5 - Accounting principles and procedures Flashcards
What are the three types of financial statement you may come across relating to a company?
Profit and loss statements
Cashflow statement
Balance sheet
What is an asset?
Assets are the items/resources your company owns that can provide future economic benefit
An economic resource the company owns
What is a liability?
Liabilities are what you owe other parties.
Business debts/obligations
Loans/debts to be settled
Can you give me an example of a asset?
Property/Land
Patents
Vehicles
Cash
Machinery
Can you give me an example of a liability
Loan
Mortgage debt
Overdrafts
Taxes
Wages
What is the difference between financial and management accounts?
Financial accounts are for external stakeholders. Management accounting is presented internally.
What do you understand by the term Generally Accepted Accounting
Principles (GAAP)?
Common set of accounting rules, standards, and procedures published by the Financial Reporting Council to provide guidance to UK businesses when preparing financial reports and accounts.
How do companies know which reporting framework to comply with?
The Companies Act 2006 requires UK companies to prepare their financial statements using either UK GAAP accounting standards or International Accounting Standards
Publicly listed companies are required to apply IFRS in the preparation of their group
accounts but may choose between IFRS and UK and Ireland GAAP for the preparation
of their individual parent accounts. Other entities have a free choice between the two
frameworks.
Which reporting framework do public limited companies have to
comply with?
Publicly listed companies are required to apply IFRS in the preparation of their group
accounts but may choose between IFRS and UK and Ireland GAAP for the preparation
of their individual parent accounts
How would you assess the financial strength of an entity
Analyse the income statement, balance sheet, and statement of cash flows to understand financial health
Can you tell me what the role of an auditor is?
To review and verify accuracy of financial records
How would you assess the financial strength of an entity e.g. for a valuation?
Analyze the Balance Sheet (shows a company’s financial position, provides a snapshot of its assets, liabilities, and owners’ equity.)
Analyze the Income Statement (shows a company’s financial position and performance over a period by looking at revenue, expenses, and profits earned)
Analyze the Cash Flow Statement (provides detailed insights into how a company used its cash during an accounting period)
Financial Ratio Analysis (the technique of comparing the relationship (or ratio) between two or more items of financial data from a company’s financial statements). main types incl: liquidity, efficiency, solvency)
Can you tell me about a common financial measure?
Liquidity ratio
- Current ratio- Current Assets / Current Liabilities.
- Measures how a business’s current assets, such as cash, cash equivalents, accounts receivable, and inventories, are used to settle current liabilities such as accounts payable
