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PS - APC Commercial > Accounting Principles > Flashcards

Accounting Principles Flashcards

1
Q

GAAP

A

Generally Accepted Accounting Principles

Common set of accepted accounting principles, standards and procedures

Aims to improve clarity of communication of financial information

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2
Q

10 principles of GAAP

A
  1. Regularity
  2. Consistency
  3. Continuity
  4. Sincerity
  5. Non-compensation
  6. Prudence
  7. Permanence
  8. Periodicity
  9. Good faith (materiality)
  10. Utmost good faith
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3
Q

International Accounting Standards

A
  • older accounting standards
  • replaced by IFRS in 2001
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4
Q

IFRS

A

International Financial Reporting Standards

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5
Q

Why did IFRS replace IAS?

A
  • aim to make it easier to compare businesses around the world
  • aim to increase transparency and trust in global reporting
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6
Q

IFRS 16

A
  • effective 1 January 2019
  • lease accounting standard
  • requires lessee to recognise assets and liabilities for leases with term of more than 12 months
  • IFRS reporter must 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
  • ensures leases are placed on balance sheets
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8
Q

What is the result of IFRS 16 financial reporting?

A
  • increase in assets, liabilities and net debt where leases are brought into balance sheet
  • can affect accounting ratios which can impact 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

Companies Act 2006

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10
Q

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

A
  • cover page
  • information and contents
  • directors report
  • accountants report
  • profit and loss account
  • balance sheet
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11
Q

Profit and Loss Account

A
  • gives summary of business income and expenditure transactions on annual basis
  • shows overall profit / loss figure at the bottom
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12
Q

Taxation

A

The amount of money owed to HMRC based on company profit

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13
Q

Directors Remuneration

A

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

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14
Q

Gross Profit

A

Turnover - cost of sales

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15
Q

What can be determined from Gross Profit?

A
  • not a lot in isolation
  • can compare to previous year to see what direction the company is heading in
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16
Q

Depreciation

A

Reduction in value of asset over time
- EG due to wear and tear

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17
Q

Amortisation

A

Reduction in value of intangible asset over time
- EG spreading out loan payment over time

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18
Q

Depreciation v Amortisation

A

Depreciation - fixed assets
Amortisation - intangible assets

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19
Q

Balance Sheet

A

Statement of businesses financial position showing assets and liabilities at given date (usually financial YE)

Only statement that applies to single point in time in business’ calendar year

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20
Q

What are assets on the balance sheet?

A

What the company owns

EG cash, property, other investments

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21
Q

What are the two types of asset?

A

Fixed asset - land, factory
Current asset - stock, cash in bank

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22
Q

What are liabilities on balance sheet?

A

What a company owes to others

EG overdrafts, loans, borrowings

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23
Q

What are the two types of liability?

A

Long term - not due to be repaid in next year
Current - due to be repaid within the year

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24
Q

What can be concluded from the balance sheet?

A
  • whether company is solvent
  • how likely it is the company will still be in business in a year
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25
Q

Liquidity Ratio

A

Financial ratio used to determine company’s ability to pay its short term debt

Current Assets dived by Current Liabilities

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26
Q

How is the liquidity ratio interpreted?

A
  • figure of 1 means company can exactly pay off current liabilities
  • figure less than 1 means unable to pay off current liabilities
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27
Q

Net Asset Value

A

Total Assets - Total Liabilities

  • simple way to establish company worth
  • frequently shown as NAV per share
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28
Q

Three parts of balance sheet

A
  1. Assets
  2. Liabilities
  3. Ownership Equity (what remains after doing Assets - Liabilities. AKA Net Worth or Net Asset Value)
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29
Q

What is the difference between Assets and Liabilities known as?

A
  • Equity
  • Net Asset Value
  • Net Worth
  • Capital
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30
Q

Cash Flow Statement

A

Financial statement that summaries movement of cash into and out of a company

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31
Q

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

A

Shows how well company is managing cash and growth

32
Q

Credit Rating

A
  • assessment of organisations creditworthiness based on previous dealings
  • shows ability of organisation to fulfil financial commitments (EG pay rent)
33
Q

Main commercial credit rating agencies?

A
  • Dun and Bradstreet
  • Standard and Poor (S&P)
34
Q

Why do companies keep accounts?

A
  • regulatory purposes
  • useful to see outgoings and incomings
  • can compare year on year
35
Q

What are the two parts of a Dun & Bradstreet rating?

