Chapter 6 - Accounting Principles And Practices Flashcards
1
Q
Identify four item Included in the statutory accounts of quoted companies will be what.
A
- Narrative reports from the chairman and chief executive
- A strategic report setting out the strategy, business model, a
- Financial accounts for the period including the balance sheet, income statement, cash flow position and
- Other legal requirements such as details of directors remuneration.
2
Q
What does the income statement show?
A
It sets out income, expenses, tax and most importantly to remember, profit or loss.
3
Q
What does the balance sheet show?
A
Statement of financial position of the business at a point in time. I.e It is a snap shot of the company’s position at a particular point in time. It lists all the companies assets and liabilities, what is owed and what is owned.
4
Q
What do cash flow statements show?
A
Show the sources and use of cash and are a useful indicator of a company’s liquidity.
5
Q
Cash flow statements are a useful indicator of?
A
Liquidity
6
Q
Record making process of accounting is known as?
A
Book-keeping
7
Q
Which type of accounting looks at the historical information and which type of accounting looks at the future?
A
Financial accounting - historic
Management accounting historic and future
8
Q
Companies are not required by law to produce what type of accounts?
A
Management accounts
9
Q
Companies are legally required under the companies act to produce what accounts?
A
Financial accounts
10
Q
When does a company “break even”?
A
If the amount left over when all costs and expenses are subtracted from a companies income is exactly zero
11
Q
Working capital is?
A
Difference between current assets and current liabilities.
12
Q
Whereas liquidity is a measure of the cash available to a company, solvency is a measure of?
A
The excess of an organisations assets compared to its liabilities.
13
Q
What is expenditure?
A
All the amounts of money incurred to pay for goods or services.
14
Q
What is shareholders equity?
A
This is the stake the shareholders have in a company. It is calculated as the total value of all the assets in the business less the total value of all the liabilities.
15
Q
What is capital?
A
Sum of the equity and long term debt used to finance the business.
16
Q
What tier of capital does equity count of and why is this better?
A
Tier 1 and this is the best sort of capital because it gives the greatest protection to policyholders.
17
Q
What is an asset?
A
Resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
18
Q
What is a tangible asset?
A
One that is physical and real such as cash, land, buildings, machinery or investments.
19
Q
What is an intangible asset?
A
One that is not physical such as a trademark, a copyright or goodwill.
20
Q
When machinery or equipment for example loses its value of time, in accounting terms, their loss of value is called?
A
Depreciation
21
Q
What is a creditor?
A
An individual or organisation to whom a debt is owed, e.g a supplier.
22
Q
What is a debtor?
A
Any organisation or person who owes a debt to a company.
23
Q
Debt owed to a company is considered as what on the balance sheet?
A
Current assets
24
Q
When adjustments are made to the value of assets over their useful lives to reflect that they will deteriorate or become obsolete, this is known as?
A
Depreciation
25
What is depreciation in reality and what is it important to note with regards to cash flow?
A book keeping entry with the company setting up a depreciation provision account. It is important to note no cash actually leaves the organisation as depreciation is incurred so it does not affect cash flow.
26
What is the formulae for straight line depreciation?
Cost of asset - scrap or residual value (both) / the life of the asset
27
Assets = equity + liabilities is what?
The accounting equation
28
What are raised to show amounts owed to the business?
Invoices
29
To keep records of expenditure, what will be retained?
Receipts
30
What does the double entry principle show?
Two fold effect on the accounting equation by reflecting that the business both receives and gives value in each transaction
31
The difference between a companies total assets and total liabilities is called its...
Shareholders equity
32
Give examples of non current assets
Goodwill and other intangible assets, property and investments.
33
Give examples of current assets
Cash Stock,debtors
34
If a liability has to paid out within 12 months what is it classed as and similarly what is is classed as if it has to pay outside of 12 months?
Current liability If required to pay within 12 months and non current liability if have over 12 months to pay.
35
What are examples of current liabilities?
Bank overdrafts trade creditors
36
Give examples of non current liabilities
Bank loans, mortgages and bond issues.
37
Reserves are the accumulated profits of the business that have been...
Reinvested into the business.
38
How do share capital and reserve differ from liability?
No requirement to repay these amounts
39
Gross profit is calculated by subtracting...
Cost of sales from turnover
40
What is revenue?
This is the total value of all sales invoiced during the year. Also known as turnover.
