Accounting Principles

Question 1

What is a balance sheet?

Answer 1

A snapshot of a business at any given date, showing the value of their assets, liabilities, and shareholders equity.

Question 2

What does a profit and loss statement show?

Answer 2

A business’ income and expenses over a specific period, including revenue, cost of sales, and various profits.

Question 3

What is the purpose of a cash flow statement?

Answer 3

To show a company’s inflows and outflows over a specific period.

Question 4

What is the standard VAT rate in the UK?

Answer 4

20% on any supply of goods and services that is not exempt, zero rated, or subject to a reduced rate.

Question 5

What is the top rate for Stamp Duty Land Tax (SDLT) on commercial property transactions?

Answer 5

5% applies to the extent that the consideration exceeds £250,000.

Question 6

What is the corporation tax rate for profits below £50,000 in the UK?

Answer 6

19%.

Question 7

What are the personal taxation rates for earnings between £12,571 and £50,270?

Answer 7

20% basic rate.

Question 8

What is the additional tax rate for earnings over £125,140?

Answer 8

45%.

Question 9

What is revenue in the context of business finance?

Answer 9

The money a company generates through selling a product or service.

Question 10

What does capital expenditure refer to?

Answer 10

Funds used for one-time large purchases of fixed assets for long-term revenue generation.

Question 11

What is revenue expenditure?

Answer 11

Ongoing operating expenses (OpEx) used in running daily business operations.

Question 12

What does cash flow measure?

Answer 12

The net cash and cash equivalents transferred in and out of a company.

Question 13

What is the purpose of auditing?

Answer 13

To review financial statements to ensure they are a fair and accurate representation of transactions.

Question 14

What are liquidity ratios used for?

Answer 14

To measure a company’s ability to pay off its short-term debts.

Question 15

What do solvency ratios compare?

Answer 15

A company’s debt levels with its assets, equity, and earnings.

Question 16

What is profitability?

Answer 16

A situation in which a company is generating a profit.

Question 17

What does insolvency refer to?

Answer 17

When the value of a company’s liabilities exceeds that of its assets.

Question 18

What is bankruptcy?

Answer 18

When an individual or partnership can’t pay their debts and applies for bankruptcy, managed by courts.

Question 19

What is an Individual Voluntary Arrangement (IVA)?

Answer 19

An arrangement where an individual arranges their debts with a creditor as an alternative to bankruptcy.

Question 20

What is a Company Voluntary Arrangement (CVA)?

Answer 20

A rescue and restructuring option that allows a company to pay its debts over time while remaining in control.

Question 21

What is compulsory liquidation?

Answer 21

When a company is ordered by a court to be wound-up due to unpaid debts.

Question 22

What are accounting standards?

Answer 22

Rules and measures determining how businesses conduct their bookkeeping and accounting.

Question 23

What are the two options for accepted accounting standards under ‘The Companies Act 2006’?

Answer 23

• UK Generally Accepted Accounting Practice (UK GAAP)
• International Financial Reporting Standards (IFRS)

Question 24

What is FRS 100?

Answer 24

‘Application of Financial Reporting Requirements’ guiding the application of relevant standards.

Question 25

What does FRS 102 cover?

Answer 25

'The Financial Reporting Standard Applicable to the UK and Republic of Ireland' with comprehensive requirements.

Question 26

What is the focus of FRS 103?

Answer 26

Reporting and accounting requirements for entities issuing insurance contracts.

Question 27

What does FRS 104 guide?

Answer 27

Preparation of interim financial reports.

Question 28

What defines a micro-entity under FRS 105?

Answer 28

A company that meets two of three requirements regarding turnover, balance sheet, and number of employees.

Question 29

What are Statements of Recommended Practice (SORPs)?

Answer 29

Accounting best practices issued by SORP-making bodies, supplementary to standards.

Question 30

What is IFRS?

Answer 30

An international set of rules for entities' financial statements established by IFRS Foundation and IASB.

Question 31

What is the purpose of IFRS 1?

Answer 31

Sets out procedures for entities adopting IFRS standards for the first time.

Question 32

What does IFRS 3 cover?

Answer 32

'Business Combinations' and the acquisition method for measuring fair value.

Question 33

What is outlined in IFRS 5?

Answer 33

Accounting for non-current assets held for sale and discontinued operations.

