Accounting / Business Flashcards
What does the Companies Act 2006 say about company accounts?
- directors must not approve accounts unless they are satisfied they give a true and fair view
- all companies, except small companies, must produce a strategic report
- directors of all companies have a duty to prepare a directors’ report
- all companies required to file a copy of their accounts & reports with the Registrar of Companies
- filing of company accounts and deadlines s.441-443
What is GAAP?
- the body of standards published by the UK’s Financial Reporting Council (FRC)
- Generally Accepted Accounting Practice
- how company accounts must be prepared
- company accounts must also be prepared in accordance with the law (Companies Act 2006)
- all listed companies must use IFRS, unlisted companies can choose IFRS or UK GAAP
- FRS 100-106 (depends on size of company)
What is IFRS?
- International Financial Reporting Standards
- a standardised way of describing the company’s financial performance and position so that financial statements are understandable and comparable across international boundaries
- IFRS financial statement consists of:
a statement of financial position (balance sheet);
a statement of comprehensive income (inc profit and loss);
a statement of changes in equity;
a statement of cash flows;
notes, inc a summary of significant accounting policies - cash flow statements presented as:
operating / investing / financing cash flows
What does the IFRS’ Conceptual Framework state is the primary purpose of financial info?
- to be useful to existing and potential investors, lenders and other creditors when making decisions about the financing of the entity, and exercising rights to vote on, or otherwise influence, managements’ actions that affect the use of the entity’s economic resources
- users base their expectations of returns on their assessment of:
the amount, timing and uncertainty of future net cash inflows to the entity;
managements’ stewardship of the entity’s resources
How is property classified under IFRS?
- IFRS 16: Property plant and equipment
(either the cost model or the revaluation model) - IFRS 17: Leases
(cost of an investment property held under a lease) - IFRS 40: Investment property
(either the fair value model or the cost model)
changes in fair value/gains or losses on disposal recognised in profit or loss
What are the elements of financial statements?
ASSET: a present economic resource controlled by the entity as a result of past events which are expected to generate future economic benefits
LIABILITY: a present obligation of the entity to transfer an economic resource as a result of past events
EQUITY: the residual interest in the assets of the entity after deducting all its liabilities
INCOME: increases in economic benefit during an accounting period in the form of inflows or enhancement of assets, or decrease in liabilities that result in increases in equity (not including contributions by owners/shareholders)
EXPENSES: decreases in assets, or increases in liabilities, that result in decreases in equity (not including distributions made to equity participants)
What is a balance sheet?
- a financial statement that reports a company’s assets, liabilities
& shareholders’ equity at a specific point in time - a snapshot of what a company owns and owes, as well as the amount invested by shareholders
- assets = liabilities + shareholders’ equity
(cash, (rent, (retained earnings)
inventory, wages,
property) utilities,
taxes,
loans)
What is a profit and loss statement?
- a financial statement that summarises the revenues, costs and expenses incurred during a specific period
- provides info about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both
What is a cash flow statement?
- summarises the amount of cash and cash equivalents entering and leaving the company
- measures how well a company manages its cash position (generates cash to pay its debts and fund its operating expenses)
What is the definition of working capital?
- the difference between a company’s current assets and its current liabilities
- a measure of a company’s liquidity, operational efficiency and short-term financial health
What is the definition of stock?
- the capital raised by a company through the issue and subscription of shares
What is the definition of debtor?
A company who owes money
What is the definition of creditor?
A company to whom money is owing
What are profitability ratios?
- gross profitability: gross profits/net sales
(measures the margin on sales the company is achieving) - net profitability: net income/net sales
(measures overall profitability of company) - return on assets: net income/total assets
(indicates how effectively the company is deploying its assets
high = efficient management) - return on investment: net income/owners’ equity
(indicates how well the company is utilising its equity investment) - earnings per share: net income/no. of shares outstanding
(states a company’s profits on a per-share basis) - ROCE = EBIT/capital employed
(EBIT: earnings before interest and tax
capital employed: total assets - current liabilities
the amount of profit a company is generating per £1 of capital employed)
What are liquidity ratios?
- acid test: quick assets/current liabilities
(cash, marketable securities, receivables)
company’s ability to make payments on current obligations,
ideally 1:1 - working capital: current assets/current liabilities
a company’s ability to pay its current liabilities with current assets
