Accounting Principles and Procedures Flashcards
Why should you keep company accounts?
- To keep track of money coming in and out
- To monitor profit and loss
- Future business planning
- Highlight any problem areas of the company so they can be reviewed and solved
- To submit annual financial statements to Company House.
In accordance with the Company’s Act, 1985 limited companies must provide their year-end accounts in accordance with a legal format
What is the difference between management and Company Accounts?
Management accounts are used internally by the managers of the business
Financial accounts are company accounts required by law and audited by a Chartered Accountant
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What is a balance sheet?
- A balance sheet is a statement showing a business’s financial position at a point in time.
- It shows a business’s assets and liability at a given date
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What is a profit and loss account?
P and L accounts demonstrate how the revenue is transformed into net profit
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What is a cash flow statement?
- Cashflow shows the actual receipts and expenditure and includes VAT
- Can highlight cash balance shortfalls.
- Reviewing cashflows can help ensure businesses can afford to pay suppliers and employees
- Struggling companies to review weekly
- Healthy companies to review weekly or monthly
What is the difference between a Sole Trader, Partnership, or Limited Company and an LLP?
Sole Trader
A person who is the excludive owner of a buisness, entitled to keep all profits after tax but liable for all losses. (Unlimited Liability).
Partnership
A business organisation in which two or more individuals manage and operate the business. Both owners are equally personally liable for the debts from the business.
Limited
In a limited company, the shareholder’s liability is limited to the capital they originally invested. If the company becomes insolvent, the shareholder’s personal assets remain protected.
Limited Liability Partnership (LLP)
An LLP is a partnership where some or all partners have limited liabilities. One partner is not responsible for another patner’s misconduct or negligence.
How would assess a contractor’s financial accounts?
Request a copy of the contractor’s company accounts for the last 3 years, which would include the profit and loss statement balance sheet and cash flow statement.
This would allow me to assess:
- If the contractor had been profitable in the last few years.
- Calculate their liquidity ratio to see if they would be able to cover losses under a contract to stay solvent.
Should mention that further advice on a contractor’s financial position should be reviewed by a qualified accountant.
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What are the main types of ratio analysis used to assess a company’s financial strength?
Liquidity - the ability of the company to pay its way.
Current ratio= Liquid assets / Liabilities.
Gearing - information on the relationship between the exposure of the business to loans as opposed to share capital.
Net Gearing = Net Debt / Equity
Profitability - how effective the company is at generating profits given sales and/or its capital assets.
Gross Margin= Gross profit / Net Sales
Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?
- For assessing incoming Tenant’s covenant
- The financial strength of contractors and those tendering for contracts.
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What does a set of Company Accounts typically contain?
- The Chairman’s statement
- Independent Auditors Report
- Income Statement (P&L Account)
- Statement of Financial Position (Balance Sheet)
- Corporate Governance Report
- Remuneration Report
- Other statutory information
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What is IFRS 16 and why does it matter to property?
IFRS 16 (International Financial Reporting Standards) came into effect in 2019. It changed the way that a lease was recorded on the balance sheet.
Previously a cost for renting property would have been recorded on the income statement, affecting profit and loss.
Now a lease is recorded as a depreciating liability on the balance sheet, the liability is largest at the start of the lease.
How short does a lease have to be for IFRS 16 not to apply?
When a lease is shorter than 12 months
Who is qualified to advise on financial matters?
A chartered accountant
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What does a Dun and Bradstreet report show?
It shows their assessment of a company’s financial strength. Using this I can determine how the investment market would view this information.
I cannot judge the company’s overall financial position as I am not a Chartered Accountant.
What is the difference between underlying profit and statutory profit?
Underlying is based on usual revenue and expenditure.
Statutory includes exceptional costs, such as the acquisition of a new business.
