Accounting Principles

Question 1

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

Answer 1

Profit and loss statement shows the profit/loss earned by a company during a particular period, normally one financial year. Balance sheet shows the list of assets and liabilities of a company on one particular day.

Question 2

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

Answer 2

All companies must file their annual accounts with Companies House and ensure that those accounts give a true and fair view.

Question 3

What is the purpose of a cash flow statement?

Answer 3

Cash flow demonstrates an organisation’s ability to operate in the short and long term, based on how much cash is flowing into and out of business.

Question 4

What are the key financial statements that all companies must provide?

Answer 4

Profit and loss account, balance sheet and cash flow.

Question 5

What is the difference between management and financial accounts?

Answer 5

Management accounts are for the internal use of the management team. Financial accounts are the company accounts required by law.

Question 6

What is the difference between a statement of comprehensive income and a statement of financial position?

Answer 6

A statement of comprehensive income shows the income, expenditure and profit or loss of the company. The statement of financial position shows what a company owns (assets) and what it owes (liabilities) at a given point in time.

Question 7

What are the main types of ratio analysis used to assess a company’s financial strength?

Answer 7

Liquidity, Investment/shareholders, Gearing, Profitability, Financial.

Question 8

Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?

Answer 8

To consider for your own business accounts, assess the covenant strength of potential tenants and landlords, assess the financial strength of contractors and those tendering for contracts, for profits-method valuation (for leisure properties), and for assessing competition.

Question 9

What are the three main financial accounts?

Answer 9

Balance Sheet, Income Statement, Cash Flow Statement.

Question 10

What is the balance sheet also known as?

Answer 10

Statement of financial position.

Question 11

What does the balance sheet show?

Answer 11

View of financial position showing assets, liabilities (owned vs owed) and shareholder’s/owners equity.

Question 12

Does a balance sheet relate to a period of time or a specific date?

Answer 12

Snapshot (given date).

Question 13

What is the income statement also known as?

Answer 13

Profit and loss.

Question 14

What does an income statement show?

Answer 14

Summary of income and expenditure to show net profit/loss for a specific period of time.

Question 15

Can you draw comparisons between income statements for different years?

Answer 15

Yes - because they relate to a specific period of time (1 year usually).

Question 16

What is a cashflow statement?

Answer 16

Merges balance sheet and income statement to show actual receipts and expenditure including VAT.

Question 17

What is a cashflow statement split into?

Answer 17

Investing activities, Financing activities, Core operations.

Question 18

What is an asset?

Answer 18

Resources controlled by a business as a result of past events and from which future economic benefits are expected to flow.

Question 19

Which of these could be assets to a business?

Answer 19

Land, Buildings, Machinery, Fixtures and Fittings, Patents, Stock, Debtors cash.

Question 20

What is a liability?

Answer 20

Present obligations of a business arising from past events, the settlement of which to result in an outflow from the business embodying economic benefits.

Question 21

Which of these could be liabilities to a business?

Answer 21

Capital, Owner’s claim against the business, Shareholders’ funds, Retained Profits, Creditor’s claims, Loans.

Question 22

Who are audited accounts prepared by?

Answer 22

Accountant.

Question 23

Under which Act may audited accounts be required?

Answer 23

Companies Act 2006.

Question 24

Why are audited accounts beneficial?

Answer 24

They identify misstatements, weaknesses, facilitate access to finance, provide better supplier terms, and are required if the business is sold.

Question 25

Which are typical UK company types?

Answer 25

Sole trader, Partnership, LLP, Limited Company, Public limited company.

Question 26

Why is an annual report important for a public limited company?

Answer 26

It explains performance to shareholders and investors and helps potential investors in decision making.

Question 27

What is the benefit of being a Public Limited Company (PLC)?

Answer 27

Audited accounts are publicly available, allowing the public and suppliers to check financial performance, and it provides perceived prestige and status.

Question 28

What are some common financial measures?

Answer 28

Acid test, Return on capital employed, Working capital ratio, Gearing ratio, Net assets per share.

Question 29

What is the acid test (quick ratio)?

Answer 29

How well are current liabilities covered by cash/liquid assets.

Question 30

What is return on capital employed?

Answer 30

How profitable is capital invested in business.

Question 31

What is working capital ratio (liquidity)?

Answer 31

Ability of company to pay (solvency) / how quickly can assets be turned into cash to pay short-term obligations.

Question 32

What is gearing ratio?

Answer 32

Exposure of business to loans as opposed to share capital.

Question 33

What is net assets per share?

Answer 33

Essentially the price which shares can be bought and sold at.

Question 34

What is the most common reason for business failure?

Answer 34

Cash flow issues.

Question 35

Which are the two financial reporting frameworks recognised by UK company law?

Answer 35

IFRS and UK GAAP.

Question 36

What does UK GAAP stand for?

Answer 36

UK Generally Accepted Accounting Practice.

Question 37

What does IFRS stand for?

Answer 37

International Financial Reporting Standards.

Question 38

Which type of entity must use IFRS?

Answer 38

Listed companies.

Question 39

Can other companies choose between IFRS and UK GAAP?

Answer 39

Yes - seek advice from an accountant.

Question 40

What is UK GAAP?

Answer 40

Financial reporting framework for how company accounts are prepared.

Question 41

What is the valuation basis for financial reporting under IFRS?

Answer 41

Fair Value.

Question 42

When would you want to assess financial strength of an entity as a surveyor?

Answer 42

For prospective tenants, contractors/tenders, profits valuation, and competition assessment.

Question 43

Which are typical credit check reports?

Answer 43

D&B, Experian, Creditsafe.

Question 44

What would you look for in a credit check report?

Answer 44

Risk assessment rating, Failure risk score, Delinquency score, Financial ratios.

Question 45

What is the profits test?

Answer 45

A typical profits test would be for the tenant to provide 3 years audited accounts showing a net profit of 3 times the annual rent.

Question 46

Why is it important to check financial strength of entities you deal with?

Answer 46

To assess risk of default and impact on investment security.

Question 47

What is the UK Corporation tax rate?

Answer 47

The main rate of corporation tax is 25% for the financial years 2023 and 2024, previously 19%.

Question 48

Tell me about VPGA 1?

Answer 48

Valuation Practice Guidance Application (VPGA 1) – Valuation for financial reporting Valuations for inclusion in financial statements must comply strictly with the applicable financial reporting standards adopted by the entity (e.g IFRS). It is important in the context of financial reporting that there are terms of engagement which are clear, leaving no areas of doubt as to what the member undertakes to do. It is the responsibility of the valuer to discuss and agree with their client and include within the terms of engagement, full details of the accounting standards to be adopted in the valuation, and to include the full definition of the basis of value, including reference of the basis of value definition (e.g. IFRS 13 or FRS 102, etc.), along with details of the accounting standard body or a local regulator whose definition has been applied.

Question 49

Talk me through one of the IFRS standards that you are aware of?

Answer 49

IFRS 16 Leases, introduced in 2016, sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective of IFRS 16 is to report information that (a) faithfully represents lease transactions and (b) provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. To meet that objective, a lessee should recognise assets and liabilities arising from a lease. IFRS 16 relates to accounting for leases on the balance sheet of a company, shown as a liability. Service charge is accounted for separately. Exemptions exist for leases of less than 12 months.

Question 50

What is a profitability ratio?

Answer 50

Profitability ratios are financial metrics that assess a company's ability to generate earnings relative to its revenue, costs, assets, or shareholder equity. These ratios provide insights into how efficiently a business uses its resources to create profits.