requires lessee to recognise assets and liabilities for leases with term of more than 12 months
IFRS reporter must recognise, measure, present and disclose leases
What is the objective of IFRS 16?
report information that represents lease transactions
ensures leases are placed on balance sheets
What is the result of IFRS 16 financial reporting
increase in assets, liabilities and net debt where leases are brought into balance sheet
can affect accounting ratios which can impact companies attractiveness to investors
provides transparency on companies lease assets and liabilities
What governs the format of company accounts?
Companies Act 2006
What is included in company accounts as laid out in Companies Act 2006?
cover page
information and contents
directors report
accountants report
profit and loss account
balance sheet
Profit and Loss Account
gives summary of business income and expenditure transactions on annual basis
shows overall profit / loss figure at the bottom
Taxation
The amount of money owed to HMRC based on company profit
Gross Profit
Turnover - cost of sales
What can be determined from Gross Profit?
not a lot in isolation
can compare to previous year to see what direction the company is heading in
Balance Sheet
Statement of businesses financial position showing assets and liabilities at given date (usually financial YE)
Only statement that applies to single point in time in business’ calendar year
What are assets on the balance sheet?
What the company owns
EG cash, property, other investments
What are liabilities on balance sheet?
What a company owes to others
EG overdrafts, loans, borrowings
What can be concluded from the balance sheet?
whether company is solvent
how likely it is the company will still be in business in a year
Credit Rating
assessment of organisations creditworthiness based on previous dealings
shows ability of organisation to fulfil financial commitments (EG pay rent)
Main commercial credit rating agencies?
Dun and Bradstreet
Standard and Poor (S&P)
Why do companies keep accounts?
regulatory purposes
useful to see outgoings and incomings
can compare year on year
VAT
Value Added Tax
- consumption tax on goods and services
- standard rate is 20% but can be reduced rate of 5% or zero rate
Management Accounts
financial reports produced for owners/managers either monthly or quarterly
includes profit and loss statement and balance sheet
less formal than year end accounts
Company Accounts
if company total VAT taxable turnover for last 12 months was £85k
Or
if turnover expected to go over £85k in next 30 days
What does it mean if company goes into administration?
Individual can no longer meet financial obligations so debts become due
occurs due to reduced cash flow / increased expenses
Bankruptcy
person can no longer meet debt payments
liquidate assets to pay debts or make payment plan
Liquidation
assets used to pay off debts
three types:
1. creditors voluntary liquidation
2. compulsory liquidation
3. members’ voluntary liquidation
How do you determine covenant strength?
profit and loss account
cash tenant is holding in bank
look at management accounts (more up to date than company accounts)
independent financial reports EG Dun and Bradstreet
