Accounting principles & procedures

Question 1

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

Answer 1

Balance Sheets, Profit and Loss Statement, Cash Flow Statement

Question 2

What is an asset / liability?

Answer 2

Asset - what company owns - current assets (cash/cash equivalent, inventory, stock) & fixed assets (property, plant, equipment, tools/machinery)
Liability - what company owes - current liabilities (to be paid within present accounting year - accounts payable, taxes, wages, short term loans) & non current liabilities (mortgage, long term borrowings, securities)

Question 3

What is the difference between financial and management accounts?

Answer 3

Management accounts are for internal management purposes and are not externally audited. Financial accounts are regulated and audited and provided to shareholders

Question 4

Can you tell me about a common financial measure?

Answer 4

Liquidity ratio - ability to pay off liabilities (current assets/current liabilities) less than 0.75 suggests insolvency
debt/equity
Return on Investment ROI

Question 5

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

Answer 5

The role of an auditor is to independently examine and report on the financial statements of an entity

Question 6

When are audited accounts needed and why?

Answer 6

Compliance with regulatory requirements, stakeholder requirements, legal requirements (public companies)

Question 7

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

Answer 7

Prior to the introduction of IFRS 16, lease accounting was governed by IAS 17. IAS 17 required lessees to classify leases as either operating leases or finance leases. Operating leases were not recognized on the balance sheet and were expensed in the income statement over the lease term, while finance leases were recognized on the balance sheet as assets and liabilities.
Under IFRS 16, which became effective after January 1, 2019, lessees are required to recognize all leases on the balance sheet as assets and liabilities: the right to use the leased asset for the lease term, and a lease liability representing the obligation to make lease payments.
IFRS 16 eliminates the distinction between operating and finance leases for lessees. Instead, all leases are classified as finance leases, except for short-term leases (leases with a lease term of 12 months or less) and low-value leases (leases of assets with a value of $5,000 or less when new). Short-term leases and low-value leases can be recognized on the income statement as expenses without recognizing assets and liabilities.

Question 8

IFRS and GAAP

Answer 8

FRS – International Financial Reporting Standards
A set of global accounting standards developed by the International Accounting Standards Board (IASB).
Designed to bring consistency and transparency to financial reporting across countries.
Used in over 140 countries, including the UK and EU.
Key for valuers because IFRS standards (e.g., IFRS 13 Fair Value Measurement) set how assets and liabilities must be reported.

GAAP – Generally Accepted Accounting Principles
A set of accounting rules and standards used mainly in the United States.
Issued by the Financial Accounting Standards Board (FASB).