Accounting principles and procedures Flashcards
What does a set of public limited company accounts include (statement, report, account, sheet, c report, r report, other)?
- Chairman’s statement
- Independent auditor’s report
- Income statement (profit and loss account)
- Statement of financial position (balance sheet)
- Corporate governance report
- Remuneration report
- Other statutory information
What do you expect to see in a published set of accounts?
These should be prepared conforming to the Companies Act 1985 (As amended 1989)
These should be prepared conforming to the Companies Act 1985 (As amended 1989). They would include names of the company directors and secretary, a record of the company’s assets and liabilities, entries of profit and loss, as well as details of stock held at the end of the year and any dividends paid.
What does a balance sheet (statement of financial position) show, and what are typical assets (4), and liabilities (4), when typically dated?
Statement of the business’s financial position showing its assets and liabilities at a given date, usually at the end of a financial year
• Assets: cash, property, debtors and other investments
• Liabilities: borrowings, overdrafts, loans and creditors
What does a profit and loss account (income statement) show/demonstate, when/where found?
- Profit and Loss statement (P+L = I+E) – A summary comparing a business’s income (revenue) and outgoings (expenditure) statements (usually annual)
Demonstrate how the revenue is transformed into the net income - how the actual income the business receives transfers into profit for the year.
- On statutory accounts
What does the cash flow statement show, what used for, prepared for what purposes, depth compared to P+L?
• Cash Flow Statement (CFS = ACE) Statement showing actual receipts and expenditure (including vat)
- Used for budgeting/business plans (reviewing cash flow can identify potential shortfalls in cash balance i.e. where you may not have enough cash in the business to pay suppliers etc.)
- Shows whether a company generated cash
- Management accounts (prepared for management purposes)
- More detail than P+L
What are the three primary types of financial accounts?
- Balance Sheet
- Profit and Loss Account
- Cash flow statement
What are management accounts?
Prepared for internal use by the business and are not audited
Who are audited accounts prepared by?
Chartered or Certified Accountant
When did IFRS 16 become effective?
1st January 2019
What does IFRS 16 require companies to do?
Full cost of the lease has to be accounted for on the balance sheet. Occupiers obligation to pay rent will have to be recognised as a liability
Is service charge counted as a liability under IFRS 16?
No, service charge payments are accounted for separately
What leases are exempt from IFRS 16?
Leases 12 months or shorter
What impact will IFRS have on commonly used financial ratios (leverage, EBITDA, asset turnover)?
- Leverage (gearing) increases – because financial liabilities increase
- EBITDA increase – because cost of lease is represented as depreciation and interest which is taken off after EBITDA
- Asset turnover (sales / total assets) decreases – because lease assets will be recognised as part of total assets
What is a covenant strength?
Ability of a tenant to meet the covenants of the lease. Includes rents, service charge, repairing and insuring obligations and statutory obligations
What is the difference between current and non-current assets (balance sheet)?
(Assets – cash, property, debtors, other investments)
Current = to be converted to cash within 1 year, e.g. a property sold soon.
Non-current = not likely to be converted to cash within 1 year e.g. trademarks, property, plant and equipment
What is the difference between current and non-current liabilities (balance sheet)?
(Liabilities – borrowings, overdraft, loan and creditors)
Current = amounts owed within 1 year, e.g. overdrafts, short-term loans
Non-current = long-term financial obligations e.g. deferred payments, long-terms loans
What is the difference between Management Accounts and Audited (Company) Accounts, and what are Statutory Accounts?
Management – prepared for internal use by a business and are NOT audited
Audited – prepared by a Chartered Accountant
Often management accounts reflect a more accurate reflection of business performance.
Statutory – mandatory for limited companies, generically formatted, requested by HMRC
What is UKGAAP?
Generally Accepted Accounting Practice in the UK (UK GAAP) - body of accounting standards published by UK’s Financial Reporting Council (FRC).
The financial reporting framework in the UK is effective from 1 January 2015. (The Red Book was updated with valuations under UK GAAP effective from 1st January 2015).
Valuations for inclusion in financial statements are prepared in accordance with this.
Under UK GAAP an owner occupied property must be valued under EUV or DRC (has this been changed to Fair Value?)
Does JT uses UK GAAP?
What do you know about IFRS 16 (effective from, why introduced, difference in recording info, definitions)?
Effective after 1 January 2019.
Brought in as transparency measure.
All leases over £500/12 months now recorded on balance sheet, as NPV of the full lease cashflow.
- New definitions of financial metrics e.g. Gearing ratio and EBITDA
Why is it important to assess the covenant strength (think about valuer responsibilities)?
Affects the perception of risk; particularly in relation to default on leases financial commitments. Knowing a prospective tenant’s covenant strength can help to mitigate risk and help a valuer to comment on suitability for lending.
What can you use to assess covenant strength (2)?
A Dun and Bradstreet report or an Experian report.
How do you communicate covenant strength to the client/with what limitations?
Include details of the result of the report it in the valuation report. We do not send the report to the client.
As surveyors we do not comment as to whether the covenant is good or bad in certain terms, but we comments on how the covenant might be perceived in the market that the asset operates in.
What would you find on an Experian Report (score, no. range, accounts info (3))?
DELPHI score 1-100, with traffic light colour system.
1-30 High risk
30-80 Medium risk
80-100 Low risk
Age of company, registered office, latest accounts
Where is the Net Profit found in the financial accounts?
On the profit and loss accounts (income statement)
What is an Asset?
Asset - things the business owns that you get a future benefit from e.g. physical assets like property and non-physical assets like brand and goodwill.
What is a liability?
Liability - amounts a business owes due to past transactions e.g. wages and loans
Which reporting framework do public limited companies have to comply with?
UK public listed companies adopt IFRS as their financial reporting standard. (Some listed companies are requirement to adopt this).
IFRS 16 from 1st January 2019
What’s the difference between GAAP and IFRS?
Basic accounting fundamentals the same
GAAP is rules based, IFRS principles based.
GAAP much more detailed
IFRS is used primarily by businesses reporting their financial results anywhere in the world except the United States.
Generally Accepted Accounting Principles, or GAAP, is the accounting framework used in the United States.
What is the acid test?
Acid Test – compares a company’s most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt. The acid test ratio disregards assets that are difficult to liquidate quickly such as inventory.
