2.4 Accounting Principles and Procedure

Question 1

What is turnover?

Answer 1

income or revenue from normal business activities.

Question 2

What are business overheads with examples?

Answer 2

Indirect business expenses of operating a business:
Rent / Leasing costs
Utility bills
Staff salaries
Insurance

Question 3

What is an escrow account?

Answer 3

A bank account that can’t be accessed until certain conditions are met.

Question 4

What are the three accounting ratios?

Answer 4

Liquidity ratio - ability to turn assets into cash
Profitability ratio - ability to generate earnings relative to revenue
Gearing ratio - proportion of company’s debt to equity

Question 5

What is the UK GAAP?

Answer 5

Regulatory body that sets how financial accounts should be prepared - UK Generally Accepted Accounting Principles

Question 6

What are the core financial statements?

Answer 6

Profit and loss
Balance sheet
Cash flow forecast

Question 7

What is a balance sheet?

Answer 7

Snapshot of a company’s financial position at a given time. Shows Assets, liabilities and shareholders equity.

Question 8

What is the differnce between debtors and creditors?

Answer 8

Creditor - lent funds and is owed money.
Debtor - borrowed funds and owes money.

Question 9

What is a cash flow forecast?

Answer 9

Document that shows how much money you expect to receive and pay out over a set period.

Question 10

What is cash flow forecast used for?

Answer 10

Make future plans
Keep track of payments
Plan for cash shortfalls
Manage surplus cash
track whether spending is on track

Question 11

What is a profit and loss account?

Answer 11

Revenue and expense over a period of time.

Question 12

What is insolvency?

Answer 12

Inability to pay off debts or creditors.

Question 13

How could you determine the financial standing of a company?

Answer 13

A Dun & Bradstreet(D&B) report - business credit report.

Question 14

What are the signs of contractor insolvency?

Answer 14

Slowing down works
Supply of materials drying up
Increase in defective work
Change in management
Inflated payment requests
Complaints from subcontractors

Question 15

What steps should you take in the event of a contractor insolvency?

Answer 15

Inform all parties involved and secure the site.
Inform the bondsman.
Consider stopping pending payments.
Take ownership of any material you have paid for.
Schedule all plant and materials.
Value completed works and any defects.
Monitor loss and expenses incurred by the employer.
Terminate the contract and appoint another contractor.

Question 16

What is liquidation?

Answer 16

Formal process of closing a company. Assets are sold to repay debts and company is struck off/dissolved from Companies House.

Question 17

What is the difference between administration and liquidation?

Answer 17

In administration the administer is appointed to manage the company’s affairs for the creditors.
Liquidation involves the shutting down of the company.

Question 18

Why do we use financial ratios and and when in construction?

Answer 18

• Provide current picture of business performance.
• Used at tender to assess financial strength.