Accounting Principles and Procedures - Summary of Experience Flashcards
1
Q
What is depreciation?
A
The reduction in value of an asset over its useful life. Applied to fixed assets which generally experience a loss in their utility over multiple years
2
Q
What are the two types of asset?
A
Fixed (long term) - e.g. land
Current (short term) - e.g. cash/stock
2
Q
What is amortisation?
A
An accounting method used to spread the cost of an intangible asset over its useful life
e.g. spreading the cost of of a patent over 10 years at 10% each year
3
Q
What are the two types of liability?
A
Non-cyrrent (long term) - e.g. not due soon such as long term loan, leases
Current (short term) - e.g. those due within a year
3
Q
What were the cash flow issues experienced by the tenant at Croxley Park (S11 B6)?
A
- It was noted that their revenue wasn’t high enough to cover expenses whilst they were also receiving customer payments late
- The service charge budget has also risen during that period and therefore their assets were struggling against liabilities
4
Q
What is tenant covenant strength?
A
The ability of a tenant to comply with lease obligations
5
Q
What is the efficiency ratio?
A
Evaluates how efficiently a company uses assets to generate sales
E.G. Cost of sales / average inventory
6
Q
What is the profitability ratio?
A
Conveys how well a company can generate profit from its operations (profit DIVIDED by net sales)
7
Q
What is the solvency ratio?
A
Compares a companys debt with its assets, equity and earnings (Net income + depreciation / current+fixed liabilities)
- Suggests whether a company is solvent and can pay lenders debts
- Takes a more long-term outlook than liquidity ratio
- Company considered financially strong if higher than 20%
8
Q
What is the liquidity ratio?
A
A ratio that determines a company’s ability to pay its short term debt obligations
Current assets / current liabilities
9
Q
How is the liquidity ratio interpreted?
A
If ratio = 1 they can exactly pay off all liabilities with assets but if lower then they can’t
9
Q
What are the main commercial credit rating agencies?
A
- Dunn and bradstreet
- Moody’s
- Standard and poor (S&P)
- Fitch Ratings
10
Q
How was the 3-month rent free period documented with solicitors?
A
1) Was documented through a side letter (rent concession letter)
2) I inputted the information onto a data change form
3) Actioned by the data team
4) No accounting charges for rent raised for the period (inbetween two quarters)
5) Accounting team allocated correctly on next payment
11
Q
What is a credit rating?
A
An independent assessment of the ability of a corporation or a person to repay their debts.
12
Q
What are the two parts of a Dunn and Bradstreet rating?
A
2A - Financial Strength (Based on tangible net worth)
4 - Risk Indicator (Derived from D&B failure score e.g. payment history, employee number, length of operation)
13
Q
How did you note that the tenant at Croxley Park’s (B6 S11) financial position had weakened?
A
Firstly employed the profits test + also dunn and bradstreet
- Then confirmed this with the independent expert I instructed
14
Q
What is a management account?
A
Internal process of accounting used to account for business transactions (profit and loss and balance sheet) - Not legally required
- More up to date so monthly/quarterly
14
Q
What is a company account?
A
Documents prepared at the financial year end showing a companys performance over the account period - Legal requirement under the Companies Act 2006
15
Q
What does it mean if a company goes into administration?
A
Company becomes insolvent and is put under the management of licensed insolvency practitioners
16
Q
What is EBITDA?
A
Earnings before interest, tax, depreciation and amortisation
- Measure of company profitability
Shows how much cash flow a company has available to pay for long-term debt
17
Q
What is bankruptcy?
A
A legal proceeding whereby a person/business is unable to repay outstanding debt and liabilities
18
Q
What are the 3 tests of insolvency?
A
- Cash flow test - check if able to pay bills in near future
- Balance sheet test - check if assets are greater than liabilities
- Legal action test - check if legal action has been taken against business for debt of £750 or more - If it has they will be deemed insolvent
18
Q
What is liquidation?
A
A process where assets are used to pay off debts via a liquidator
- Leftover money goes to shareholders and company is closed
19
Q
What is receivership?
