Accounting Principles

Question 1

Why are accounting principles relevant to your pathway?

Answer 1

• In order to set up my own practice
• For the profits method we look through the trading accounts of the last 3 years

Question 2

Why does a business keep company accounts?

Answer 2

• Tax purposes (required by law)
• Demonstrates a company’s financial standing
• To ensure cash flow and profitability are correctly managed

Question 3

What are asset valuations?

Answer 3

• This is a legal obligation to revalue on 3 or 5 yearly programmes
• Required to maintain a register of assets

Question 4

What are business overheads?

Answer 4

The costs your business incurs i.e. rent, leasing and wages

Question 5

What are the two financial reporting standards in the UK?

Answer 5

1) The UK Generally Accepted Accounting Principles (GAAP)
2) The International Financial Reporting Standards (IFRS)

Question 6

What is the difference between IFRS and GAAP?

Answer 6

• IFRS must always be adopted by PLCs (public limited companies)
• Other companies may have a choice but UK GAAP is commonly applied because it is more straightforward and flexible, and the accounts are less comprehensive than under IFRS

Question 7

What are the 3 key Financial Reporting standards (FRS) under UK GAAP?

Answer 7

1) FRS 101 (reduced disclosure framework) - exemptions from certain disclosure requirements of IFRS Standards

2) FRS 102 (small and medium entities) - assets be valued in line with the cost approach, revaluation approach or fair value approach

3) FRS 105 (a single accounting standard for micro-entities)

An accounting specialist should be consulted about which FRS should be adopted for a specific company

Question 8

Who is responsible for
issuing the relevant accounting standards under UK GAAP?

Answer 8

The Financial Reporting Council (FRC)

Question 9

What does FRS 102 say?

Answer 9

UK VPGA 1 confirms that under FRS 102, assets should be measured based on the cost, revaluation or fair value model

Question 10

If you were assessing the covenant strength of a tenant, where would you look?

Answer 10

Dunn and Bradstreet

Question 11

What is IFRS 16?

Answer 11

• Relates to lease accounting
• Effectively brings all leases onto the balance sheet so that they are treated as finance leases instead, makes it easier to assess an entity’s lease commitments and compare different entities using their financial statements
• Under IFRS 16, a lease is a contract that “conveys the right to control the use of an identified asset for a period of time in exchange for consideration”
• IFRS 16 impacts EBITDA
• Leases under 12 months are excluded

Question 12

What is UK GAAP?

Answer 12

Generally Accepted Accounting Principles – A regulatory body that establishes how accounts and financial reports should be prepared in the UK.

Question 13

What does EBITDA stand for?

Answer 13

Earnings Before Interest, Taxation, Depreciation and Amortisation

Question 14

What is the objective of financial statements?

Answer 14

• To provide information about the financial
  position and performance of a reporting entity, not only to satisfy the requirements of the
  UK Companies Act 2006 but also to inform the decision-making process

Question 15

What do companies need to provide every year in accordance with the Companies Act 2006?

Answer 15

• Prepare accounts that report on performance during financial year
• Entries showing all money received/expended, profit/loss account, balance sheet, group accounts (if appropriate) and accompanied by the director and auditor’s report
• Record of assets and liabilities of the company
• Private companies must keep accounting records for 3 years from the date they were made
• Public companies must keep accounting records for 6 years from the date they were made

Question 16

How soon must companies file their accounts in accordance with the Companies Act 2006?

Answer 16

• Private limited companies must file within 9 months of the year-end
• Public limited companies must file within 6 months of the year-end

Question 17

What does accrual mean?

Answer 17

Money that a business has earned or spent but has not yet been paid e.g. payment from a client or amount owed to a supplier

Question 18

What is turnover?

Answer 18

Total sales

Question 19

What is gross profit?

Answer 19

Turnover minus the costs of sales

Question 20

What is the gross profit margin?

Answer 20

Gross profit divided by revenue, multiplied by 100

Question 21

What are operating expenses?

Answer 21

The expenditure needed to support the overall running of the business such as rents, rates and utility costs

Question 22

What is the net profit?

Answer 22

Gross profit minus operating expenses and taxes

The amount of money that can be reinvested in the business or distributed to business owners

Question 23

What is the net profit margin?

Answer 23

Net profit divided by revenue, multiplied by 100

A high profit margin is desirable to a business

Question 24

What is the difference between financial and management accounts?

Answer 24

Financial accounts describe the performance of the business i.e. must be filed with Company House and give precise data to external stakeholders.

Management accounts used by owners/management for day-to-day and strategic decision making. Not required by law or to be filed with Company House.

Question 25

When does the UK tax year run from?

Answer 25

6th April - 5th April

Question 26

What is a balance sheet?

Answer 26

Snapshot of a company’s financial position by recording assets, liabilities and shareholder equity on a given date.

Question 27

What is a profit and loss statement?

Answer 27

Shows a company’s income and expenditure over the accounting period. Provides an overview of the company performance.

Question 28

What is a cashflow statement?

Answer 28

This looks at the actual cash that passes hands in the business, the receipts and expenditure. It demonstrates how the business' bank balance changed over the accounting period.

Question 29

What is financial leverage?

