2 - Accounting Principles and Procedures Flashcards
This competency covers the basic principles of accounting and the interpretation of company accounts in order that reasoned advice can be given to clients
Accounting Principles and Procedures - Extract from Candidate Guide - Aug 2018 (updated Feb 2022)
What is a balance sheet ?
The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a snapshot point in time, typically annually.
What is a profit and loss account
The profit and loss statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period
What is taxation ?
The amount of money or % that is owed to HMRC based on the company profit.
What is revenue?
Income generated by the sales of the product or services.
What is capital expenditure ?
Money spent by a business or organisation on acquiring or maintaining fixed assets such as land, buildings and equipment.
What is auditing ?
Term used to describe the examination and verification of a company’s financial records.
Performed to ensure that financial statements are prepared in accordance with the relevant accounting standards.
Prepared internally using GAAP or IFRS.
Overall provides useful information to stakeholders, creditors, customers, suppliers
What is ratio analysis and name three examples?
Method of gaining insight into a company’s liquidity, efficiency and profitability by studying its financial statements.
- Liquidity Ratios - Measure a company’s ability to pay off its short-term debts.
- Solvency Ratios - Compare a company’s debt levels with its assets, equity, and earnings.
- Profitability Ratios - These ratios convey how well a company can generate profits from its operations.
- Efficiency Ratios - Also called activity ratios, efficiency ratios evaluate how efficiently a company uses its assets to generate sales and maximize profits.
What is credit control ?
System used by businesses and central banks to make sure that credit is given only to borrowers who are likely to be able to repay it.
What is profitability ?
Measure of an organisation’s profit relative to its expenses.
What is insolvency?
When a business can no longer meet your financial obligations, ie not enough money coming in to match money going out.
What is VAT?
The standard rate of Value Added Tax is 20%. The VAT rate businesses charge depends on their goods and services.
Some things are exempt from VAT, such as postage stamps, financial and property transactions.
What is a balance sheet used for?
Assets are used to generate wealth and generally something owned by the company such as properties, cash, plant, equipment etc. The asset will have a market value which can appreciate or depreciate.
The liability is what is owned against the asset. The difference between the two is the equity of the company.
It is used to evaluate a business’ financial standing and help with business planning.
Where might you find information on a company assets?
On a balance sheet
What is a cashflow statement?
The cash flow statement (CFS) measures how well a company manages its cash position
The company’s short term ability to pay its debt obligations and fund its operating expenses.
What is included in a profit and loss statement?
Turnover, profits, expenses, taxations, dividends.
Are profit and loss accounts current?
No, they are retrospective.
What are management accounts?
Management accounts are prepared for internal use generally to record, plan and control a company’s activities and help with decision making processes such as purchasing new assets or employing staff etc.
What are company accounts?
Company accounts are legally required from all incorporated companies under the Companies Act 1989. They are prepared for external parties (HMRC, banks etc) to show the performance over a period and help prevent fraud, ensure that cashflow is managed, provide evidence for borrowing purposes etc.
When should a company be registered for VAT ?
If the company a VAT taxable turnover to be greater than £85,000 in the last 12 months or in the proceeding 30 day period.
Give me an example of different VAT rates ?
Standard rate=20%
Reduced rate=5%
Zero rate=0%
Can you give me some example of reduced rate VAT items ?
Renovating or altering an empty house or flat reduced rate
Supplying and installing certain mobility aids for elderly people reduced rate
Supplying and installing certain energy saving materials and equipment reduced rate
Can you give me some example of zero rate VAT items ?
Supplying or installing goods for a disabled person in their home
What is domestic reverse charge ?
The domestic reverse charge is a VAT procedure that was implemented in the UK on March 1st 2021 for construction services. Under the domestic reverse charge procedure, the buyer (contractor) accounts for the VAT rather than the supplier (subcontractor). this is try and account for missing VAT payments
Who does Domestic Reverse charge apply to ?
Main Contractors and Subcontractors.
When did the domestic reverse charge come into affect ?
1st March 2021.
What is VAT ?
Value Added Tax
What does EBITDA stand for ?
EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and its margins reflect a firm’s short-term operational efficiency. EBITDA is useful when comparing companies with different capital investment, debt, and tax profiles.
Give me some examples of how you forecast your individual fee income.
- Consideration of pipeline
- Framework contracts
- Upcoming projects
- Scheduled appointments
What is accounting?
It is the process of keeping financial accounts of something.