41
What is finance income?
Income earned on any investments held during the year
42
What are finance costs?
Cost of loans made to the company such as bank loans, mortgages and corporate bonds.
43
What are overheads?
Expenses incurred by a company such as management, administration staff and office accommodation.
44
All businesses have to pay what tax on their profits?
Corporation tax
45
The main sources of revenue for insurance brokers are what?
Commission and admin fees
46
In insurance broker accounts, the main cost items are?
Cost of the staff and running the office
47
What are the main current and non current assets of insurance brokers balance sheet?
Main non current assets are office equipment and property. The main current assets are liquid assets such as money in the bank (
48
What is an associated interest?
Generally one in which the business has a greater than 20% ownership but less than a controlling interest.
49
What is a controlling interest?
Generally greater than 50% ownership of a company - and at this level a company would generally be classed as a subsidiary.
50
What is gross written premium?
Gross amount payable by the insured to which the insurer is contractually bound within the accounting period, regardless of the period of cover. Gross premiums will be gross of commissions but net of insurance premium tax.
51
Which component of a company's financial statements is the best indicator of liquidity?
Cash flow statement
52
Working capital is the difference between?
Current assets and current liabilities
53
Sunk costs are?
Costs which are the product of past decisions
54
Give 7 differences between management and financial accounting
1. Financial is external whereas management is for internal planning
2. Financial is highly structured for legal regulatory requirements
3. Financial looks at and records the financial impact of events on the organisation as a whole, whereas management includes both monetary and non monetary
4. Financial is based on historical
5. Financial is prepared in accordance with accounting standards,
6. Financial must be filed at companies house whereas management is usually not made publicly available
7. Financial must be audited
55
Claims are shown on the income statement as net of...
Reinsurance. There is a gross share, reinsurers share and then net of reinsurance.
56
What are acquisition costs?
Amounts paid to brokers and other intermediaries who have placed business with the company and other direct costs of acquiring the business such as policy issue costs.
57
An interim dividend approved by the board but not paid will be a...
Liability
58
What will provision for unearned premiums show?
Portion of premiums already entered into the accounts as due which relates to a period of risk subsequent to the balance sheet date.
59
Reinsurance liabilities will include...
Amounts due to reinsurers such as reinsurance premiums.
60
Investments shown in the balance sheet will include what?
Government bonds, property, corporate bonds, and equities.
61
What do reinsurers share of insurance contract liabilities relate to?
Potential reinsurers recoveries available on the technical provisions in the liability section of the balance sheet.
62
What are deferred acquisition costs?
Cost of acquiring insurance policies that have been written during the financial year but will be earned in the subsequent year. Hence they are the portion of acquisition costs attributable to unearned premiums
63
What does the cash flow statement record?
Movements of cash in and of cash out that took place during the last financial year. Also shows the company's net cash flow for the year.
64
Cash inflows are different to revenue because
Not all customers pay in cash and not all invoices are paid on time.
65
A cash flow statement analyses the cash flows into those arising from what three areas?
Operating activities, investing activities and financing activities.
66
What constitutes cash flows from operating activities?
Deals with how much cash the business managed to generate or consume as a direct consequence of its trading activities including tax paid, interest received and paid and dividends received.
67
What does cash flow from investment activities show?
Includes sales of investments including associates and subsidiaries purchased and outflows will include investments made.
68
What will cash flows from financing activities show?
Deals with changes to loan and share capital and payment of dividends to shareholders.
69
Why is it important to have a cash flow statement, an income statement and a balance sheet?
Each document measures a different aspect of the businesses financial health
70
What is the primary objective of management accounting?
Help managers take the appropriate decisions to enable the company to achieve its business objectives.
71
If a profit centre is charged for the number of invoiced raised and the numbers of queries raised, and this technique makes it clear to the business the cost of queries and incentivise mangers to improve the accuracy of their billing and hence the cost to the profit centre, what is this method called?
Activity based costing.
72
Reserves are the accumulated profits of the business that have been...
Reinvested into the business
73
Gross profit is calculated by subtracting cost of sales from...
Turnover
74
What is actual capital?
Actual capital chosen by the company taking into account regulatory requirements.
75
Acquisition costs are?
Cost paid to intermediaries to acquire the business such as commission and other direct costs in acquiring the business such as policy issue.
76
What are assets defined as?
