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 are the signs of insolvency?
- Overvaluing Interim Valuations
- Front Loading
- Dissatisfied workforce
- Asking for upfront payment
- Contractual Approach
Who is employed when a company becomes insolvent?
- Administrator, who will try to keep the company going
- Liquidator, who will wind up the company and sell the assets
What options are available to a company that has gone insolvent?
- Administration.- Company Voluntary Agreement
What is Administration?
A method of holding a business together, whilst plans are formed to either restructure the business of sell assets.
What financial checks may you undertake on a company before entering into a contract with them?
- Check their published accounts on companies house
- Check their credit ratings
- Ask for their order book
- Check references from previous clients
What Is GAAP ?
Generally Accepted Accounting Principles - UK GAAP, is the overall body of regulation establishing how company accounts must be prepared in the United Kingdom.
RLB
Company accounts must also be prepared in accordance with applicable company law (for UK companies, the Companies Act 2006
What is the limitations act ?
The Limitation Act 1980 sets out the rules on how long someone has to take action through the courts against another party. If the limitation period has expired then a claim is statute-barred and the person who wants to make the claim may be prevented from doing so.
Is there any RICS document relating to cash flow ?
RICS guidance note - 2012 - Cash flow forecasting - First edition
Can you expand on the contents of this (RICS guidance note - 2012 - Cash flow forecasting - First edition) ?
- What cash flow forecasting is,
- How to produce a useful forecast
- How to then use the forecast to assess progress on site
- To assist both employers and contractors to analyse actual expenditure against forecast expenditure.
Name three accounting statements ?
- The balance sheet
- Profit and loss statement
- Cash flow statement
What is WIP?
Work in progress (WIP) refers to partially-completed goods that are still in the production process. These items may currently be undergoing transformation in the production process, or they may be waiting in queue in front of a production workstation. Work in progress items do not include raw materials or finished goods.
What is Amortization ?
The action or process of gradually writing off the initial cost of an asset.
What is Misappropriation of company funds ?
Misappropriation of company funds is considered fraud and may be an internal matter involving employees or funds being diverted to another company – or might involve a criminal gang infiltrating a company.
What is included in a set of accounts?
The main account types include Revenue, Expenses, Assets, Liabilities, and Equity
What do you know about your company’s accounts?
How do you calculate utilisation ?
The number of billable hours divided by the total number of available hours (x 100).
So, if an employee billed for 32 hours from a 40-hour week, they would have a utilization rate of 80%.
How much did VAT rise?
2.5% (17.5% increased to 20%)
Give me an example of different VAT rates ?
Standard rate=20%
Reduced rate=5%
Zero rate=0%
What is the current rate of VAT ?
Standard - 20%,
Reduced = 5% such as power bills,
Zero - zero rated goods and services such as children’s clothes.
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
What is the VAT reverse charge ?
The customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier if they are VAT registered and part of the Construction Industry Scheme (CIS) - see flowcharts for further info
What is the difference between a profit and loss sheet and a balance sheet ?
The Profit and Loss account is the statement of revenue and expenses which shows the net profit and loss for the particular period
Balance sheet is the statement of assets, liabilities and capital which showing the actual financial position of an entity at a certain point in time.
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.
What is a profit and loss statement ?
The profit and loss statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period. / • Financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time, usually yearly.
Give me some examples of the subject areas of the RICS Professional Statement on Conflicts of Interest.
- Record Keeping
- Party conflicts
- Informed consent
- Information barriers
- Own interest conflicts
- Confidential information
What is the difference between a profit and loss statement and a balance sheet?
A profit and loss shows the income and expenditures of a company and resulting profit or loss.
The balance sheet shows what a company owns (assets) and what it owes ((liabilities) at any given point.
A profit and loss statement summarises the revenues, costs and expenses and a balance sheet shows the value of a business on a particular date and shows what the business owns and owes (assets and liabilities).
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 revenue is greater than expenses.
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, 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
What is solvency ?
The possession of assets in excess of liabilities; ability to pay one’s debts.
What is a Cash flow statement ?
A financial statement that shows all the cash inflow a company receives from operations and external investment. It also shows cash outflow that pays for business activities during a given period.
What is a profit and loss statement ?
A document which shows the amount of revenue against the expenses made during a specified period.
What is the difference between a Sole Trader, Partnership, Limited, and a LLP ?
- Sole Trader A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses (unlimited liability).-
- Partnership A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business.
- Limited In a limited company, the shareholders’ liability is limited to the capital they originally invested. If such company becomes insolvent, the shareholders personal assets remain protected. Shares in a private limited company are not offered to the general public (distinguishing it from a public limited company - plc.)
- Limited Liability Partnership (LLP)A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.
What is VAT ?
Value added tax, it is charged to companies with a turnover of more than £85,000.
What are Capital Allowances ?
A sum of money, that can be deducted from a company’s overall tax corporate or income tax on its profits.
