Accounting

Question 1

What is the objective of creating accounts?

Answer 1

To provide information on the companies financial position for; tax & regulation purposes, monitor businesses performance & investment recommendations.

Question 2

Why is the accounting system centrally set

Answer 2

To make it easy to compare for performance, to provide fair tax & regulation system.

Question 3

What are the 5 basic accounting concepts?

Answer 3

Business identity, going concern (considered the entity will continue to operate), monetary period (only money is recorded), accounting period (monthly, quarterly or annually) and accrual (income recorded when earned & expenses incurred)

Question 4

What are the classifications of business activities

Answer 4

Operational: day to day business function (sale of goods/purchase/paying rent)

Investing: Aqusition and disposal of long-term assets.

Financing: Activities of obtaining/ repaying capital. Main sources of funds are owners & creditors.

Question 5

Define assets

Answer 5

The economic resources of a company - what the company owns either current assets or non-current assets

Question 6

Define current assets and non-current assets

Answer 6

Current assets: cash & other assets that are expected to be converted to cash within a yr.

Non-current assets: Purchased for long-term use. Not likely to be converted into cash in less than a yr

Question 7

What does PPE stand for?

Answer 7

Property, plant and equipment. Properties can be classed as this or as investment property. If PPE then the prop will be used as part of the operations

Question 8

Define liabilities and non-current liabilities

Answer 8

Current liabilities: Amounts owed with one yr

Non-current liabilities: Long-term financial obligations, owed later than a yr

Question 9

What is owners equity?

Answer 9

The residual claim on the resources, the companies ‘net worth’. The difference between assets and liabilities.

Includes; capital, additional paid in cap, retained earnings

Question 10

What does it mean if owners equity is negative?

Answer 10

About to go bankrupt, red flag

Question 11

Define both types of income; revenue and gains

Answer 11

Revenue; Income that arises in the course of ordinary activities of entity & accounts for sales, fees, interest, dividends, royalties & rent.

Gains; Other items that meet def of income but are not rev because they do not form part of normal operations of the business or they are non monetary (positive prop revaluations)

Question 12

Define capital expenditures and operating expenses

Answer 12

Capital expenses: costs directly relation to improvements of the property. Cash outflow

Operating expenses: Those related to the maintenance of the property. These reduce profits as they come out of incoming producing

Question 13

Define net income

Answer 13

The amount of money remaining (+ or -) after all costs and expenses have been deducted from total sales.

Also known as the bottom line.

Question 14

Define retained earnings

Answer 14

The amount that the company will keep in the company to support future operations.

Beginning Retained Earning + Net Income - Dividends

Question 15

Define dividends

Answer 15

The amount that is distributed to the owners of the business if retained earnings are positive and there is enough cash to do so.

Real Estate Investment Trusts (REITs) must pay out at least 90% of their property rental income to SH to maintain their tax exemption.

Question 16

What does a Balance Sheet present

Answer 16

Presents a company’s financial position at a particular point in time.

Shows assets, liabilities and owners equity.

Assets = liabilities + owners equity

Question 17

What does the Profit and Loss statement show?

Answer 17

Presents the performance of a business for a specific PERIOD of time.

Revenue, expenses & profit/loss

Revenue - expenses

Question 18

What does the cash flow statement provide?

Answer 18

Provides information about the changes in cash & cash equivalents of an entity for a reporting period (net cash flow).

Showed separately for each business activity.

CF from operations, CF from investing, CF from financing

Question 19

What are the two most common accounting frameworks?

Answer 19

-The US Generally Accepted Principles (US GAAP) - Applicable to US companies & its subsidiaries - no specific def for invest prop thus prop held as PPE.

-International Financial Reporting Standards (IFRS) - Internationally adopted and the required standard by EU companies - properties recognised at cost & depreciated over time

Question 20

What is an accounts auditors responsibility?

Answer 20

Checking if the financial statements comply with adopted accounting principles & examine the company’s accounting control systems.

Confirms reported values and identifies any material errors in the financial statements.

Question 21

Define double-entry accounting & the associated equation

Answer 21

Every recorded transactions affects at least two accounts in order to keep the equation in balance.

Assets = liabilities + owners equity

Question 22

Define accrual accounting

Answer 22

Requires revenue to be recorded when earned and expenses to be recorded when incurred.

(I.e- can only record a monthly subscription payment each month even if all paid at once)

Question 23

Define the main accrual accounts

Answer 23

-Unearned revenue; when business receives cash before providing goods/services.
-Accrued Revenue; When the business provides goods/services before receiving cash.
-Prepaid Expenses; When the business pays with cash ahead of time for the anticipated expense (cash decrease)
-Accrued Expenses; When the business owes cash for expenses it has incurred (expenses increase).

Question 24

What is valuation adjustments?

Answer 24

Assets can’t be recorded at there purchase price, it has to be at there MV now taking into account depreciation.

Question 25

What are the most common adjustments to financial accounts

Answer 25

-Net asset value: Same as owners equity but NAV assumes fair value = adjustment
-Net operating income: Measures net cash generated by an income producing prop. NOI = recurring rental/other income minus all non-recoverable operating expenses.
-Funds from operations: If a prop is carried at cost FFO is used. Allows for analysation of CF obtained from prop ownership.
-Earnings: Revaluation of prop = if revaluation gains are subtracted and revaluation losses subtracted.

Question 26

Why are financial ratios used and name the four commonly used

Answer 26

Used to provide common size values, allow for easier comparison between firms.

1. Active Ratios 2. Liquidity Ratios 3.Solvency Ratios 4. Profitability Ratios

Question 27

Define each financial ratio

Answer 27

-Activity Ratio: Measures comps ability to convert its assets to cash, shown as NIY or Capitalisation rate.
-Liquidity Ratio: Measures comps ability to meet its short-term obligations & how quickly assets are converted into cash. Commonly shown as; current assets DB current liabilities, Acid test, cash ratio & defensive interval.
-Solvency Ratio: Higher debt to asset = higher leverage & risk of solvency. Measures ability of a business to meet its long-term obligations. Shown as loan to value ratio, debt to equity ratio, debt service coverage ratio.
-Profitability ratio: measures ability of a business to generate profit relative to its sales, assets & equity. Shown as net profit margins, operating profit margin, returns on assets & returns of equity.

Question 28

What is the accruals concept?

Answer 28

Fundamental concept in accounting
Income is recorded when earned, not when received & expenses are recorded when incurred, not when paid.

Question 29

What’s the difference between a balance sheet and profit and loss statement?

Answer 29

Balance sheet: snapshot of accounts at that point in time

Profit and Loss: summarises businesses finance across a set time period