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Accounting principles and procedures > Phoebe > Flashcards

Phoebe Flashcards

1
Q

What is GAAP?

A

Generally Accepted Accounting Principles

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2
Q

What is the benefit/purpose of GAAP?

A

To improve the clarify of the communication of financial information

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3
Q

What are the 10 principles of GAAP?

A

Regularity

Consistency

Sincerity

Permanence

Non-compensation

Prudence

Continuity

Periodicity

Materiality

Utmost good faith

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4
Q

Why were IFRS introduced to replace IAS?

A

Goal was to make it easier to compare businesses around the world

Wanted to increase transparency and trust in global reporting

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4
Q

What are the International Accounting Standards?

A

The older accounting standards that were replaced by IFRS in 2001

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5
Q

What is IFRS?

A

International Financial Reporting Standards

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6
Q

What is IFRS 16?

A

Effective from 1 January 2019

Requires lessee to recognise assets and liabilities for all leases with a term of more than 12 months

IFRS 16 sets out principles for an IFRS reporter to recognise, measure, present and disclose leases

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7
Q

What is the objective of IFRS 16?

A

Report information that represents lease transactions

Leases need to be placed on balance sheets

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8
Q

What is the result of IFRS 16 accounting reporting?

A

Results in increase in assets, liabilities and net debt where leases are brought onto the balance sheet

Can affect key accounting and financial ratios - impacts a companies attractiveness to investors

Provides transparency on companies’ lease assets and liabilities

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9
Q

What governs the format of company accounts?

A

The Companies Act 2006

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10
Q

What is included in company accounts, as laid out in the Companies Act 2006?

A

Cover page

Information and contents

Directors report

Accountants report

Statutory profit and loss account

Balance sheet

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11
Q

What is a profit and loss account?

A

A summary of the business income and expenditure transactions on an annual basis

Gives overall profit / loss figure

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12
Q

What is taxation?

A

The amount of money or percentage that is owed to HMRC based on company profit

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13
Q

What is directors remuneration in a profit and loss account?

A

How directors are paid for their services - fees, salary, or dividends

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14
Q

How is gross profit calculated?

A

Turnover minus cost of sales

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15
Q

What can be determined from gross profit?

A

Not a lot in isolated, but when compared to previous years gross profit then can get an idea of what direction the company is heading in

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16
Q

What is depreciation?

A

A reduction in the value of an asset over time EG due to wear and tear

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17
Q

What is amortisation?

A

A reduction in the value of an intangible asset over time EG spreading out loan payments over time

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18
Q

What is the difference between depreciation and amortisation?

A

Amortisation focuses on intangible assets, whereas depreciation focuses on fixed assets

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19
Q

What is a balance sheet?

A

Outlines companies assets and liabilities

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20
Q

What are assets on a balance sheet?

A

Items the company owns which provide economic benefit

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21
Q

What are the two types of asset?

A

Fixed / Long-Term EG land, factories

Current / Short-Term EG stock, cash in bank

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22
Q

What are liabilities?

A

What a company owes to others

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23
Q

What are the two types of liability?

A

Long-Term EG not due to be repaid in next year

Current - those due within the year

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24
Q

What key piece of information can be concluded from a balance sheet?

A

Whether a company is solvent

How likely it is that the company will still be in business in a year

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25
Q

How is liquidity ratio calculated?

A

Current assets divided by current liabilities

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25
Q

What is the liquidity ratio?

A

A financial ratio used to determine a company’s ability to pay its short term debt obligations

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26
Q

What is difference between assets and liabilities known as?

A

Equity / Net Asset Value / Net Worth / Capital

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26
Q

How is liquidity ratio interpreted?

A

Figure of 1 means company can exactly pay off its current liabilities

Ratio of less than 1 means it is unable to pay off its current liabilities

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27
Q

What is Net Asset Value?

A

Total assets mins total liabilities

Simple way to establish how much a company is worth

Frequently shown as NAV per share

28
Q

What are the three parts of a balance sheet?

A

Assets

Liabilities

Ownership equity

29
Q

What is a cash flow statement?

A

Financial statement that summarises movement of cash in and out of a company

30
Q

Why is cash flow statement believed to be the most intuitive of all financial statements?

A

Shows movement of money in and out of a company, and how well a company is managing it’s cash and growth

31
Q

What are the main commercial credit rating agencies?

A

Dunn & Bradstreet

Standard and Poor (S&P)

31
Q

What is a credit rating?

A

Assessment of an organisations creditworthiness based on previous dealings

Shows ability of organisation to fulfil financial commitments EG pay rent on time

32
Q

Why do companies keep accounts?

A

For regulatory purposes

33
Q

What are the two parts of a Dunn and Bradstreet rating?