Calculated based off the purchase of specific items such as plant and machinary and research and development
Who can claim Capital Allowances?
- Limited Companies
- Sole traders
What options are available to a company that has gone insolvent ?
- Administration
- Company Voluntary Agreement
- Compulsory Liquidations.
Give me some examples of how you forecast your individual fee income.
I keep a weekly and monthly log of ongoing project, billing dates and amounts to ensure I have visibility and clarity of I am going to hit my targets.
What do companies need to provide every year to comply with the Companies Act 2006?
An annual summary of a company’s capital and shares by means of a statement of capital, together with an up-to-date list of directors with their names, service address and business occupation.
What current challenges is Covid and/or Brexit bringing to Accounting Principles?
The initial lack of face to face interaction make general business and day to day ongoing challenging. As demenading as increased for labour, constrctor and materials this is having an impact on the suitability of works across the sector.
What is a creditor ?
Someone who you owe money
What is a debtor ?
Some who owes you money
Why might financial information be included in a business plan ?
- Balance sheets
- Profit and loss statements
- Cash flow statements
- Statements of shareholders’ equity
Give me some examples of some new business areas your employer could considering moving into.
The inclusion of technology such as laser scanning and drones into our offering to provide additional data within our services.
Briefly explain your employer’s cost recovery fee model.
What does a Dunn and Bradstreet report look like?
What is WIP is considered as?
A current asset on a balance sheet.
What are production costs
The expenses associated with providing a service, such as labour and equipment. Gross profit is after the subtraction of these costs.
What is financial gearing
What companies are exempt from the company’s act 2006?
What is a statutory account and what is included?
Same a business accounts
- - Balance sheet
- Profit and loss
- one more
What profit target do you work towards
55%, 27.5 after PPC and other overheads
What do you know about the Company’s Act
What would you do if a client wanted to use a contractor with a poor credit rating?
Request a performance bond
Request a parent company guarentee
Project bank account
What is a project bank account
Escrow account
What are the types of client account
- Discrete (Single Client)
- General (Multiple Clients)
What is the late payment of commercial debts act 1998 and regulations 2002 are?
What is a poor credit score from Dunn and Bradstreet?
Why should you not instruct a contractor who has a poor credit score?
- Exposing yourself and client to risk
- Works may not complete or finish late
- May request higher or additional interim payments
What is a red flag on a balance sheet?
Assets are under a parent company
Are you aware of any RICS documents with regards to money handling?
What are the requirements for handling clients money?
Rule 1 identifies that we must keep client money safe. RICS PS on Client Money Handling details
Does monies paid in advance of providing a service count as holding client money?
No
What is reconciliation?
Where two sets of records are analysed to identify and resolve any differences
Who does the client money handling procedures apply to?
All RICS regulated firms and their employees, and RICS regulated individuals - including LLPs.
What are some of the principles of the client money handling procedures professional statement?
- Account names clearly identified
- Ensure the money is immediately available
- Clarity on who the interest is paid to
- Clarity on the penalties for early access is paid by
(Unless otherwise agreed in writing and in the best interests of the client)
Whats PFI?
Public finance initiative - financing public sector works privately which is repayed over the long term by the government. Takes the burden off the tax payer
What is tax depreciation?
Declining value of an asset is offset against a company’s taxable profit - recorded as an expense.
Examples include plant, tools, machinery and buildings
What are overheads?
Operating costs of a business
What is an escrow account?
Sums held between two parties (by a third party) and used as a financial instrument to hold sums while the two parties meet their contractural agreements
What is financial leverage?
Using borrowed funds to enhance business operation
What is a current asset vs fixed asset?
Current - converted into cash within a year, e.g WIP
Fixed - cannot be converted into cash within a year, e.g. buildings
What is the purpose of a profit and loss
- Monitor and measure P&L, inaccuracies could have consequences for forecasting etc
- For forecasting
- For comparison
What are financial statements?
Forecasts of income and expenditure that can be used to analyse shortfalls and surpluses
Who requires auditing?
All companies unless exempt - eg small companies and charties
What are some catagories of fixed assets?
Tangible, Intangible, Investments
Why are management accounts different to P&L?
Presented differently but P&L presented differently for company accounts
Why do we use PPC?
Sum of all fees, less billable time, less staff expenses
What is the relationship between IFRS and GAAP?
IFRS used in other countries, GAAP used in the UK.
Can be compared reliably using FRC 101 (of GAAP)
RLB use FRC 102 to report our own accounts
What is the different types of WIP?
Positive WIP - work done but no fees raised
Negative WIP - fees raised for work to be completed in the future
What might an auditor’s report include
- Opinions
- Conclusions
-‘going concern’; going to continue trading
What does an auditor look at?
- Substantial risk assessment, e.g. expenses controls
- Evidence gathering around ‘material’ items (substantial)
- Reporting on the financial statement
