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EHAPC > PE Accounting Principles & Practice > Flashcards

PE Accounting Principles & Practice Flashcards

1
Q

What are the differences between financial and management accounting?

A

Financial
> Formal reporting to show accountability
> Generally produced annually
> Governement by legal requirements and mandatory requirements/conventions

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2
Q

What are the three main financial accounts?

A
  1. Balance sheet
  2. Income statement
  3. Cash flow statement
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3
Q

What is the balance sheet also known as?

A

Statement of financial position

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4
Q

What does the balance sheet show?

A

View of financial position showing assets, liabilities (owned v owed) and shareholder’s/owners equity

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5
Q

Does a balance sheet relate to a period of time or a specific date (snapshot in time)?

A

Snapshot (given date)

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6
Q

What is the income statement also known as?

A

Profit and loss

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7
Q

What does an income statement show?

A

Summary of income and expenditure to how net profit/loss for a specific period of time

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8
Q

Can you draw comparisons between income statements for different years?

A

Yes - because they relate to a specific period of time (usually 1 year)

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9
Q

What is a cashflow statement?

A

Merges balance sheet and income statement to show actual receipts and expenditure including VAT

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10
Q

What is a cashflow statement split into?

A
  1. Investing activities
  2. Financing activities
  3. Core operations
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11
Q

What is an asset?

A

Resources controlled by a business as a result of past events and from which future economic benefits are expected to flow

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12
Q

What could be assets to a business?

What are liabilities?

A

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

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13
Q

Who are audited accounts prepared by?

A

Accountant

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14
Q

Under which Act may audited accounts be required?

A

Companies Act 2006

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15
Q

Why are audited accounts beneficial?

A
  1. Confirms no material misstatements
  2. Identifies weaknesses
  3. Facilitiates access to finance
  4. Better supplier terms
  5. Required if business sold
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16
Q

What are typical UK company types?

A
  1. Sole trader
  2. Partnership
  3. LLP
  4. Limited company
  5. Public limited company
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17
Q

Why is an annual report important for a public limited company?

A
  1. Explains performance to shareholders and investors
  2. Helps potential investors in decision-making
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18
Q

What is the benefit of being a Public Limited Company (PLC)?

A
  1. Audited accounts are publicly available - public and supplies can check financial performance
  2. Perceived prestige and status
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19
Q

What are common financial measures?

A
  1. Acid test
  2. Return on capital employed
  3. Working capital ratio
  4. Gearing ratio
  5. Net assets per share
20
Q

What is the acid test (quick ratio)?

A

How well are current liabilities covered by cash/liquid assets

21
Q

What is return on capital employed?

A

How profitable is capital invested in business

22
Q

What is working capital ratio (liquidity)?

A

Ability of company to pay (solvency)/how quickly can assets be turned into cash to pay short-term obligations

23
Q

What is gearing ratio?

A

Exposure of business to loans as opposed to share capital

24
Q

What is net assets per share?

A

Essentially the price which shares can be bought and sold at

25
Q

What is the most common reason for business failure?

A

Cash flow issues

26
Q

What are the two financial reporting frameworks recognised by UK company law?

A

IFRS (International Financial Reporting Standards)

UK GAAP (UK Generally Accepted Accounting Principles)

27
Q

What does UK GAAP stand for?

A

UK Generally Accepted Accounting Principles

28
Q

What does IFRS stand for?

A

International Financial Reporting Standards

29
Q

What type of entity must use IFRS?

A

Listed companies

30
Q

Can other companies choose between IFRS and UK GAAP?

A

Yes - seek advice from an accountant

31
Q

What is a UK GAAP?

A

Financial reporting framework for how company accounts are prepared

32
Q

FRS 102 is used by small and medium businesses as part of UK GAAP, when was it last updated?

A

1 January 2015

33
Q

What is a key chance in FRS 102?

A

Investment properties held at fair value and (unrealised) revaluation movements recorded in income statement

34
Q

Why might the introduction of changes to investment property accounting in FRS 102 problematic?

A

Can affect key profitability ratios (with the potential to breach loan covenants)

35
Q

What is the valuation basis for financial reporting under IFRS?

A

Fair value

36
Q

What is the Red Book definition of fair value?

A

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

37
Q

What does IFRS 16 relate to?

A

Lease accounting

38
Q

When did IFRS 16 come into force?

A

1 January 2019

39
Q

What are the impacts of changes to IFRS 16?

A
  1. Eliminated off balance sheet lease accounting
  2. Affected financial metrics, e.g. gearing ratio, EBITDA
  3. Encouraged short-term arrangements as leases under 12 months are exempt
40
Q

When would you want to assess financial strength of an entity as a surveyor?

A
  1. Prospective tenants
  2. Contractors/tenders
  3. Profits valuation
  4. Competition assessment
41
Q

What are typical credit check reports?

A
  1. D&B
  2. Experian
  3. Creditsafe
42
Q

What would you look for in a credit check report?

A
  1. Risk assessment rating (e.g. D&B risk assessment)
  2. Failure risk score
  3. Delinquency score
  4. Financial ratios
43
Q

For a typical credit check report, what would be the best financial rating?

A

A/1

44
Q

What else (other than a credit check report) would you ask to assess financial strength of an entity, e.g. a prospective tenant?

A

References - bank, trade, landlord and accountant, Accounts (3 years’ audited), Profits Test and business plan (if a new business)

45
Q

What is the profits test?

A

Net profit for proposed business must be 3x rent for 3 consecutive years or NAV of business must be 5x rent

46
Q

Why is it important to check financial strength of entities you deal with?

A

Assess risk of default and impact on investment security

47
Q

Do LLPs pay Corporation Tax?

A

No

EHAPC (41 decks)

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