A
A court appointed tool that can assist creditors to recover funds in default and help companies avoid bankruptcy
- Aims to return companies to profitability
- Independent receiver appointed by court - they manage companys business
20
What is the acid test ratio?
Liquidity ratio that measures ability of company to use its quick assets to extinguish its current liabilities immediately
21
What are the account KPIs related to the 7 day markers?
Rent collection
- Day 7 - 90%
- Day 14 - 92%
- Day 21 - 95%
- Day 28 - 98%
SC
- Get budget to accounts 2 months before SC period begins
- Recs get finalise 2 months after period ends
22
What is IFRS and what did it replace?
International Financial Reporting Standards
- Replaced international accounting standards in 2001
23
What is IFRS16?
International accounting model that specifies how leases are recognised in financial statements (Effective from 01/01/2019)
- Results in an increase in assets, liabilities and net debt where leases are brought on to the balance sheet
- Lease has to be longer than 12 months
24
What are the goals of IFRS 16?
- Ensure that leaseholders provide relevant info that represents their lease
- Assess the effect that leases have on financial position, financial performance and cash flows of an entity
25
What is the result of IFRS 16?
- Affects key accounting and financial ratios impacting a companies attractiveness and ability to raise finance
- Might result in entities taking shorter leases to reduce debt on the balance sheet
- Increase in assets, liabilities and net debt where leases are brought onto the balance sheet
26
What governs the format of company accounts?
The Companies Act 2006
27
What is included in company accounts as laid out in Companies Act 2006?
- Cover page
- Information and contents page
- Directors report
- Accountants report
- Statutory profit and loss account
- Balance sheet
- Notes to the accountant
- Auditors reports
28
What is a balance sheet?
Outlines a companys assets and liabilities - Shows a sign of their worth
29
What is a cash flow statement?
Statement providing data regarding all cash flows received from ongoing operations and investments - includes cash outflows that pay for operations/investments
30
What is a profit and loss account?
Summarises a companys revenues, costs and expenses during a specific period (These are retrospective)
31
What is GAAP?
Generally Accepted Accounting Principles
32
What is the difference between GAAP and IFRS?
FRS102 - Most commonly used UK GAAP accounting standard (more cost effective that IFRS) - Legally bound to use under companies act 2006
GAAP is more legally based - lease classified as finance or operating lease (compared to asset and liability under IFRS)
IFRS is more principal based - Used for UK companies part of wider international group to ensure consistency
33
What are the 10 principles of GAAP?
- Regularity
- Consistency
- Sincerity
- Permanence
- Non-compensation
- Prudence
- Continuity
- Periodicity
- Materiality
- Utmost good faith
34
What are the 3 types of financial statements you might come across?
- Balance sheets (statement of financial position)
- Income statements (profit and loss account)
- Cash flow statements
35
What are assets on the balance sheet?
Items the company owns and can provide economic benefit to them
36
What are the liabilities on the balance sheet?
Funds owed to other parties
37
What can be concluded from a balance sheet?
Whether a company is solvent and if it is likely they will still be in business in a year
38
What are 3 parts of balance sheet?
- Assets
- Liabilities
- Owners equity
39
What are the international accounting standards
Older accounting standards replaced by IFRS in 2001
40
Why were IFRS introduced to replace IAS?
Made it easier to compare businesses globally and increase transparency and trust in global financial reporting
41
What is taxation?
Amount of money or % owed to HMRC based on company profit
42
What is directors remuneration in a profit and loss account?
How directors are paid for their services - e.g. fees, salary or dividend
43
Why do surveyors need to be able to interpret company accounts?
To assess the covenant strength of tenants
44
When must a company be VAT registered?
If company turnover for last 12 months was over £90k or is expected go over 90k in next 30 days
45
What is VAT?
Consumption tax on goods and services
- Levied at each supply chain stage where value is added
- 20%, 5% (reduced rate for some goods), 0%
46
Why do companies keep accounts?
- Regulatory
- Keep track of incomings/outgoings
- Compare performance and plan future growth
47
Why is cash flow statement believed to be the most intuitive of all financial statements?