Question 34

What does IFRS 10 require?

Answer 34

Preparation of consolidated financial statements including controlled entities.

Question 35

What is the focus of IFRS 12?

Answer 35

Disclosure of interests in other entities, including joint arrangements and subsidiaries.

Question 36

What are the requirements for preparing a consolidated financial statement?

Answer 36

An entity includes other entities it controls ## Footnote This involves reporting the financial positions of all controlled entities as a single entity.

Question 37

What does IFRS 11: 'Joint Arrangements' outline?

Answer 37

The requirements for any entities which jointly control a venture ## Footnote This standard addresses how to account for joint arrangements.

Question 38

What is the focus of IFRS 12: 'Disclosure of Interests in Other Entities'?

Answer 38

Disclosures regarding joint arrangements, subsidiaries, associated and structured entities ## Footnote This standard ensures transparency in reporting interests in other entities.

Question 39

What does IFRS 13: 'Fair Value Measurement' provide?

Answer 39

A comprehensive framework for measuring the fair value of assets using a market-based measurement ## Footnote This standard aims to enhance consistency and comparability in fair value measurements.

Question 40

What does IFRS 14: 'Regulatory Deferral Accounts' allow?

Answer 40

An entity to use previous GAAP accounting for certain regulatory deferral account balances when adopting IFRS ## Footnote This standard facilitates a smoother transition to IFRS for certain entities.

Question 41

What is the purpose of IFRS 15: 'Revenue from Contracts with Customers'?

Answer 41

Determines how an IFRS reporter can recognise revenue and requires more informative disclosures ## Footnote This standard aims to standardize revenue recognition practices across industries.

Question 42

What does IFRS 16: 'Leases' specify?

Answer 42

How IFRS reporters can recognise, measure, disclose, and present leases ## Footnote This standard changes the way leases are reported on the balance sheet.

Question 43

What framework does IFRS 17: 'Insurance Contracts' set out?

Answer 43

For recognising, measuring, presenting, and disclosing insurance contracts ## Footnote This standard aims to provide relevant information regarding insurance contracts.

Question 44

What are current assets?

Answer 44

Assets that can be converted to cash within a year, including cash, accounts receivable, inventory, supplies ## Footnote Current assets are critical for assessing liquidity.

Question 45

What are current liabilities?

Answer 45

Debts that are due within a year, including notes payable, accounts payable, wages payable, interest payable ## Footnote Current liabilities are important for understanding short-term financial obligations.

Question 46

What is a cashflow statement?

Answer 46

Summary of the actual or anticipated inflows and outflows of cash in a firm over the accounting period ## Footnote Often represented as an S curve on construction projects.

Question 47

What is a balance sheet?

Answer 47

A financial snapshot showing a company’s assets, equities, and liabilities at one point in time ## Footnote This document is vital for understanding the financial position of a company.

Question 48

What is a profit and loss account?

Answer 48

Shows the income and expenditure, and the resulting profit or loss over a certain time period ## Footnote This statement is essential for assessing business performance.

Question 49

What is capital expenditure?

Answer 49

Money spent on acquiring or improving an asset, usually a one-time purchase, such as buildings or equipment ## Footnote Capital expenditures are crucial for long-term investment strategy.

Question 50

What is revenue expenditure?

Answer 50

Money spent on the day-to-day running of the business, including utility bills, staff wages, temporary office space ## Footnote Revenue expenditure is necessary for operational continuity.

Question 51

What are capital allowances?

Answer 51

A deduction from taxable profits for certain types of capital expenditure, such as plant and machinery, computer equipment, or electric cars ## Footnote These allowances incentivize investment in capital assets.

Question 52

How is VAT dealt with in a company account?

Answer 52

A separate VAT account is kept and needs to be up-to-date ## Footnote Proper VAT management is essential for compliance and financial reporting.

Question 53

What is VAT reverse charge?

Answer 53

Where payments are made net of VAT and the contractor or client pays VAT direct to HMRC instead of the supplier ## Footnote This mechanism shifts the responsibility of VAT accounting.

Question 54

What are the types of insolvency?

Answer 54

Administration, Administrative receivership, Company compulsory liquidation, Voluntary liquidation ## Footnote Understanding these types is crucial for managing financial distress.