Accounting

Question 1

What are the three types of financial statements you may come across relating to a company?

Answer 1

• Profit & Loss statement
• Balance Sheet
• Cash Flow Statement

Question 2

What is an asset / liability?

Answer 2

• An asset is a resource owned by the company.
• A liability is an obligation owed by the company.

Question 3

Can you give me an example of an asset / liability?

Answer 3

• Asset – property or IT equipment
• Liability – mortgage or unpaid invoices

Question 4

What is the difference between financial and management accounts?

Answer 4

• Financial accounts are for external stakeholders.
• Management accounts are for internal use, forward-facing.

Question 5

What do you understand by the term Generally Accepted Accounting Principles (GAAP)?

Answer 5

• General Accepted Accounting Principals is a framework of UK accounting standards.

Question 6

How do companies know which accounting reporting framework to comply with?

Answer 6

• Depends on the size, ownership and listing status.
  o Publicly listed companies must use IFRS

Question 7

Which accounting reporting framework do public limited companies have to comply with?

Answer 7

• IFRS - international financial reporting standards

Question 8

How would you assess the financial strength of an entity, e.g. for a valuation?

Answer 8

• Check the balance sheet for its net worth and liquidity ratio (current assets-current liabilities).
• Check several P&L for the turnover trends.
• Check there are adequate cash reserves in the Cash Flow statement.
• Check its credit rating (say on Dunn & Bradstreet).

Question 9

Can you tell me about a common financial measure?

Answer 9

• Acid test (illiquidity ratio) = current assets/current liabilities
• ROCE – operating profit/capital
• Gearing ratio – debt/equity
• Working capital ratio – current assets/current liabilities
• Net assets per share – net assets/number of shares

Question 10

Can you tell me what the role of an auditor is?

Answer 10

• To independently check that the accounts fairly represent the company’s financial position.

Question 11

When are audited accounts needed and why?

Answer 11

• Required for PLCs or large companies to reassure investors, lenders and regulators.

Question 12

How do public limited company accounts differ?

Answer 12

• Must be IFRS compliant and externally audited.

Question 13

Tell me something you understand from the Companies Act 2006.

Answer 13

• Governs company formation, directors duties, accounting and reporting obligations.
• Lease are on the balance sheet and properties should be valued using Fair Value.

Question 14

What is the difference between UK GAAP and IFRS?

Answer 14

• GAAP is the UK standard accounting framework for smaller companies.
• IFRS is international and applies to publicly listed companies.

Question 15

What is the basis of valuation under IFRS 13 accounting framework?

Answer 15

• Fair value

Question 16

What is fair value?

Answer 16

Fair value is what a willing buyer would pay, or a willing seller would accept, in a normal market today

Question 17

What has changed in relation to lease accounting / IFRS 16?

Answer 17

• Leases must be on the balance sheet.

Question 18

What is FRS 102 accounting standard? How has this impacted upon investment property?

Answer 18

• Investment properties must use Fair value.
• It changes the value of a property in the P&L account. Improves transparency and consistency.

Question 19

What are statutory accounts?

Answer 19

• Accounts required by law, filed with Companies House.

Question 20

Why is good financial record-keeping important to you?

Answer 20

• To ensure compliance with regulatory requirements
• To effectively monitor the business performance
• Helps audits.

Question 21

Tell me three ways you ensure that clients’ money is handled properly.

Answer 21

• It should be held in a discrete named account
• It should not be used other than for the specific purpose
• The staff should be trained and adequately supervised.
• Adherence to RICS guidance.

Question 22

What RICS guidance or Schemes do you adhere to when looking after client money?

Answer 22

• RICS Client Money Handling 2024

Question 23

Explain your understanding of the VAT domestic reverse charge for building and construction services.

Answer 23

• The VAT domestic reverse charge in the UK is a mechanism where the responsibility for paying VAT shifts from the supplier to the buyer for certain construction services. This change, effective from March 1, 2021, aims to combat VAT fraud in the construction sector by ensuring that VAT is accounted for correctly by the recipient of the services

Question 24

How do you account for the impact of inflation when reporting to clients?(N.b. Also see client money handling questions as per Ethics competency)

Answer 24

• By adjusting the costs and future cash flows to reflect today’s value.