L1 - Accounting Principles Flashcards
What is the Relevance of Accountancy?
Understand own company performance as well as tendering contractors
Assets vs Liabilities
Asset (owned) = cash, accounts receivable, land, property, shares, vehicles, equipment Liabilities (owed)= debt, loans, accounts payable, tax, wages
Fixed and Current Assets
Fixed = Property, Vehicles, office furniture
Current = Cash, accounts receivable, goods
Turnover
Business Income. Contractors’ turnover is the accrued income from all projects
Cashflow
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
Balance sheet
Snapshot of a company’s financial position in terms of what it owns and is owed (assets & liabilities)
Profit & Loss
Shows a business’s profitability over a year.
Turnover less
Costs (GP)-expenses-(EBITDA)- Earnings Before Interest Tax Depreciation and amortisation (NP)
Insolvency
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.
Administration
Keeps trading.
Assets protected.
Restructure to pay debtors.
Compulsory Voluntary Arrangement (CVA)
Financially strained but not insolvent.
Payment structures to help pay debtors.
Receivership
Court/creditors appoint a receiver to secure assets and manage company to pay debtors.
Assets returned after.
Contractor Insolvent Signs
Low credit rating, falling working capital (high nr. of contracts), low equity, highly geared, falling cash flow.
Why an issue (Contractor Insolvent Signs)
Performance (too busy), limit on resources (min. cash), supply chain issues (slow/non-payment)
Ratio Analysis
Business performance metrics
Profitability
Revenue less expenses
Liquidity
assets to cash speed
Current Asset analysis
£150k (asset)/£100k (liability) =1.5
(below=risky above=stable).
Acid Test
Assets-stock/liabilities (stock slow to cash) 1-1.2
Credit Control
Protect business cashflow.
Process = Credit check, limit, payment terms, auto invoice, failure to pay process (letter, final warning, suspend, legal proceeding)
Legislation
Companies act 2006; keep accurate records e.g. clearly identify what is owned and owned. Records for tax purposes
Taxation
Government imposed charges on citizens & companies to finance their expenditure. e.g. Income tax, corporation tax, national insurance, VAT.
Revenue
Income produced by a company typically measured annually
Capital expenditure
Costs associated with a company’s balance sheet rather than income statement. e.g. purchase of land, vehicles, buildings, or heavy machinery.
Auditing
Legal requirement. Prove income and expenditure. Identify performance of company as well as how tax you are liable to pay.
Auditors job
Inspect organisations’ financial accounts to ensure they’re correct and comply with the law.
UK Generally Accepted Accounting (GAAP) -
Body of accounting standards published by the UK’s Financial Reporting Council (FRC)
GAAP Principles: (SSCCFF)
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
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
Key Info Companies must provide
Profit & Loss, Balance Sheet and Cashflow
GAAP
Country’s individual approach to accounting
International Accounting Standards (IAS)
Globally adopted method for accounting
What tax would a company typically be liable for?
Corp tax, national insurance, vat
Name ratio analysis examples?
Profit
Asset vs liability
