Business Accounts Flashcards
Why do solicitors need to understand business accounts?
- To be able to follow negotiation meetings with clients and accountants
- To understand the client’s financial position going into a transaction
- To be able to assess the financial position of a target in an acquisition
- To be proactive, for example anticipating solvency issues
- To understand and advise on financial covenants in loan agreements
- To understand a client’s duties and obligations in relation to financial records
- Important part of litigation process
- CA 2006 refers to accounts
Why do financial statements have to be prepared?
- For external reporting to shareholders, creditors and the market
- For tax authorities
What is the balance sheet?
A snapshot of the business at one point in time, listing everything the business owns and owes
What are fixed and current assets?
Fixed: assets which are held and used in the business over the long-term
Current: assets which are expected to be used over the short-term
What are long-term (non-current) and current liabilities?
Long-term: liabilities which will fall due to be repaid after one year
Current: liabilities which are payable in the short term (less than a a year)
What is the Profit and Loss Account?
Shows the profit or loss made by the business over a given period.
Also known as the Income Statement.
Why are accounts prepared for internal management?
- Cash: to ensure that the business has sufficient cash available to continue its day to day operations.
- Profits: to determine how much profit the business is making.
- Assets/liabilities: to determine whether it’s assets exceed its liabilities.
All three factors ensure that the business is capable of continuing to operate.
When are accounts prepared?
Annual accounts are prepared at the end of each financial year, and must be audited.
Interim accounts may also be prepared to keep track of progress e.g monthly. These are not audited, and are not usually made available to shareholders.
What are the different types of accounts?
- Personal accounts
- Accounts to record: assets, liabilities, capital, income, expenses
What is the trial balance?
A list of all the balances on all of a business’ asset, liability, capital, income and expense accounts.
This forms the basis of information from which the financial statements are compiled.
How is gross profit calculated?
For a business trading in goods:
Gross profit = income - cost of sales
Cost of sales = (opening stock + purchases) - closing stock
For a business trading in services:
Gross profit = income + (closing WIP - opening WIP)
How is net profit calculated?
Net profit = gross profit - overhead costs
What is net book value and how it is calculated?
Net book value is an estimation of the ‘current’ value of the asset to the business in terms of how much of the asset has been consumed.
NBV = cost - accumulated depreciation
How is net current assets calculated?
Net current assets = current assets - current liabilities
How is net assets calculated?
Net assets = (net current assets + net book value) - long term liabilities