Accounting Principles & Procedures Flashcards
(24 cards)
What are the three types of financial statements you may come across relating to a company?
Balance Sheet, Profit & Loss Statement, Cashflow Statement.
What is an asset / liability?
In simple terms, an asset is something a company owns that has value, like cash, property, or equipment. A liability is something a company owes, like a loan or an unpaid bill. Assets increase the value of a company, while liabilities decrease it.
Can you give me an example of each?
Asset: Accounts Receivable
Liability: Accounts Payable
What is the difference between financial and management accounts?
Financial accounting focuses on reporting a company’s historical financial performance to external stakeholders like investors and regulatory bodies, following GAAP (Generally Accepted Accounting Principles).
Management accounting, on the other hand, provides internal reports to business managers and owners, often more frequently and with a focus on future-oriented planning and decision-making.
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
GAAP is a set of accounting principles that publicly traded companies must use when preparing balance sheets, income statements, and other financial documents.
How do companies know which reporting framework to comply with?
Companies determine which financial reporting framework to use based on several factors, primarily the company’s legal structure, the location of its operations, and any regulatory requirements.
For instance, U.S. public companies typically follow Generally Accepted Accounting Principles (GAAP), while companies with international operations might prefer International Financial Reporting Standards (IFRS).
Which reporting framework do public limited companies have to comply with?
GAAP
How would you assess the financial strength of an entity e.g. for a valuation?
I would analyze financial statements (income statement, balance sheet, and cash flow statement), and consider key financial ratios like profitability, liquidity, and solvency.
Can you tell me about a common financial measure?
Gross profit margin: It is a profitability ratio that measures what percentage of revenue is left after subtracting the cost of goods sold.
The cost of goods sold refers to the direct cost of production and does not include operating expenses, interest, or taxes.
In other words, gross profit margin is a measure of profitability, specifically for a product or item line, without accounting for overheads.
What is the acid test / ROCE / working capital ratio / gearing ratio / net assets per share?
Acid Test: measures a company’s ability to pay off its current liabilities with its most liquid assets, excluding inventory.
Return On Capital Employed (ROCE): measures how efficiently a company is using its capital to generate profits.
Working Capital Ratio: measures a company’s ability to pay its current liabilities with its current assets.
Gearing Ratio: measures a company’s financial leverage by comparing its debt to its equity (owner’s investment).
Net Assets Per Share: measures the value of a company’s assets per share of its outstanding stock.
Can you tell me what the role of an auditor is?
The primary role of an auditor is to examine and verify the financial records and reports of an organization, ensuring accuracy and compliance with relevant laws and regulations.
When are audited accounts needed and why?
Audited financial statements are needed when a company is public, seeking loans, or attracting investors, or when regulatory bodies require them. The main reason for requiring audited statements is to ensure the financial reports are accurate and reliable, providing assurance to stakeholders.
How do public limited company accounts differ?
All public limited companies are mandated to have their accounts audited annually, as required by the Securities and Exchange Commission (SEC).
Tell me something you understand from relevant national corporate legislation.
Relevant national corporate legislation primarily focuses on corporate transparency, worker protection, and governance standards.
Tell me what it means to prepare accounts in accordance with IFRS.
Preparing accounts by International Financial Reporting Standards (IFRS) means following a specific set of accounting rules and standards when preparing financial statements. These standards, developed by the IFRS Foundation, aim to provide a globally consistent and understandable way to report a company’s financial performance and position.
What is the difference between relevant national GAAP and IFRS?
IFRS is a principle of the standard-based approach and is used internationally, while GAAP is a rule-based system compiled in the U.S.
What is the basis of valuation under IFRS 13?
Essentially, it’s an “exit price,” reflecting the price an asset could be sold for in the market. This basis of valuation is market-based, meaning it considers factors that market participants would use when determining the value of an asset or liability, such as its condition, location, and any restrictions on sale.
What is fair value?
Fair value is essentially a price estimate reflecting the current market conditions and expectations about an asset or liability’s worth.
What has changed in relation to lease accounting / IFRS 16?
IFRS 16 has significantly changed how leases are accounted for, requiring lessees to recognize most leases as assets and liabilities on the balance sheet, regardless of whether they are finance or operating leases.
When did the change come into effect?
January, 2019
What are statutory accounts?
Statutory accounts represent a true and fair view of the company’s financial position and provide insights into the actual business performance
Why is good financial record-keeping important to you?
Good financial record-keeping is important for businesses and individuals for Tax Compliance, Financial Management, Lending, Performance, and Legal Protection.
Tell me three ways you ensure that clients’ money is handled properly.
Maintain Separate Client Accounts
Implementing Robust Internal Controls and Procedures and nominate a qualified person to manage.
Maintain Transparency with the client.
What RICS guidance or Schemes do you adhere to in doing so?
Client Money Handling, 1st Edition.
