Accounting principles and Business planning Flashcards
1) What accounts are most useful to you when doing the profits method?
Three years previous to the valuation date as long as they are a full set of accounts.
2) What is a profit and loss statement?
Shows the money that has come in and gone out during a specific period. It shows how the income (top line) is transformed into the bottom line (profit) after all expenses and revenues have been deducted. This represents a period of time.
Summary of income and expenditure prepared on annual basis.
4) What is a balance sheet?
shows assets and liabilities at a specific point in time, e.g. at the end of the financial year.
5) What assets would you find on a balance sheet?
Cash, property and other investments.
6) What liabilities would you find on a balance sheet?
Borrowing, overdrafts and loans
What is a cash flow statement?
shows all the actual receipts and expenditure to include VAT.
9) What is the main difference between a cash flow statement and a balance sheet?
The main difference between these is that a balance sheet reflects a specific point in time, whilst cash flow statements and profit and loss accounts reflect a period of time. Cash flow statements are not included in the annual accounts, they are used for management purposes.
14) Why are accounting principles relevant to your pathway?
All candidates may potentially set up their own practice or join the company’s management team in the future; therefore a basic knowledge of accounting principles is required.
For assessing covenant strength of potential tenants and landlords.
a. Profits test
i. Net profit of business must be x3 rent for 3 consecutive years
ii. Net asset value must be x5 times rent
For profits method valuations
b. MCC evidence can include trade accounts; need to be able to assess this over the period in question.
What would you expect to see in the accounts of a Public Limited Company?
- Chairman’s statement
- Independent auditors report
- Income statement (profit and loss account)
- Statement of financial position (balance sheet)
- Corporate governance report
- Remuneration report
- Other statutory information
How would you use accounts for a covenant check?
- Profits text – net profit is 3 times the annual rent payable
- Creditsafe checks
What are the differences between auditable and non-auditable accounts?
Audited Accounts
- Produced annually
- Prepared by chartered or certified accountant
- For a statutory function, reporting to companies house and HMRC (corporation tax)
Management Accounts
- Produced throughout the year
- Prepared for internal use by a business and not audited
- Used to give information on the financial accounts of a business for management
Why might management accounts be of use?
- When undertaking a tenant covenant check, the annual audited accounts may not be prepared for the year at that time and management accounts may be able to give an indication of the tenant’s financial position at the time of the transaction rather than relying on historical account data
What is IFRS 16?
- The International Financial Reporting Standards 16 is the lease accounting standard all companies must comply with when using IFRS
- The full cost of leases have to be recognised as a liability, though service charge payments would be accounted for separately
- Exemptions exist for a lese of 12 months or shorter
1) What is a business plan?
A business plan is a formal statement of a set of goals, the reason they are attainable and the plan for reaching the goals. It may also contain information regarding how the business or team are going to reach the goals.
2) What factors must be considered when producing a business plan?
Main objectives to be achieved
Staffing levels
Budgets
Timescales
External factors which can affect plan e.g. economy
