Accounting principles and procedures Flashcards
1
Q
What should be included in a set of public limited company accounts?
A
- Chairman’s statement
- Independent auditors report
- Income statement (profit and loss)
- Statement of financial position (balance sheet)
- Corporate governance report
- Remuneration report
- Other statutory information
2
Q
What is a balance sheet?
A
A statement of the businesses financial position showing its assets and liabilities at a given date, usually at the end of a financial year
3
Q
What is included in assets?
A
- Cash
- Property
- Debtors
- Other investments held
4
Q
What is included in liabilities?
A
- Borrowings
- Overdrafts
- Loans
- Creditors
5
Q
What is a Profit and Loss Accounts?
A
A summary of the business income and expenditure, prepared usually on an annual basis
6
Q
Explain management accounts.
A
Prepared for internal use by a business and are not audited
7
Q
Explain audited accounts.
A
Prepared by a Chartered or Certified Accountant
8
Q
Explain consolidated set of accounts.
A
They comprise a number of individual subsidiary accounts for a company within a single set of accounts
9
Q
Explain a cash flow statement.
A
Shows all the actual receipts and expenditure to include VAT
10
Q
What does IFRS stand for?
A
International Financial Reporting Standards
11
Q
Which lease accounting standard do all companies have to comply with?
A
IFRS 16
12
Q
What are the 3 types of financial statements you might come accross relating to a company?
A
- Balance sheets
- Income statements
- Cash flow statements
13
Q
What is an asset?
A
A resource owned or controlled by a business entity containing economic value
14
Q
What is a liability?
A
Something a person or company owes
15
Q
What is the difference between financial and management accounts?
A
Financial accounts is the collection of accounting data to create financial statements required by law
Managerial accounting is the internal processing used to account for business transactions
16
Q
What do you understand about the term Generally Accepted Accounting Principles (GAAP)
A
Standards that encompass the details, complexities and legalities of business accounting and must be followed when compiling financial statements
17
Q
What is the purpose of GAAP?
A
To improve the clarity of the communication of financial information
18
Q
Name 3 principles of GAAP
A
- Regularity - rules applied as standard practice
- Consistency - use same standards throughout
- Sincerity - provide objective and accurate information
19
Q
How do companies know which reporting framework to comply with?
A
It is set out in FRS 100 Application of Financial Reporting Requirements
20
Q
Can you tell me about a common financial measure?
A
Gross profit margin / net profit margin
Working capital ( Current assets minus current liabilities)
Debt-to-equity ratio (total debt/total equity)
21
Q
What is a debt-to-equity ratio?
A
Solvency ratio which measures how much a company finances itself using debt as opposed to equity
22
Q
What is the acid test?
A
Type of liquidity ratio
Measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately
23
Q
What is ROCE?
A
Return on capital employed
Compares the relative profitability of a company after taking into account the amount of capital use
24
Q
What is the working capital ratio?
A
Working capital ratio = current assets / current liabilities
Assess companies liquidity
25
What is the gearing ratio?
Compares some form of owner equity (or capital) to funds borrowed by the company (debt-to-equity ratio - debt/shareholders equity)
26
What are net assets?
Value of a companies assets minus its liabilities
27
What is net assets per share?
An expression of net asset value that represents the value per share of a mutual fund or an exchange-traded fund
28
Can you tell me what the role of an auditor is?
Inspect organisations’ financial accounts to ensure they’re correct and comply with the law
29
When are audited accounts needed and why?
All UK companies require an audit, except for ‘small companies’ with turnover below £10.2m or total assets below £5.1m (or less than 50 employees)
Needed because it is require by law and provides a high level of assurance to shareholders
30
Do public limited companies need an audit?
Yes, PLC must get their annual financial statements audited each year by independent auditors or accountants as prescribed in section 143 of the Companies Act 2013
31
Tell me something you understand from the Companies Act 2006
Replaced Companies Act 1985 and aims to improve shareholders rights, modernise and simplify corporate law one of the largest acts in history with over 1300 sections
Primary source of UK company law
32
What are the International Accounting Standards (IAS) ?
Previous accounting standards - replaced in 2001 by the IFRS
33
Why was IFRS introduced to replace IAS?
1. Easier to compare businesses around the world and increase transparency and trust in financial reporting
2. Foster global trade and investment
34
What is the difference between UK GAAP and IFRS?
FRS 102 is the most commonly used UK GAAP accounting standard and is more cost effective than IFRS
IFRS is internationally used
Differences in lease and investment property
35
What is the basis of valuation under IFRS 13?
Fair value
36
What is fair value?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
37
What is IFRS 16?