Follows cash made by business in operations, investment and financing (sum of these is net cash flow) - Demonstrates organisations ability to operate in the short and long-term
48
What is the difference between depreciation and amortisation?
Amortisation focuses on intangible assets (e.g. patent/copyright)
Depreciation focuses on fixed assets
49
What are liabilities?
What a company owes to other parties
50
What is the gearing ratio?
Compares some form of owner equity/assets (capital) to funds borrowed by the company (debt to equity ratio)
SHOWS HOW A COMPANY IS FUNDED
50
Can you give me an example of a liability?
Bank loan, unpaid bill
51
What are net assets?
Value of a companys assets minus its liabilities
51
What is the difference between financial and management accounts?
Management accounts internal
Financial accounts required by law and must follow format (year end)
52
Can you tell me what the role of an auditor is?
Inspects organisations financial accounts to ensure they are correct and comply with the law
53
When are audited accounts needed and why?
All companies require an audit except for small companies with :
- Turnover below £10.2m
- Total assets below £5.1m
- Under 50 employees
Required by law and provide assurance to shareholders
54
Do public limited companies need an audit?
Yes - By independent auditors or accountants (section 143 of Companies Act 2013)
55
What is the basis of valuation under IFRS 13?
Fair value
56
What is fair value?
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
56
What is FRS 102?
A UK GAAP Financial reporting standard applicable to UK and Ireland
- Applys to financial statements that are intended to give a true and fair view of a reporting entity's financial position and profit or loss for a period (also applies to public benefit).
57
When did IFRS 16 changes come into effect?
1st Jan 2019
58
Why is good financial record keeping important to you?
- Easier budgeting
- Important for tax purposes
- Prevents fraud/theft
- Manage cash flow better
58
Tell me 3 ways you ensure that Client money is handled properly?
- Money is kept in a separate account - Identifiable
- Ensure I provide account details to client if they need money immediately
- Have in writing from bank that client money is not to be transferred/combined
59
What RICS guidance or schemes do you adhere to in relation to Client money?
RICS Professional Standard: Client Money Handling, 1st Edition, 2019
RICS Regulation: Client Money Protection Scheme, Version 1, 2019
60
How is gross profit calculated?
Turnover (value of a companys sales) minus the cost of sales
61
What can be interpreted from gross profit?
Provides an idea of company performance year-on-year when comparing with previous gross profit
62
What is a better indicator of profit than gross profit?
EBITDA - Calculated by subtracting administrative expenses from gross profit
63
What is the difference between assets and liabilities known as?
- Equity
- The net assets
- Net worth
- Capital of the company
64
What is revenue?
Income generated by the sale of products or services
65
What is capital expenditure?
Money spent by business in acquiring/maintaining fixed assets
66
Are profit & loss accounts current?
No - Retrospective
67
What is the VAT threshold?
£90k before tax
68
What is the Limitations Act 1980?
Outlines a time limit which a creditor can chase a debtor for outstanding debts - Only applies when there is no contact between parties for specific period (Usually 6 YEARS)
69
What is the meaning of misappropriation of funds?
Happens when a person entrusted to manage someone elses money or property, steals all or part of that for their own gain (can be internal or external) - ALSO CALLED FRAUD
70
What is a financial bond?
Fixed income instrument that represents a loan made by an investor, to a borrower
71
What is the result of IFRS16?
- Increase in assets, liabilities and net debt as leases brought onto balance sheet
- Impacts companys attractiveness and ability to raise finance
72
Consequences of insolvency?
- Business may go into liquidation and stop trading
- Business may go into administration and be sold
73
What is statutory profit?
The profit that a company is required to report by law in their financial statements according to UK GAAP
74
You say your familiar with company accounts, can you tell me when you have interpreted accounts and for what reason?
For a lease assignment - Helped by an independent accountant to back up my original thoughts
75
Croxley Park – how did you determine that their financial position had weakened exactly?
Falling revenues, whilst costs remained high
76
Croxley Park - Why did you recommend such drastic loss to your client? Could you not have recommended a payment plan/monthly payments?
