Accounting Principles Flashcards
What are the key financial statements that companies provide?
The key financial statements are:
* Profit and loss accounts
* Balance sheets
* Cash flow statements
What is the difference between management and financial accounts?
Management accounts are for internal use, while financial accounts are required by UK law.
What does a profit and loss account show?
It shows the incomes and expenditures of a company and the resulting profit or loss.
What does a balance sheet show?
It shows what a company owns (its assets) and what it owes (its liabilities) at a given point in time.
What is a cash flow statement?
It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
What are capital allowances?
Tax relief on certain items purchased for the business, such as tools and equipment.
What are sinking funds?
Funds that are set aside for future expense or long-term debt.
What is insolvency?
An inability to pay debts where liabilities exceed assets.
What is Companies House?
An agency that incorporates and dissolves limited companies within the United Kingdom.
What does HMRC stand for?
His Majesties Revenue and Customs.
What are liquidity ratios?
They measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
What is the liquidity ratio calculation?
Liquidity ratio = current assets / current liabilities.
What is the typical liquidity ratio?
The ratio is usually around 1.5, but it depends on the sector of activity.
What does a liquidity ratio of less than 0.75 indicate?
It can be an early indicator of insolvency.
What are profitability ratios?
They measure the performance of a company in generating its profits.
What is the trading profit margin ratio formula?
Trading profit margin ratio = turnover – (cost of sales / turnover).
What are financial gearing ratios?
They measure the financial structure of the company and are crucial indicators for suppliers of debt and equity.
What do highly geared companies rely on?
They rely mainly on borrowing.
Why do chartered quantity surveyors need to understand company accounts?
To aid in preparing their own business accounts and assessing the financial strength of contractors.
What is the purpose of a profit and loss account?
To monitor and measure profit (or loss) and assist in forecasting future performance.
What is the difference between debtors and creditors?
Creditors are owed money, while debtors owe money.
What are management accounts?
Accounts prepared by a company for internal management use.
What is a financial statement?
Forecasts of income and expenditure used as an analytical tool.
What does a profit and loss account demonstrate?
It demonstrates a company’s sales, running costs, and profit or loss over a financial period.