International accounting model that specifies how leases are recognised in financial statements
Single leaseholder accounting model - Leaseholders required to recognise leases as assets and liabilities in their financial statements
38
What is the objective of IFRS 16?
1. Ensure that leaseholders provide relevant information that represents their lease
2. Assess the effect that leases have on the financial position, financial performance and cash flows of an entity.
39
What is the result of IFRS 16 accounting?
1. Increase in assets, liabilities and net debt where leases are brought onto the balance sheet
2. Affects key accounting and financial ratios impacting a companies attractiveness and ability to raise finance
3. Might result in entities taking shorter leases to reduce net debt on the balance sheet
40
What has changed in relation to lease accounting / IFRS 16?
Changes the accounting substantially for lessees, eliminates a lessees classification of leases as either operating leases or finance leases
41
What is FRS 102?
The financial reporting standard applicable in UK and Ireland, designed to apply to the general purpose financial statements and financial reporting of entities including those that are not constitutes as companies and those that are not-profit orientated
42
What changes have been made to FRS 102?
Changes in the definition of intangible assets, greater range of intangible assets recognised
Companies required to account for holiday and sick pay liabilities at each year end. For example, employees carrying over holiday recognised as a liability on the balance sheet
43
How have FRS 102 changes affected investment property?
Investment property is measured at fair value at each reporting date with changes in fair value recognised in profit or loss and will require a valuation exercise in practice, instruction of a valuation expert
44
What are statutory accounts?
Also known as financial statements or year-end accounts
Drawn up to report various financial measures and related disclosures for filing with companies house
45
Why is good financial record keeping important to you?
1. Makes budgeting easier
2. Important for tax purposes
3. Prevents fraud and theft
4. Helps to efficiently manage cash flow
5. Makes management easier
46
Tell me 3 ways you ensure that Client money is handled properly?
1. Kept in a seperate account with word ‘client’ in the account name and distinct identifier of client
2. Have in clear writing, confirmation from the bank that client money in the account is not to be transferred or combined
3. Ensure account details are provided to clients and that money is immediately available
47
What RICS guidance or schemes do you adhere to in relation to Client money?
RICS Client Money Handling, 2019 (professional statement)
RICS Client Money Protection Scheme, 2019
48
Explain your understanding of the VAT domestic reverse charge for building and construction services
The VAT domestic reverse charge procedure is an anti-fraud measure designed to counter criminal attacks on the UK VAT system
Customers are able to charge themselves VAT and pay it directly to HMRC, rather than the supplier sending them an invoice at a later date
49
When do changes to the reverse charge apply from?
1st March 2021 - to include Building and Construction Services
50
What is the impact of the reverse charge on VAT accounting?
1. Subcontractor impact on cashflow, losing 20% of income ahead of quarterly VAT return
2. Boost to main contractors cash flow
51
What governs the format of company accounts?
The Companies Act (2006)
52
What is taxation?
Amount of money or % that is owed to HMRC based on company profit
53
What is directors remuneration in a profit & loss account?
Refers to how directors of a company are compensated for their services, usually fees, salary, use of company property or benefits
54
How is gross profit calculated?
Turnover (value of a company's sales) minus the cost of sales
55
What can be interpreted from gross profit?
Provides an idea of company performance year-on-year when comparing with previous gross profit
56
What is a better indicator of profit than gross profit?
EBITA - Earnings Before Interest, Tax, Depreciation and Amortisation
Calculated by subtracting administrative expenses from gross profit
Good indicator on whether company has a future
57
What is depreciation?
Planned, gradual reduction in recorded value of a tangible assset over its useful life
Applied to fixed assets, which generally experience a loss in their utility over multiple years
58
What is Amortisation?
The process of incrementally charging the cost of an intangible asset to expense over its expected period of use, which shifts the asset from the balance sheet, to the income statement
Reflects the consumption of an intangible asset over its useful life
59
What is the difference between Amortisation and Depreciation?
Amortisation charges off the cost of an intangible asset and depreciation does so for tangible assets
60
What are the two types of asset?
Fixed (around for a long time, such as land)
Current (shorter life span, such as stock)
61
What are the two types of liability?
Long term (not due in the next year)
Current (due within the year)
62
What key information can be concluded from a balance sheet?
Whether a company is solvent
How likely it is that the company will still be in business in a year
63
What is the liquidity ratio?
Ability to pay short-term debt obligations
64
How is liquidity ratio calculated?
Current assets / current liabilities
65
How is the liquidity ratio figure interpreted?
Ratio of 1 = can exactly pay off all current liabilities with current assets
66
What is Net Asset value (NAV)?