No - Financial position of the tenant was worrying, whilst office units on the park were struggling due to the properties' position as an out of London office premises.
77
You say the rent free period was formally documented by sols – how did they document this?
Via a side letter, which was appended to the lease
78
How can a company become insolvent?
- Liabilities outweigh assets or unable to pay your debts
79
What is net operating income?
Properties income deducting its expenses
80
Four key principles of GAAP?
Cost principle - items to be recorded as actual price paid
Revenue principle - Recognizing revenue when received/earnt
Matching principle - Any expenses incurred to be recorded in same period as related revenue
Disclosure principle - Ensures investors receive all info necessary to make investing decisions
81
What is compulsory liquidation?
- Follows winding up petition
- Insolvency practitioner liquidates assets to cover debts
- Company is dissolved
82
What is creditors voluntary liquidation?
- Directors choose to liquidate themselves if no viable future
- Creditors vote to choose liquidator
- Liquidate assets to pay creditors
83
What is the difference between an application for payment or an invoice?
Application for payment = Used for completed works or materials supplied and is gross of VAT
Invoice = Used for works that are to be provided and is net of VAT
84
What is the difference between a BACS and CHAPS payment?
BACS = takes 3 business days to arrive
CHAPS = Same day payment (have to pay costs)
85
What is a Creditsafe Report?
Statement including information about a company to determine how reliable a business is at paying back their loans
- Business info
- Company credit limit
- Director and shareholder details
- Company financial information
- Adverse information (e.g. court judgements)
- Payment behaviour
86
What is NAV?
Net Asset Value = Total assets - Total liabilities
87
Which reporting framework do public limited companies have to comply with?
IFRS
88
How do companies know which reporting framework to comply with?
Can choose IFRS or UK GAAP
- It depends - IFRS required for public limited companies
89
What is IFRS 13?
2013 standard - Refers to IFRS that require or permit fair value measurements, providing a single IFRS framework for measuring fair value.
- Defines fair value as a market based measurement (Estimate price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions
90
What are micro company accounts used for?
- turnover of £632,000 or less
- £316,000 or less on its balance sheet
- 10 employees or less
91
What are micro-company accounts?
- Prepare simpler accounts that meet statutory minimum requirements
- Send only your balance sheet with less information to Companies House
- Benefit from the same exemptions available to small companies
92
What is another name for a profit and loss account?
Income statement
93
What is another name for a balance sheet?
Statement of financial position
94
Do you include VAT on a balance sheet?
Yes
95
What is the difference between input and output VAT?
Input = paid by a business on its services
Output = charged by a business on sale of goods and services
96
Do foreign landlords need to register for VAT?
Yes under the non-resident landlord scheme (NRLS)
Letting agents of a non-resident landlord must deduct tax from the landlord’s UK rental income and pay the tax to HMRC.
97
What is the liability aspect of a PLC?
Members of a PLC are not responsible for the company's debt unless they have given personal guarantees on any business loans
98
What is a limited company?
Shareholders/directors are legally responsible for company's debt only up to the value of their shares
99
What is the highest score D+B?
5A financial strength (£35m+ net worth)
1 Risk indicator - Minimal risk
100
What needs to be served with company accounts?
statement of truth
101
What is turnover vs sales?
Sales = total value of products and services business sells
Turnover = amount of money business earns from selling products within specific period (VAT and trade discounts deducted)
102
What are timescales for uploading company accounts?
9 months after companys financial year end
103
What are the dates for uploading newly appointed company accounts?
21 months from date you register with companies house
104
What is the scale on a credit safe report?
71-100 = Very Low Risk
1-20 = Very High Risk
105
What kind of companies have to use IFRS and GAAP?
Listed companies have to abide by IFRS, UK GAAP is used for limited companies
106
What were you trying to determine by reviewing the accounts at Suite 11, Building 6?
The tenant's covenant strength
107
What is the difference between revenue and turnover?
Revenue = Amount of money business makes by selling products/services
Turnover = Measures the speed of collecting cash from services or selling its inventory
108
Do you include VAT on a balance sheet and P+L?
You do on a balance sheet, but not P+L