A
  1. Risk indicator (1 - 5 where lower is better)
  2. Financial strength indicator (A - E where A is better)

Overall, helps identify organisations likely to fail or pay late

36
Q

Tenant Covenant Strength

A

Tenant ability to comply with covenants laid out in lease

37
Q

Revenue

A

Income generated by the sale of products or services

38
Q

Capital Expenditure (CAPEX)

A

Money spent by a business or organisation on acquiring / maintaining fixed assets (EG buildings, land, equipment)

39
Q

Financial Audit

A

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

40
Q

Ratio Analysis

A

Method of gaining insight into company’s liquidity, efficiency and profitability by studying financial statements

41
Q

Profitability Ratio

A

Shows how well company can generate profit from its operations

42
Q

Solvency Ratio

A

Compares company debt against assets, equity and earnings to conclude whether company is solvent and whether they can pay their debts

43
Q

Efficiency Ratio

A

Evaluates how efficiently a company uses its assets to generate sales

44
Q

Credit Control

A

Process of ensuring debtors do not take too long to pay you

45
Q

Profitability

A

Determines company profit in relation to the size of the business

46
Q

VAT

A

Value Added Tax
- consumption tax on goods and services
- standard rate is 20% but can be reduced rate of 5% or zero rate

47
Q

Where do you find information on company’s assets?

A

On the balance sheet

48
Q

Are profit and loss accounts current?

A

No, they are retrospective

49
Q

Management Accounts

A
  • financial reports produced for owners/managers either monthly or quarterly
  • includes profit and loss statement and balance sheet
  • less formal than year end accounts
50
Q

Company Accounts

A
  • documents produced at year end for each company (YE differs)
  • shows performance over account period
  • legally required from all companies under Companies Act 2006
51
Q

When must company be VAT registered?

A
  • if company total VAT taxable turnover for last 12 months was £85k

Or

  • if turnover expected to go over £85k in next 30 days
52
Q

EBITDA

A

Earnings Before Interest Tax Depreciation and Amortisation

Note: it is a measure of company profitability

53
Q

What does it mean if company goes into administration?

A

company becomes insolvent and is out under management of insolvency practitioners

54
Q

Insolvency

A

Individual can no longer meet financial obligations so debts become due

  • occurs due to reduced cash flow / increased expenses
55
Q

Bankruptcy

A
  • person can no longer meet debt payments
  • liquidate assets to pay debts or make payment plan
56
Q

Receivership

A
  • court appointed tool to protect a company
  • receiver steps in to manage company, assets and all financial decisions
57
Q

Liquidation

A
  • assets used to pay off debts
  • three types:
    1. creditors voluntary liquidation
    2. compulsory liquidation
    3. members’ voluntary liquidation
58
Q

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

A

To assess covenant strength of tenants

59
Q

Where do you find information on a companies financial status?

A

Companies House

60
Q

Limitations Act 1980

A
  • outlines time within which creditor can chase debtor for outstanding debt
  • only applies when no contact made between creditor and debtor within given time limit
61
Q

Misappropriation of funds

A

Someone entrusted with managing money steals it for personal gain

62
Q

Financial Bond

A

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

63
Q

3 tests of insolvency

A
  1. Cash Flow Test - check if able to pay bills in near future
  2. Balance Sheet Test - check if assets are greater than liabilities
  3. Legal Action Test - check if legal action has been taken against business for debt of £750 or more
64
Q

What are consequences of insolvency?

A
  • business may go into liquidation and stop trading
  • business may go into administration and be sold
65
Q

Statutory Profit

A

Company’s earnings calculated according to U.K. GAAP

66
Q

Invoice v Application for Payment

A

Invoice - VAT payable once invoice generated

Application for Payment - VAT payable once gross payment received, and then VAT receipt generated

67
Q

Why do clients prefer Application for Payment over an Invoice?

A

Means they only have VAT liability for rents paid, rather than all rents charged

Note: if you raise invoices, you have VAT liability in rent even if not been paid (if never paid, can claim back VAT retrospectively but not ideal)

68
Q

How do you determine covenant strength?

A
  • profit and loss account
  • cash tenant is holding in bank
  • look at management accounts (more up to date than company accounts)
  • independent financial reports EG Dun and Bradstreet
69
Q

Creditors

A

People the company owes money to

70
Q

Acid Test Ratio

A

Take current assets, remove value of stock (hard to shift in emergency) and divide by current liabilities

Considered to be best test of company short term viability

71
Q

Intangible Assets

A

Things you cannot sell EG copyright or patents

72
Q

Balance Sheet Example

A

ASSETS:
- Current: cash, supplies, prepaid expenses
- Fixed: property, equipment, land
- Intangible: goodwill

LIABILITIES:
- Current: rent, salaries, tax
- Long term: mortgage, purchase agreements (EG car due over 10 years)

STOCKHOLDERS EQUITY:
- Common Stock
- Retained Equity

73
Q

Profit & Loss Example

A

INCOME:
- sales, services, other

EXPENSES
- advertising, electricity, insurance, rent, salaries, vehicles

OVERALL PROFIT/LOSS

74
Q

How is VAT dealt with in respect of rent demands?

A

use application for payment rather than an invoice

75
Q

RPI v CPI

A

former tends to be higher as it is a broader measure and considers housing costs too

PS - APC Commercial (17 decks)

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