What are company accounts?
Legal requirement submitted to HMRC. It is a record of the companies financial performance
What are management accounts?
These are produced for internal usage for particular requirements such as calculating acquisitions. It can be in any format for the purposes of what it is needed for.
How do you deliver healthy cashflow?
- Ensure cash coming in is greater than that going out
- Working within my competence
- Financial forecasting
- Good client care
What does a Dun and Bradstreet report show?
It compiles business information to measure the creditworthiness of a company. They are the business equivalent of a credit report check. It will colour code the companies financial status from green, red or orange/yellow to show their risk.
What are the limitations of a Dun and Bradstreet Report?
It is limited only to the latest submitted documents on companies house.
Why do companies keep accounts?
- For regulatory purposes for tax purposes
- To keep track/record of outgoings and in goings and compare performances and to plan future growth.
How are fee proposals prepared?
A fee proposal is prepared using an estimate of the time required to carry out a job multiplied by the cost of your hire on an hourly rate. A percentage will then be added for company overheads.
What is goodwill?
An intangible asset that arises when a buyer acquires an existing business. It represents assets that are not separately identifiable.
What is bankruptcy?
The legal process where people or companies who cannot repay debts may seek relief from the government of their debt. It is court ordered. It stays on your financial record for up to 10 years
What is receivership?
The process in which a ‘receiver’ is appointed by a creditor to liquidate company assets to allow creditors to recoup their money.
What is retention and why do we keep this?
Retention is the withholding of a percentage of a contract sum to ensure the contractor properly completes the activities required within the rectification period.
What is solvency?
The possession of assets in excess of liabilities; ability to pay one’s debts.
What is meant by the terms Gross and Net?
In salary terms, Gross is the total salary and net is salary minus tax and all other deductions.
What is meant by depreciation in relation to an asset?
Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are furniture and IT equipment.
What are the main types of ratio analysis used to assess a company’s financial strength?
Liquidity the ability of the company to pay its way (solvency). More companies fail due to cash flow than any other reason.
Current Ratio = Liquid assets / Liabilities Investment/shareholders information to enable decisions to be made on the extent of the risk and the earning potential of a business investment.
Return on Investment (ROI) = (Gain Cost) / Cost€¢ Gearing information on the relationship between the exposure of the business to loans as opposed to share capital.
Net Gearing = Net Debt / Equity Profitability how effective the company is at generating profits given sales and/or its capital assets.
Gross Margin = Gross profit / Net Sales Financial the rate at which the company sells its stock and the efficiency with which it uses its assets.
Asset Turnover = Net Sales / Total Assets
Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?
- For assessing the financial strength of contractors and those tendering for contracts
- For assessing competition
- To assist with business operations
- When setting up a new firm
What is insider trading?
The trading of a public company’s stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company.
What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a scheme created by HM Revenue & Customs (HMRC) for tax from contractors and subcontractors. The scheme is designed to minimize tax evasion within the construction industry. Contractors deduct tax from payments to subcontractors. All contractors and subcontractors must register with the scheme before work starts.
What happens if a company’s liabilities are greater than its assets?
There is a likelihood the company will go into administration.
What does the term liabilities mean to you?
Any outstanding costs which are yet to be paid.
What does the term assets mean to you?
Anything that can be deemed to have a value attached to it.
What is corporation tax?
Tax levied on company profits.
What is Revenue Expenditure?
The cost of maintaining an existing assets, the cost of which are placed wholly on the profit and loss account for that period.
What is Capital Expenditure?
The cost of purchasing or upgrading an existing asset, the cost of which are spread over the useful life of the asset, and shown on the balance sheet.
What is Cash Flow?
The incomings and outgoings of cash within a business.
What procedures can you implement to improve Cash Flow?
- Negotiate shorter payment terms with clients
- Negotiate longer payment terms with suppliers and sub-contractors.
Where can you find information on a company’s financial status?
- Companies House for filed accounts
* Credit checks.
What is Current Ratio Analysis?
An examination of a companies liquidity, comparing company assets against company liabilities.
What is Debt Ratio Analysis?
An examination of a company€™s debs, comparing company assets against company debts.
What is Insolvency?
Where a company is unable to pay its way.
What does a Dun and Bradstreet report show?
It compiles business information to measure the creditworthiness of a company. They are the business equivalent of a credit report check. It will colour code the companies financial status from green, red or orange/yellow to show their risk.
What does a Dunn and Bradstreet report look like?
