Accounting Principles > General Qs > Flashcards

General Qs Flashcards

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1
Q

What are financial statements?

A

Written records that convey the financial activities of a firm

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2
Q

What are the key financial statements that companies provide?

A

P&L
Balance sheets
Cash flow statements

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3
Q

What is the difference between management and company/financial accounts?

A

Managed accounts are for internal use of management team (informal but recent)
Company accounts are accounts required by UK law submitted every 9 months

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4
Q

What governs the format of company accounts? 

A

Companies Act 2006

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5
Q

What is included in company accounts, as laid out in the Companies Act 2006? 

A
  1. Cover page
  2. Information/contents page
  3. Directors report
  4. Accountant report
  5. Statutory profit and Loss
  6. Balance sheet
  7. Notes to the accounts
  8. Detailed P&L
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6
Q

What is a profit and loss account? (also known as INCOME STATEMENT, STATEMENT OF COMPREHENSIVE INCOME)

A

Summary of business income & expenditure prepared on annual basis
(best for determining covenant strength as shows breakdown of turnover)

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7
Q

What is a balance sheet?

A

Shows a companies assets, liabilities and equity at a current time
Shows whether company solvent

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8
Q

What is a cashflow statement?

A

Statement summarising movement of cash into and out of a company
It measures short term ability of a firm to pay off bills

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9
Q

What are two types of assets and give examples?

A

Fixed asset - property, machinery, vehicles
Current asset - stock, cash

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10
Q

What are two types of Liability and give examples?

A

Fixed/long term liability - mortgage
Current - salaries

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11
Q

How to get Net Asset Value?

A

Total assets-total liabilities

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12
Q

What is a ratio analysis?

A

Method of gaining insight into company’s liquidity, efficiency and profitability by studying its financial statements

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13
Q

What are liquidity ratios?

A

-Used to determine a companies ability to pay it’s short term debt obligations
- Current assets/current liabilities=liquidity ratio
- Ratio of exactly 1 - company can pay exactly off

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14
Q

What is Acid Test Ratio?

A

Evaluates a company’s ability to meet its short-term liabilities with its most liquid assets

(Current Assets-Inventory)/Current liabilities

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15
Q

What are probability ratios?

A

Measures the performance of a company in generating its profits
Turnover - (cost of sales/turnover)

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16
Q

What are financial gearing ratios?

A

Gearing is the amount of debt - in proportion to equity capital - that a company uses to funds its operations
High gearing = relying on debt to fund operations
Low gearing = Reliance on equity funding to operate

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17
Q

What is the difference between debtors and creditors?

A

Creditors: entities which are owed money by another entity
Debtors: entities which owe money to another entity

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18
Q

Where have you used company accounts in your work?

A
  • Assess tenants covenant strengths following applications to assign
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19
Q

How do you analyse a companies accounts?

A
  • Client accounts will carry out detailed analysis
  • I can look for warning signs by calculating ratios such as such as liquidity ratio
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20
Q

How would you carry out a credit check? Give an example.

A
  • My client account would carry out a credit check via Credit safe
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21
Q

What is GAAP? 

A

Generally Acceptable Accounting Practices

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22
Q

What is the benefit/purpose of GAAP? 

A

Common set of accepted accounting principles standards and procedures when compiling financial statements

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23
Q

What are the 10 principles of GAAP?  

A
  1. Regularity
  2. Consistency
  3. Sincerity
  4. Permanence of Methods
  5. Non-compensation
  6. Prudence
  7. Continuity
  8. Periodicity
  9. Materiality
  10. Utmost Good Faith
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24
Q

What are the International Accounting Standards?  