Answer 29

It is the concept of using borrowed funds in the form of debt to enhance business operations and increase profitability.

Question 30

What is an escrow account?

Answer 30

- Contractual agreements that are used as financial instruments within a transaction - The asset or currency being transferred between two primary parties is held by an intermediary 3rd party until each of the original contracted parties have met their obligations.

Question 31

What is working capital?

Answer 31

- Difference between company's current assets and current liabilities - Measures how much more capital may be needed to finance the operations - A falling ratio may mean that the company has taken on more work than it can finance and may be heading for cashflow difficulties (asset-liabilities/turnover)

Question 32

What is meant by depreciation in relation to an asset?

Answer 32

The systematic reduction in the recorded cost of an asset e.g. furniture and IT equipment

Question 33

What is a financial audit?

Answer 33

Audit in accounting is the examination and verification of a company’s financial records. It is to ensure that financial information is represented fairly and accurately.

Question 34

What is corporation tax?

Answer 34

Paid by UK limited companies and some other organisations. It is based on the annual profit that a company makes. 25%

Question 35

What is VAT?

Answer 35

Value Added Tax – Added to most products and services sold by VAT registered businesses.

Question 36

Please name three types of accounting ratios?

Answer 36

1. Liquidity ratio – Organisation’s ability to turn assets into cash, in order to pay debts (current assets/current liabilities) 2. Profitability ratio – Used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders’ equity over time 3. Gearing ratio – Compares its debt to its equity. The ratio indicates how much a business is funded by either debt or equity. Higher ratio suggests more reliance on debt which is a higher risk.

Question 37

Provide examples of assets and liabilities

Answer 37

Assets – buildings, land, equipment, etc. owned by the company. Liabilities – loans or debts

Question 38

What are current assets?

Answer 38

Current assets aka liquid assets are short-term assets that a company expects to use up/convert to cash within one fiscal year.

Question 39

What are fixed assets?

Answer 39

Long-term assets not likely to be sold within 12 months. Typically used to generate income such as property, plant and equipment.

Question 40

What is the difference between debtors and creditors?

Answer 40

Creditor – Someone who has lent funds and is owed money. Debtor – Someone who has borrowed funds and owes money.

Question 41

What is a cash flow forecast?

Answer 41

Document that sets out how much a business expects to receive and pay over a set period. How much you expect to make in sales and spend in the future and understand when money enters or leaves your accounts.

Question 42

What is a cash flow forecast used for?

Answer 42

1. Understanding impact of future plans. 2. Keep track of overdue payments. 3. Plan for upcoming cash gaps. 4. Manage surplus cash. 5. Track whether spending is on target.

Question 43

What is insolvency?

Answer 43

It is the inability to pay debts or creditors (the people you owe money to). It is a generic term used to describe bankruptcy, liquidation or administration.

Question 44

Why would you not recommend the appointment of a contractor with a low credit rating?

Answer 44

- Risk of contractor or supply chain insolvency. - Possibility of contractor not performing satisfactorily or have restricted resources.

Question 45

What are signs of contractor insolvency on a construction project?

Answer 45

1. Slowing down works. 2. Materials drying up. 3. Increase in defective work. 4. Changes in management. 5. Additional or inflated payment requests. 6. Complaints from subcontractors.

Question 46

What is liquidation?

Answer 46

Formal process of bringing about the closure of a limited company. Assets are sold to pay creditors/shareholders before the company is dissolved (think Wilko).

Question 47

What is the difference between a sole trader and a limited company?

Answer 47

- Liability, sole traders cease to exist so are personally liable whereas with limited companies, liability remains within the company - Separate legal distinction for a PLC

Question 48

When is a statutory financial audit required?

Answer 48

Annually required by law. Carried out by independent party who is a registered auditor or specialist within accounting firm.

Question 49

What is VPGA 1?

Answer 49

Valuations for financial reporting It provides an overview of the typical components of a financial report, matters that the valuer needs to consider when agreeing terms of engagement for work of this type and additional matters that need to be addressed in the report.

Question 50

Why do chartered surveyors need accounts?

Answer 50

Assess competition Setting up own business Financial standing of contractors Financial standing of landlords and tenants

Question 51

What do Company cash flow statements tell you?

Answer 51

- Is business viable? - What size overdraft/borrowings are needed? - Early warning of turn down in business. - Do you have excess cash available that might be better used? - Are your customers taking too long to pay? - Are you paying your bills too quickly?

Question 52

What are the differences between a Budget and a Financial Forecast?

Answer 52

Budget - uses estimation to quantify the amount of revenues and expenses a company may incur over a future period. Essentially, they detail where a business wants to go. Financial Forecasts - use of information on past, current, and projected financial conditions to estimate the amount of revenues and expenditure that will be achieved. Forecasting indicated where the business is actually headed.

Question 53

Why is GAAP important to RICS?

Answer 53

It ensures consistency, accuracy, and transparency in financial reporting

Question 54

What is the difference between PPE properties and Investment?

Answer 54

PPE properties are used by the business, for example as headquarters. Investment that are held to receive an income.

Question 55

What are the key principles of GAAP?

Answer 55

- Consistency - Transparency - Comparability