Flashcards in Accounting Principles and Procedures Deck (55)
What is the difference between financial accounting and management accounting?
- Management accounting provides information to people within an organization and is not required by law. Can be relating to a single aspect of organisation.
- Financial accounting is mainly for those outside it, such as shareholders, and is required by law. Covers the entire organisation.
What is the Sarbanes-Oxley Act?
- Enron pulled up for having accounting irregularities. Bosses had altered financial statements to cover up losses
Sarbox Act stipulated that:
- Officers of company required to sign financial statements, holding them personally accountable
- Harsher punishments for tampering
- Company must provide description of internal controls to public
- Company is responsible for hiring independent accounting firms to audit accounts. Auditors opinion now forms a section of financial report
What is a balance sheet?
A snapshot of where a business is at. The companies financial position / net worth
What does a balance sheet consist of?
Assets (fixed, current)
- Liabilities (long term, short term)
+/- Net position (assets - liabilities
+/- Net position funding (shareholders funds + profit/loss)
Why are balance sheets important?
- P+L accounts can look great one year due to one off profits. Balance sheet gives a broader view of the companies health
What are contingent liabilities?
- Balance sheets are supported by a note called contingent liabilities which shows potential liabilities not yet recorded on BS but may be present in future, e.g. law suit losses
What is a profit and loss account? (P+L)
A summary of a business's income and expenditure transactions.
- Usually prepared on an annual basis. Shows journey from one balance sheet to the next.
What is included in a P+L account?
- Cost of sales
= Gross profit
- Operating costs/overheads
= Operating profit or EBIT/PBIT (earnings/profit before interest and tax)
= PAT/Net profit
= Retained profits
What is EBITDA?
Earnings before interest, tax, depreciation and amortisation is the earnings before depreciation of fixed assets and amortisation (costs of things such as licences) are deducted from the (gross profit - overheads/operating costs). These items are otherwise deducted from the gross figure within the overheads/operating cost figure.
What is the IFRS 16?
- International financial reporting standards
- Standards issued to provide common global language for business affairs so company accounts are understandable/comparable worldwide
How would you acquire information about a company to review their financial position?
- Dun & Bradstreet provide commercial data, analytics and insights for businesses
What is an annual report?
- An annual report is a comprehensive report on a company's activities throughout the preceding year
- They give shareholders and other interested people information about the company's activities and financial performance
Name different types of taxation in the UK.
- Capital Gains Tax
- Stamp Duty Land Tax
- Income tax
What is VAT?
- A tax on goods and services
- VAT registered companies charge VAT which they then pay to HMRC
- VAT registered companies can reclaim VAT on purchases
- Different VAT levels are 20%, 5% and 0%
What is capital gains tax?
A tax on the profit when you sell (dispose) of something (asset) that has increased in value
What is SDLT?
- Stamp Duty Land Tax is a tax on the purchase of a property
- Commercial rates are:
0% up to £125k
2% £125k - £250k
5% above £250k
- Residential rates are:
0% up to £125k
2% £125k - £250k
5% £250k - £925k
10% £925k - £1.5m
First-time buyers pay no SDLT up to £300k (£500k in London).
People buying a second property pay an extra 3% SDLT for each band.
What is income tax?
- The tax everybody pays on their income
- EVeryone has a personal allowance of £11,850 tax free
- Income tax is 20% on everything over persona allowance up to £46k
- Income tax is 40% on earnings between £46k - £150k
- Income tax is 45% on earnings over £150k
What is revenue expenditure?
- Expenditures for costs related to specific revenue or operational periods
- Examples include cost of goods sold or repair/maintenance expenses
- Generally smaller expenditures, consumed within short period
What is capital expenditure?
- Expenditure on fixed assets expected to be productive for a long period of time
- Charges to expense gradually via depreciation
- Generally involve larger monetary amounts
What is meant by cash flow?
Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business for a set period of time
Give an example of poor cash flow in the construction industry
- Carillion's cash flow was very poor leading to their liquidation in January 2018
- Many outgoing costs, not enough money coming in, leading to cash shortfall
How can contractors predict their cash flow before a project begins?
- S-Curve shows a high level expected cash flow for a construction project.
- More accurate cash flows can be created between Contractor and Subbies by analysing the programme and working out when costs are going to be incurred
Why are cash flows useful for the client's QS?
- Actual costs incurred at interim valuations can be charted against forecasted cash flow
- If actual cash flow is behind forecasted, project may be behind programme
- If actual cash flow is ahead of forecasted, project may be ahead of programme
Why are cash flows useful for the Contractor?
- Incoming payments (from the client) and expenditure (to suppliers, subcontractors) can be forecasted.
- Can be used to monitor progress/float in the programme
- As costs are usually incurred before payment is received from client, there is often a cash shortfall to be covered by an overdraft. Forecasting incoming/outgoing cash can help identify when this will be/how much overdraft
What are the benefits of a cash flow forecast for a company?
- Good for business and resource planning
- Shows when liabilities must be met eg wages
- Good for analysing financial health of companies
- Profitable business can go into administration if cashflow is poor due to not being able to meet their current liabilities
Why might a company have poor cash flow?
- Late payments from clients
- Too much capital tied up in assets
- Withdrawal of overdraft from funders
What is the HGCRA?
- The Housing Grant, Construction and Regeneration Act 1996 (HGRCA, or Construction Act)
- Policies to improve cash flow and help resolve disputes quicker
- HGCRA 2009 supersedes 1996
What are some of the key points in the HGCRA 1996?
- All contracts should provide a payment mechanism stipulating when/how/final date for payment
- Payer must give early communication of amount to be paid
- No withholding of sums without withholding notice, stipulating what is to be withheld and why
- Payee may suspend performance where sum is due and not paid in full by final date of payment
- Provides statutory right to refer disputes to adjudication
What changes were brought in with the HGCRA 2009?
- Includes all construction contracts, even if not in writing
- Parties are free to agree amounts for payments and the intervals
- No withholding of sums without pay less notice instead of withholding notice, stipulating the basis on which they have built up the sum to be paid
- Prohibits payment clauses whereby payment is linked to payments under separate contract