A

Financial strength indicator

Risk indicator

34
Q

What is covenant strength?

A

Tenant ability to comply with covenants laid out in their lease

35
Q

What is revenue?

A

Income generated by the sale of products or services

36
Q

What is capital expenditure?

A

Money spent by a business or organisation on acquiring or maintaining fixed assets like land, buildings and equipment

37
Q

What are profitability ratios?

A

Show how well a company can generate profit from its operations

37
Q

What is VAT?

A

Value Added Tax

Consumption tax on goods and services

Standard rate 20%, sometimes reduced rate of 5% or Zero rate of 0%

37
Q

What is a financial audit?

A

An objective examination and evaluation of the financial statements to ensure they are fair and accurate

38
Q

What is a ratio analysis?

A

Method of gaining insight into a companys liquidity, efficiency and profitability by studying its financial statements

39
Q

What are solvency ratios?

A

Compare company debt levels against its assets, equity and earnings

Suggest whether company is solvent and whether they can pay lenders debts

40
Q

What are efficiency ratios?

A

Evaluate how efficiently a company uses assets to generate sales

41
Q

What is credit control?

A

The practice of ensuring debtors do not take too long to pay you

42
Q

What is profitability?

A

Used to determine company profit in relation to the size of the business

43
Q

Where might you find information on a company’s assets?

A

On their balance sheet

44
Q

Are profit and loss accounts current?

A

No, retrospective

45
Q

What are management accounts?

A

Management accounts are financial reports produced for business owners/managers either quarterly or monthly

Normal includes profit and loss report and balance sheet

Less formal than year end accounts

46
Q

What are company accounts?

A

Documents produced at year end (company financial year end differs)

Shows performance over accounting period

Legally required from all companies under Companies Act 2006

47
Q

When must a company be VAT registered?

A

If company total VAT taxable turnover for last 12 months was over £85,000 OR if turnover is expected to go over £85,000 in next 30 days

47
Q

What is EBITDA?

A

Earnings before interest, tax, depreciation and amortisation

It is a measure of company profitability

48
Q

What is insolvency?

A

Individual can no longer meet financial obligations, so debts become due

Comes about due to reduction in cash inflow and increase in expenses

48
Q

What does it mean for a company to go into administration?

A

Company becomes insolvenet and is put under management of licenced Insolvency Practitioners

49
Q

What is receivership?

A

Court appointed tool that that protects a company

Receiver steps in to manage company, it’s assets and all financial decisions

50
Q

What is bankruptcy?

A

Person can no longer meet debt payments

Liquidate assets to pay debts, or create payment plan

51
Q

What is liquidation?

A

Process where assets are used to pay off debts

Three types - creditors voluntary liquidation, compulsary liquidation and members’ voluntary liquidation

52
Q

Why do surveyors need to be able to interpret company accounts?

A

To assess covenant strength of tenants

53
Q

Where can you find information on company’s financial status?

A

Companies House

54
Q

What is Limitations Act 1980?

A

Outlines time within which creditor can chase debtor for outstanding debt

Only applies when no contact has been made between creditor and debtor within given time limit

55
Q

What is misappropriation of funds?

A

When someone entrusted with managing money, steals it for personal gain

56
Q

What is a financial bond?

A

Fixed income instrument that represents a loan made by an investor, to a borrower

57
Q

What are the 3 tests of insolvency?

A

Cash flow test - check if able to pay bills in near future

Balance sheet test - check if assets are greater than liabilities

Legal action test - check if legal action has been taken against business for debt of £750 or more

58
Q

Consequences of insolvency?

A

Business may go into liquidation and stop trading

Business may go into administration and be sold

59
Q

Please may you explain the difference between a balance sheet, and a profit and loss statement?

A

Profit and Loss:

displays company financial information over a period of time (month/quarter/year)

Shows income, expenditure and profit/loss

Balance Sheet:

displays company financial information at a particular moment in time

Shows assets, liabilities and equity

59
Q

What is statutory profit?

A

A company’s earnings calculated accroding to UK GAAP

60
Q

According to the RICS, how in advance does a new service charge budget need to be issued to tenants?

A

Minimum of 1 month

61
Q

According to the RICS, how soon after year end should the service charge budget be reconciled?

A

Maximum of 4 months

62
Q

What is difference between assets and liabilities known as?

A

Equity / Net Asset Value / Net Worth / Capital

63
Q

What is the profits test?

A

net profits of the business exceed the annual rent rates and service charge for 3 years.
If yes, you pass.
If no, you fail.

64
Q

Which schemes do you adhear to in relation to client money?

A

Accounting principles and procedures (1 decks)

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