L1 - Accounting Principles

Question 1

What is the Relevance of Accountancy?

Answer 1

Understand own company performance as well as tendering contractors

Question 2

Assets vs Liabilities

Answer 2

Asset (owned) = cash, accounts receivable, land, property, shares, vehicles, equipment Liabilities (owed)= debt, loans, accounts payable, tax, wages

Question 3

Fixed and Current Assets

Answer 3

Fixed = Property, Vehicles, office furniture
Current = Cash, accounts receivable, goods

Question 4

Turnover

Answer 4

Business Income. Contractors’ turnover is the accrued income from all projects

Question 5

Cashflow

Answer 5

Incoming vs outgoing money.
A business can be profitable in the long term but suffer from short term cashflow issues. E.g., their income may come predominantly say every quarter, but their running costs are ongoing

Question 6

Balance sheet

Answer 6

Snapshot of a company’s financial position in terms of what it owns and is owed (assets & liabilities)

Question 7

Profit & Loss

Answer 7

Shows a business’s profitability over a year.
Turnover less
Costs (GP)-expenses-(EBITDA)- Earnings Before Interest Tax Depreciation and amortisation (NP)

Question 8

Insolvency

Answer 8

Company unable to pay debts.
Company may appear profitable but cannot service it debts in the short term. Liquidation – Company assets retrieved, and debtors are paid.
Dissolved and wound up.

Question 9

Administration

Answer 9

Keeps trading.
Assets protected.
Restructure to pay debtors.

Question 10

Compulsory Voluntary Arrangement (CVA)

Answer 10

Financially strained but not insolvent.
Payment structures to help pay debtors.

Question 11

Receivership

Answer 11

Court/creditors appoint a receiver to secure assets and manage company to pay debtors.
Assets returned after.

Question 12

Contractor Insolvent Signs

Answer 12

Low credit rating, falling working capital (high nr. of contracts), low equity, highly geared, falling cash flow.

Question 13

Why an issue (Contractor Insolvent Signs)

Answer 13

Performance (too busy), limit on resources (min. cash), supply chain issues (slow/non-payment)

Question 14

Ratio Analysis

Answer 14

Business performance metrics

Question 15

Profitability

Answer 15

Revenue less expenses

Question 16

Liquidity

Answer 16

assets to cash speed

Question 17

Current Asset analysis

Answer 17

£150k (asset)/£100k (liability) =1.5
(below=risky above=stable).

Question 18

Acid Test

Answer 18

Assets-stock/liabilities (stock slow to cash) 1-1.2

Question 19

Credit Control

Answer 19

Protect business cashflow.
Process = Credit check, limit, payment terms, auto invoice, failure to pay process (letter, final warning, suspend, legal proceeding)

Question 20

Legislation

Answer 20

Companies act 2006; keep accurate records e.g. clearly identify what is owned and owned. Records for tax purposes

Question 21

Taxation

Answer 21

Government imposed charges on citizens & companies to finance their expenditure. e.g. Income tax, corporation tax, national insurance, VAT.

Question 22

Revenue

Answer 22

Income produced by a company typically measured annually

Question 23

Capital expenditure

Answer 23

Costs associated with a company’s balance sheet rather than income statement. e.g. purchase of land, vehicles, buildings, or heavy machinery.

Question 24

Auditing

Answer 24

Legal requirement. Prove income and expenditure. Identify performance of company as well as how tax you are liable to pay.

Question 25

Auditors job

Answer 25

Inspect organisations’ financial accounts to ensure they’re correct and comply with the law.

Question 26

UK Generally Accepted Accounting (GAAP) -

Answer 26

Body of accounting standards published by the UK’s Financial Reporting Council (FRC)

Question 27

GAAP Principles: (SSCCFF)

Answer 27

Standard Practice– Staff apply rules as standard practice
Sincerity – Objective and accurate
Compensation (non) – Do not get paid based on reporting
Continuity – Should not impact business
Fact – Fact not guesswork
Faith – Expectation of honesty and completeness in data

Question 28

Standard Practice

Answer 28

Staff apply rules as standard practice

Question 29

Sincerity

Answer 29

Objective and accurate

Question 30

Compensation (non)

Answer 30

Do not get paid based on reporting

Question 31

Continuity

Answer 31

Should not impact business

Question 32

Fact

Answer 32

Fact not guesswork

Question 33

Faith

Answer 33

Expectation of honesty and completeness in data

Question 34

Key Info Companies must provide

Answer 34

Profit & Loss, Balance Sheet and Cashflow

Question 35

GAAP

Answer 35

Country’s individual approach to accounting

Question 36

International Accounting Standards (IAS)

Answer 36

Globally adopted method for accounting

Question 37

What tax would a company typically be liable for?

Answer 37

Corp tax, national insurance, vat

Question 38

Name ratio analysis examples?

Answer 38

Profit
Asset vs liability