Accounting Flashcards
(26 cards)
GAAP
Generally Accepted Accounting Principles
Common set of accepted accounting principles, standards and procedures
Aims to improve clarity of communication of financial information
10 principles of GAAP
Regularity
Consistency
Continuity
Sincerity
Non-compensation
Prudence
Permanence
Periodicity
Good faith (materiality)
Utmost good faith
IFRS
International Financial Reporting Standards .
Replaced international accounting standards (2001)
Why did IFRS replace IAS?
aim to make it easier to compare businesses around the world
aim to increase transparency and trust in global reporting
IFRS 16
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
What is the objective of IFRS 16?
report information that represents lease transactions
ensures leases are placed on balance sheets
What is the result of IFRS 16 financial reporting?
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
What governs the format of company accounts?
Companies Act 2006
What is included in company accounts as laid out in Companies Act 2006?
cover page
information and contents
directors report
accountants report
profit and loss account
balance sheet
Profit and Loss Account
gives summary of business income and expenditure transactions on annual basis
shows overall profit / loss figure at the bottom
Taxation
The amount of money owed to HMRC based on company profit
Balance Sheet
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
What are assets on the balance sheet?
What the company owns
EG cash, property, other investments
What are liabilities on balance sheet?
What a company owes to others
EG overdrafts, loans, borrowings
What are the two types of asset?
Fixed asset - land, factory
Current asset - stock, cash in bank
What are the two types of liability?
Long term - not due to be repaid in next year
Current - due to be repaid within the year
What can be concluded from the balance sheet?
whether company is solvent
how likely it is the company will still be in business in a year
Liquidity Ratio
Financial ratio used to determine company’s ability to pay its short term debt
Current Assets dived by Current Liabilities
figure of 1 means company can exactly pay off current liabilities
figure less than 1 means unable to pay off current liabilities
Net Asset Value
Total Assets - Total Liabilities
simple way to establish company worth
frequently shown as NAV per share
Three parts of balance sheet
Assets
Liabilities
Ownership Equity (what remains after doing Assets - Liabilities. AKA Net Worth or Net Asset Value)
Credit Rating
assessment of organisations creditworthiness based on previous dealings
shows ability of organisation to fulfil financial commitments (EG pay rent)
Why do companies keep accounts?
regulatory purposes
useful to see outgoings and incomings
can compare year on year
Profitability Ratio
a
Shows how well company can generate profit from its operations
Solvency Ratio
Compares company debt against assets, equity and earnings to conclude whether company is solvent and whether they can pay their debts
