Accounting principles and procedures

Question 1

What does a set of public limited company accounts include?

Answer 1

• Chairman’s statement
• Independent auditor’s report
• Income statement (profit and loss account)
• Statement of financial position (balance sheet)
• Corporate governance report
• Remuneration report
• Other statutory information

Question 2

What does a balance sheet (statement of financial position) show?

Answer 2

Statement of the business’s financial position showing its assets and liabilities at a given date, usually at the end of a financial year
• Assets: cash, property, debtors and other investments
• Liabilities: borrowings, overdrafts, loans and creditors

Question 3

What does a profit and loss account (income statement) show?

Answer 3

Summary of the business’s income and expenditure transactions, prepared usually on an annual basis
Recorded on an accruals basis i.e. revenues are reported when they’re earned

Question 4

What does the cash flow statement show?

Answer 4

Shows actual receipts and expenditure. It is not included in the annual accounts but is prepared for management purposes

Question 5

What are the three primary types of financial accounts?

Answer 5

• Balance Sheet
• Profit and Loss Account
• Cash flow statement

Question 6

What are management accounts?

Answer 6

Prepared for internal use by the business and are not audited

Question 7

Who are audited accounts prepared by?

Answer 7

Chartered or Certified Accountant

Question 8

When did IFRS 16 become effective?

Answer 8

1st January 2019

Question 9

What does IFRS 16 require companies to do?

Answer 9

Full cost of the lease has to be accounted for on the balance sheet. Occupiers obligation to pay rent will have to be recognised as a liability

Question 10

Is service charge counted as a liability under IFRS 16?

Answer 10

No, service charge payments are accounted for separately

Question 11

What leases are exempt from IFRS 16?

Answer 11

Leases 12 months or shorter

Question 12

What impact will IFRS have on commonly used financial ratios?

Answer 12

• Leverage (gearing) increases – because financial liabilities increase
• EBITDA increase – because cost of lease is represented as depreciation and interest which is taken off after EBITDA
• Asset turnover (sales / total assets) decreases – because lease assets will be recognised as part of total assets

Question 13

What is a covenant strength?

Answer 13

Ability of a tenant to meet the covenants of the lease. Includes rents, service charge, repairing and insuring obligations and statutory obligations

Question 14

What is a D&B rating?

Answer 14

The D&B Rating is an indicator that assesses the creditworthiness of a company based on the financial strength of the business, payment behaviour, age of the company, company size and other important factors

Question 15

What are the two components comprising the D&B rating?

Answer 15

• Financial Strength (e.g. 5A) rating is based on the tangible net worth as computed by D&B from financial statements supplied by the company. The rating indicates the credit capacity
• Risk Indicator highlights the chance of business failure, ranging from 1 – 4 with one reflecting low/minimum risk and four reflecting high risk

Question 16

What is the risk indicator score produced by D&B based on?

Answer 16

• Outstanding charges or slow payment experiences reported
• Tangible net worth of the parent company
• Pre-tax profit over total assets ratio
• Values, ratios and trends from the Balance Sheet

Question 17

What do the two scores produced by D&B show?

Answer 17

• Delinquency Score shows an organisation’s relative rank of delinquency against other organisations in the country by percentiles (100 = lowest risk, 1 = highest risk)
• Payment Score (Paydex) shows an organisation’s payment timeliness based on their trade history (<80 = slow payments, 80 = prompt payments, >80 = payment before due)