Total assets minus total liabilities
If share price is higher than NAV per share, market expects company to make future profits
67
What are the 3 parts of a balance sheet?
1. Assets
2. Liabilities
3. Owners equity
68
What is a credit rating?
A numerical or quantified assessment of an organisations creditworthiness, based on previous dealings.
Shows the ability for an organisation to fulfil their financial commitments or likelihood of defaulting on its debt obligations
69
What are the main commercial credit rating agencies
1. Dunn and Bradstreet (D&B)
2. Moody’s
3. Standard and Poor (S&P)
4. Fitch Ratings
5. Creditsafe
70
What are the two parts of a Dunn and Bradsteet rating?
Financial Strength indicator (5A - HH)
Indicator of size of tangibles and net worth based on recent balance sheet
Composite credit appraisal/risk indicator (1,minimum → 4, high risk)
Overall evaluation of creditworthiness and takes several factors into account: financial condition, payment history, length of operation, employee numbers etc
71
What is covenant strength?
Tenant ability to comply with lease obligations
72
What is revenue?
Income generated by the sale of products or services
73
What is capital expenditure?
Money spent by a business on acquiring or maintaining fixed assets (land, real estate, equipment)
74
What is a financial audit?
Objective examination/evaluation of financial statement to ensure they are fair and accurate
75
What is ratio analysis?
Method of gaining insight into a company's liquidity efficiency and profitability by studying its financial statements
76
What are profitability ratios?
Convey how well a company can generate profit from its operations
Gross profit ratio (gross profit/net sales)
Net profit ratio (Net profit/net sales)
Operating profit ratio (EBITA/net sales)
77
What are solvency ratios?
Compare a company's debt levels with its assets, equity and earnings
Suggest whether a company is solvent and can pay debt
Debt equity ratio
Interest coverage ratio
Equity ratio
78
What are efficiency ratio?
Evaluate how effective a company uses its assets to generate sales and maximise profits
Also called activity ratios
79
What is credit control?
Strategies employes by businesses to accelerate sales of products or services through the extension of credit to potential customers and Clients
Process of checking their creditworthiness to ensure that credit is only given to parties able to pay it
80
What is profitability?
Determines the scope of a company's profit in relation to the size of the business
Measure of efficiency
81
What is insolvency?
When an individual or company can no longer meet their financial obligations to lenders as debts become due
Can arise from poor cash management, reduction in cash inflow, and increases in expenses
82
What is VAT?
Consumption tax on goods and services, levided at each supply chain stage where value is added
20%
5% (reduced rate for some goods and services)
0% (zero rate)
83
Where might you find information on company assets?
On the balance sheet
84
Are profit & loss accounts current?
No - retrospective
85
When must a company be registered for VAT?
Total VAt taxable turnover for the last 12 months was over £85,000
or
The turnover is expected to go over £85,000 in the next 30 days
86
What is the VAT threshold?
Amount of money a company can earn before registering for VAT → £85,000
87
What is EBITA?
Earnings Before Interest, Taxes and Amortisation
Measure of a company's profitability
88
What is Goodwill?
An intangible asset that is associated with the purchase of one company by another
Portion of the purchase price that is higher than the sum of the net fair value of all assets purchased in the acquisition and the liabilities assumed in the process
The value of a company's name, brand reputation, loyal customer base represents aspects of goodwill → this is why one company may pay a premium for another
89
What does it mean for a company to go into administration?
A company becomes insolvent and it is put under the management of licenced insolvency practitioners
90
What is bankruptcy?
A legal proceeding initiated when a person or business is unable to repay its outstanding debts and liabilities
Makes sure any assets are shared amongst creditors and allows the party to make a fresh start from debt, with restrictions
91
What is receivership?
A court appointed tool that can assist creditors to recover funds in default and can help companies avoid bankruptcy
Aims to return companies to profitability
Court appoints an independent receiver who manages the company's business
92
Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?
To assess the covenant strength of tenants
To assist with building operations
93
Where can you find information on a company's financial status?
Companies House
Credit check from credit agencies
94
What is liquidation?
A process where assets are used to pay off its debts
Leftover money goes to shareholders and the company is then closed / de-registered
95
What is the Limitations Act 1980?
Outlines the time limit which a creditor can chase a debtor for outstanding debts
Only applies where no contact between creditor and debtor has been made in a specific period
96
What is the meaning of misappropriation of funds?
Occurs when a person entrusted to manage someone else's money or property, steals all or part of that for their own gain
Can be internal, such as a employee or external, such as targeted infiltration
97
What are the three types of liquidation?
1. Creditors voluntary
2. Compulsory
3. Members voluntary
