PE Accounting Principles & Practice Flashcards
What are the differences between financial and management accounting?
Financial
> Formal reporting to show accountability
> Generally produced annually
> Governement by legal requirements and mandatory requirements/conventions
What are the three main financial accounts?
- Balance sheet
- Income statement
- Cash flow statement
What is the balance sheet also known as?
Statement of financial position
What does the balance sheet show?
View of financial position showing assets, liabilities (owned v owed) and shareholder’s/owners equity
Does a balance sheet relate to a period of time or a specific date (snapshot in time)?
Snapshot (given date)
What is the income statement also known as?
Profit and loss
What does an income statement show?
Summary of income and expenditure to how net profit/loss for a specific period of time
Can you draw comparisons between income statements for different years?
Yes - because they relate to a specific period of time (usually 1 year)
What is a cashflow statement?
Merges balance sheet and income statement to show actual receipts and expenditure including VAT
What is a cashflow statement split into?
- Investing activities
- Financing activities
- Core operations
What is an asset?
Resources controlled by a business as a result of past events and from which future economic benefits are expected to flow
What could be assets to a business?
What are liabilities?
Assets =
1. Land
2. Buildings
3. Machinery
4. Fixtures and fittings
5. Patents
6. Stock
7. Debtors’ cash
Liabilities =
1. Capital
2. Owner’s claim against the business
3. Shareholders’ funds
4. Retained profits
5. Creditords’ claims
6. Loans
Who are audited accounts prepared by?
Accountant
Under which Act may audited accounts be required?
Companies Act 2006
Why are audited accounts beneficial?
- Confirms no material misstatements
- Identifies weaknesses
- Facilitiates access to finance
- Better supplier terms
- Required if business sold
What are typical UK company types?
- Sole trader
- Partnership
- LLP
- Limited company
- Public limited company
Why is an annual report important for a public limited company?
- Explains performance to shareholders and investors
- Helps potential investors in decision-making
What is the benefit of being a Public Limited Company (PLC)?
- Audited accounts are publicly available - public and supplies can check financial performance
- Perceived prestige and status
What are common financial measures?
- Acid test
- Return on capital employed
- Working capital ratio
- Gearing ratio
- Net assets per share
What is the acid test (quick ratio)?
How well are current liabilities covered by cash/liquid assets
What is return on capital employed?
How profitable is capital invested in business
What is working capital ratio (liquidity)?
Ability of company to pay (solvency)/how quickly can assets be turned into cash to pay short-term obligations
What is gearing ratio?
Exposure of business to loans as opposed to share capital
What is net assets per share?
Essentially the price which shares can be bought and sold at
What is the most common reason for business failure?
Cash flow issues
What are the two financial reporting frameworks recognised by UK company law?
IFRS (International Financial Reporting Standards)
UK GAAP (UK Generally Accepted Accounting Principles)
What does UK GAAP stand for?
UK Generally Accepted Accounting Principles
What does IFRS stand for?
International Financial Reporting Standards
What type of entity must use IFRS?
Listed companies
Can other companies choose between IFRS and UK GAAP?
Yes - seek advice from an accountant
What is a UK GAAP?
Financial reporting framework for how company accounts are prepared
FRS 102 is used by small and medium businesses as part of UK GAAP, when was it last updated?
1 January 2015
What is a key chance in FRS 102?
Investment properties held at fair value and (unrealised) revaluation movements recorded in income statement
Why might the introduction of changes to investment property accounting in FRS 102 problematic?
Can affect key profitability ratios (with the potential to breach loan covenants)
What is the valuation basis for financial reporting under IFRS?
Fair value
What is the Red Book definition of fair value?
The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date
What does IFRS 16 relate to?
Lease accounting
When did IFRS 16 come into force?
1 January 2019
What are the impacts of changes to IFRS 16?
- Eliminated off balance sheet lease accounting
- Affected financial metrics, e.g. gearing ratio, EBITDA
- Encouraged short-term arrangements as leases under 12 months are exempt
When would you want to assess financial strength of an entity as a surveyor?
- Prospective tenants
- Contractors/tenders
- Profits valuation
- Competition assessment
What are typical credit check reports?
- D&B
- Experian
- Creditsafe
What would you look for in a credit check report?
- Risk assessment rating (e.g. D&B risk assessment)
- Failure risk score
- Delinquency score
- Financial ratios
For a typical credit check report, what would be the best financial rating?
A/1
What else (other than a credit check report) would you ask to assess financial strength of an entity, e.g. a prospective tenant?
References - bank, trade, landlord and accountant, Accounts (3 years’ audited), Profits Test and business plan (if a new business)
What is the profits test?
Net profit for proposed business must be 3x rent for 3 consecutive years or NAV of business must be 5x rent
Why is it important to check financial strength of entities you deal with?
Assess risk of default and impact on investment security
Do LLPs pay Corporation Tax?
No