Resources controlled by the entity as a result of past events and which future economic b benefits are expected to flow to the entity.
77
How are assets employed calculated?
Calculated by adding non current assets to working capital (net current assets)
78
What is an associated company?
Where a company owns more than 20% share but a 50% or less share in another company it is said to be an associated company.
79
What is capital?
Sum of the equity (shares) plus long term debt (bank loans and financing agreements) used to finance the business.
80
What are claims incurred?
Claims paid in the year plus the cost of outstanding claims carried forward to the next year, minus the cost of outstanding claims brought forward from the year before (can be gross or net of reinsurance contributions)
81
Who/what are creditors?
Organisations or individuals to whom the company owns money.
82
Current assets are?
Items of wealth that the business controls and intends to use within the next twelve months, e,g debtors.
83
What are current liabilities?
Those liabilities that must be paid back within 12 months e.g creditors, overdraft
84
What is a debit or fee note?
Invoice created showing the amount owed to the business by other parties.
85
Who are debtors?
Organisations or individuals that owe money to the company.
86
What is deferred tax?
Tax charged or credited to the income statement to deal with timing differences between recognising income, or an expense that will be recorded in a future tax return. It must be accounted for where the accounting period for the tax year differs from the financial year.
87
What is economic capital model?
Means by which an insurer decides the appropriate level of capital to hold. In deciding this, the insurance company will seek to maintain an appropriate buffer in excess of the regulatory minimum capital requirement.
88
What is gross written premium?
Written premiums are the gross amount payable by the insured to which the insurer is contractually bound within the accounting period, regardless of the period of cover (excluding IPT) I,e the premiums relating to policies incepted/renewed in the financial year.
89
What is income.?
Amount of money earned by the organisation from any source, including investments, rentals, interest payments and investments.
90
What is liquidity?
The amount of cash that is held or accessible immediately.
91
What is net investment returns?
Investment return received including realised gains or losses from selling and investment income from dividends, interest, rent received etc. net investment return excludes unrealised gains or losses If the investment is classified as available for sale.
92
What is net profit or profit ?
Gross profit minus all other expenses such as overheads, interest paid and tax.
93
What is net written premium?
Gross written premium minus outward reinsurance premiums.
94
The stake that shareholders have in the business is equal to the value of the assets minus the total value of the...?
Liabilities
95
Cash received from operating activities will be...
Cash generated or consumed as a direct consequence of the businesss trading activities(including tax paid, interest paid or received and dividends received.
96
What is outward reinsurance premium?
Premiums paid to reinsurers for policies written during that financial period.
97
What are overheads?
Other expenses incurred by the company such as cost of management, admin staff, office accommodation (which appears as expenditure on the income statement)
98
What is a realised loss or gain?
A loss or gain that you have made when you seek a share or other investment
99
Reinsurance liabilities will be?
Amounts due to reinsurers for the protection that has not yet been paid.
100
What is reinsurers share of insurance contract liabilities?
Potential recoveries from reinsurers. These go as an asset on the balance sheet.
101
What are retained earnings?
Amount of net income left in a business after dividends have been paid. This appears on the balance sheet as part of equity.
102
The Solvency margin is what?
Amount of difference between total assets and total liabilities.
103
Tax paid on profits appear as what on the income statement?
Expenditure
104
The difference between current assets and current liabilities is known as?
Working capital
105
Revenue is?
Total value of all sales invoiced during the financial year
106
If a company has paid back some of its loan capital during the year, how will this be shown in its cash flow statement?
A outflow of cash under financing activities
107
Activity based costing is used to do what
Charge profit centres for the services of cost centres
108
Which component of a company's financial statements is the best indicator of liquidity?
Cash flow statement
109
Sunk costs are
Costs which are the product of past decisions eg depreciation and space costs
110
What are the cash inflows and outflows for each area?
Operating - inflow is cash from trading activities, profit before tax, and outflow is like tax paid.
Investing - inflow from sale of investments including associates and subsidiaries, and outflow is investments made, e.g equipment and property
Financing - inflows from raising cash by negotiating new loans or by issuing more shares. Outflow shown if paid back some of its loan capital during the year. Also outflow if it decides to buy back some share capital.
111
What is earned premium
Premium earned in accounting year i.e. written premium less unearned premium at end of accounting year plus unearned premium reserve at start of year