A

Old accounting standards replaced by IFRS 2001

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25
What is FRS?
Financial Reporting Standards
26
What is IFRS? 
- International Financial Reporting Standards set - Maintained by International Accounting Standards Board
27
Why were IFRS introduced to replace IAS?
Easier to compare businesses around the world
28
What is IFRS 16? 
- Effective Jan 1st 2019 - Enhances visibility of liabilities globally - Requires lessees to recognise assets and liabilities for all leases with a term of more than 12 months
29
What is the objective of IFRS 16? 
Ensure that lessees recognise assets and liabilities for their major leases
30
What is the result of IFRS 16 accounting reporting? 
Leads to increase in assets and liabilities and net debt when leases are brought onto balance sheet Can affect key accounting and financial ratios - impact a company's attractiveness to investors
31
What is a major way in which IFRS differs from GAAP?
GAAP is rules based IFRS is principle based IFRS is mandatory if on London stock exchange
32
What is a major way in which IFRS 16 differs from GAAP?
All leases appear on IFRS whereas only finance leases show on GAAP balance sheet (also operating leases treated as off balance sheet)
33
Definitions for a profit and loss account
Sales - invoices amounts to costumers excluding VAT Directors Remuneration - How directors are paid for their services Expenses - must be business related Cooperation tax - only tax stated in company accounts Dividends - Tax efficient drawing from directors
34
How is gross profit calculated? 
Turnover - cost of sales
35
What can be determined from gross profit? 
- Using multiple years gross profit you can make rough estimates on trajectory of a business
36
What is depreciation?  
Reduce in value of asset over time (wear and tear)
37
What is amortisation? 
A reduction in the value of an intangible asset over time e.g. spreading out loan payments over time  - Loans - amortisation refers to the process of repaying a loan through regular payments over time - Intangible assets - systematic allocation of the cost of an intangible asset (like patents, trademarks, or goodwill) over the period in which it is expected to generate economic benefits.
38
What is the difference between depreciation and amortisation? 
Depreciation focuses on fixed assets, amortisation deals with intagible asstes
39
 Why is cash flow statement believed to be the most intuitive of all financial statements? 
Show all movement of cash in and out of a company, how well company is manging its cash and growth
40
What is a credit rating? 
- Assessment of an organisations creditworthiness - Shows ability to fulfil financial commitments
41
What are the main commercial credit rating agencies? 
- Dunn & Bradstreet - Standard and Poor - Credit safe
42
What are the two parts of a Dunn and Bradstreet rating? 
1. Financial Strength Indicator 2. Financial risk indicator - rates companies 1-4 (1 is best) - 5A1 reflects financial strength over £50m
43
Why do companies keep accounts?
- For regularity purposes so managers can monitor and measure performance over time and manage appropriately
44
What is revenue? 
- Income generated by sales
45
What is capital expenditure? 
-Expenditure by businesses or organisation on acquiring or maintaining fixed assets like land & buildings
46
What is a financial audit? 
- Objective examination and evaluation of financial statements to ensure they are fair and accurate
47
What are profitability ratios?
How well company can generate profits from its operations
48
What are solvency ratios? 
- Extent to which assets cover liabilities
49
What are efficiency ratios? 
- How efficient companies uses its assets to generate sales
50
What is credit control? 
- Ensuring debtors do not take to long to pay
51
 What is VAT? 
Value added Tax Consumption tax on goods and services Standard rate 20%, sometimes 5% & 9%
52
Where might you find information on a company's assets? 
On their balance sheet
53
Are profit and loss accounts current?
No retrospective (cover previous fiscal year)
54
When must a company be VAT registered? 
Turnover exceeds 90k in last 12 months Turnover is expected to go over 90k in next 30 days
55
What is EBITDA? 
Earnings before interest, tax, depreciation , amortisation Measure of companies profitability
56
Where can you find information on company's financial status? 
Companies house
57
What is Limitations Act 1980? 
Outlines time within which creditor can chase debtor of outstanding debt (6 years after due date)
58
What is misappropriation of funds? 
Illegal use of another person's money
59
What is a financial bond? 
Fixed income instrument that represents loan made by an investor to a borrower
60
What are the 3 tests of insolvency? 
- Cash Flow test - bills can be paid in near future - Balance sheet test - check if assets greater than liabilities - Legal action test - check if legal action has been taken against business of debt of £750 or more
61
Consequences of insolvency? 
Business may go into liquidation and stop trading Business may go into administration and be sold
62
What is statutory profit? 
A companies earnings according to GAAP
63
What are prelists?
A documenting listing charges to be raised so checks can be carried out to verify the charges are correct prior to raising them onto the accounts system to produce tenant invoices.
64
What is a statement of account and what's included?
A document that reflects transactions on a particular account, including any overall remaining or credit balances.
65
What is a copy invoice and what does it include?
An invoice is a request sent to the debtor for payments of goods or services. It includes the amount due and the preferred method of payment.
66
What are remittances?
Money sent from one party to another
67
What is turnover?
Amount of money taken by business in a specified turnover period
68
What is a turnover certificate?
Details of turnover and specified turnover period
69
What does turnover include and exclude?
Stipulated in turnover clause - Normally gross turnover - excludes discounts and VAT
70
What is a turnover top-up ?
Top up on base rent when turnover has exceeded specified threshold in set period
71
Please provide an example of a standard turnover clause/ calculation?
check GTR
72
What is the profits test?
- Tenant provides 3 years of audited accounts showing net profit x3 annual rent
73
Why request three years' worth of P&L?
To carry out profits test and compare over period
74
What is service charge reconciliation?
A comprehensive comparison of income demanded against all service charge expenditure (including accruals and prepayments for a given service charge accounting period
75
Why check that invoices are applied to the correct code/schedule?
So cost are correctly apportioned to those who benefits from those services, thsi is a transparent approach and assist in resolving an disputes
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