6 - Accounting Principles and Procedures

Question 1

210 - What is VAT? (2)

Answer 1

1) Value Added Tax
2) VAT is a CONSUMPTION TAX placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.

Question 2

211 - What is corporation tax? (2)

Answer 2

1) Corporation tax is paid BY BUSINESSES in the UK.
2) Calculated on their ANNUAL PROFIT in a similar way to income tax for individuals.

Question 3

212 - What is an audit? (2)

Answer 3

1) PROCESS used to CHECK a person or companies COMPLIANCE with POLCY, PROCEDURES and REGULATIONS.
2) Audits are PERFORMED TO ASCERTAIN the VALIDITY and RELIABILITY of information; also, to provide an assessment of a system’s internal control.

Question 4

213 - What is turnover? (2)

Answer 4

1) INCOME or REVENUE that a company receives from its normal business activities.
2) Usually from the SALE OF GOODS and SERVICES to customers.

Question 5

214 - What are management accounts?

Answer 5

Accounts PREPARED BY a COMPANY for INTERNAL MANAGEMENT USE, or accounts prepared for a tender, such as a bank to evaluate how the business will repay funding. Management accounts will NOT be AUDITED EXTERNALLY.

Question 6

215 - What is the difference between management and financial accounts? (2)

Answer 6

1) Financial accounting is meant for EXTERNAL STAKEHOLDERS.
2) Management accounting is presented INTERNALLY.

Question 7

216 - Why does a business keep company accounts? (3)

Answer 7

1) TAX PURPOSES (required by law)
2) DEMONSTRATES the companies FINANCIAL STANDING (supports loan or borrowing applications).
3) To ensure CASH FLOW and PROFITABILITY in a company is being CORRECTLY MANAGED.

Question 8

217 - What is an escrow account? (2)

Answer 8

1) A SEPARATE ACCOUNT owned by a THIRD PARTY, held on BEHALF of two other parties.
2) Can be used as a PROJECT BANK ACCOUNT.

Question 9

218 - What is a project bank account? (3)

Answer 9

1) RINGFENCED bank account (the money is held in escrow).
2) Ensures contractors, key subcontractors and key members of the supply chain are PAID on the CONTACTUALLY AGREED DATES.
3) Usually, MECHANISMS are in place for the RELEASE OF FUNDS (such as payment certificates).

Question 10

219 - What are overheads? (statement + 4 points)

Answer 10

The INDIRECT COSTS or FIXED EXPENSES of OPERATING a BUSINESS such as;
1) Rent / leasing costs
2) Utility bills
3) Staff salaries
4) Insurance

Question 11

220 - Explain the principle of tax depreciation?

Answer 11

Tax depreciation is the DEPRECIATION EXPENSE CLAIMED by a taxpayer on a tax return to COMPENSATE for the LOSS IN the VALUE of the TANGIBLE ASSETS. Examples include property, plant and equipment.

Question 12

221 - Name three types of accountancy ratios? (3)

Answer 12

1) LIQUIDITY RATIOS - The organisation’s ABILITY to turn ASSETS INTO CASH in order to pay debts.
2) PROFITABILITY RATIOS - Used to assess a business’ ability to GENERATE EARNINGS RELATIVE TO its revenue, operating costs, balance sheet assets, or shareholders equity over time, using data from a specific point in time.
3) GEARING RATIO - Measure the PROPORTION of a company’s BORROWED FUNDS to its EQUITY. The ratio INDICATES the FINANCIAL RISK to which a business is subjected, since excessive debt can lead to financial difficulties.

Question 13

222 - What is financial leverage? (2)

Answer 13

1) Financial leverage is an INVESTMENT STRATEGY of USING BORROWED MONEY.
2) Specifically, the use of VARIOUS financial instruments or borrowed capital to INCREASE the potential RETURN of an investment.

Question 14

223 - What are capital allowances?

Answer 14

The practice of allowing taxpayers to get TAX RELIEF on their TANGIBLE CAPITAL EXPENDITURE by allowing it to be deducted against their annual taxable income.

Question 15

224 - What are the key financial statements / documents that companies produce? (3)

Answer 15

1) Profit and loss account
2) Balance sheet
3) Cash flow forecast

Question 16

225 - Can you explain the difference between “gross” and “net” in accounting terms please?

Answer 16

Gross refers to the TOTAL amount of INCOME BEFORE DEDUCTIONS, while net is the TOTAL AFTER DEDUCTIONS or ADJUSTMENTS.

Question 17

226 - Why is it beneficial for surveyors to understand company accounts? (3)

Answer 17

1) For ASSESSING the FINANCIAL HEALTH of competing surveying practices.
2) To ASSESS the FINANCIAL STABILITY of tendering contractors and sub consultants.
3) To AID in preparing COMPANY ACCOUNTS within their own surveying practice.

Question 18

227 - What is expenditure?

Answer 18

Expenditure represents a PAYMENT with either cash or credit to PURCHASE GOODS or SERVICES.

Question 19

228 - What is capital expenditure? (2)

Answer 19

1) CAPEX (capital expenditure).
2) Capital expenditure is spent to AQUIRE or IMPROVE an ASSET such as equipment or buildings.

Question 20

229 - What is revenue expenditure? (2)

Answer 20

1) OPEX (revenue expenditure).
2) Revenue expenses are COSTS in the DAY TO DAY RUNNING of the business. For example, servicing a machine, spare parts etc.

Question 21

230 - Why are CAPEX and OPEX budgets split out in business accounts?

Answer 21

They have DIFFERENT TAX OBLIGATIONS, for example, CAPEX can benefit from capital allowances.

Question 22

231 - What is a balance sheet? (2)

Answer 22

1) A balance sheet is a SNAPSHOT of a company’s FINANCIAL POSITION a given POINT IN TIME.

Question 23

232 - What is meant by assets and the liabilities, please give examples? (2)

Answer 23

1) ASSET - a van or land which is OWNED.
2) LIABILITY - a loan or DEBT

Question 24

233 - What is a current asset?

Answer 24

Cash and other ASSETS that are EXPECTED to be CONVERTED to CASH within a YEAR.

Question 25

234 - What is a fixed asset?

Answer 25

ASSETS which are purchased for LONG-TERM USE and are not likely to be converted quickly into into cash such as land, buildings and equipment.

Question 26

235 - What is the difference between debtors and creditors? (2)

Answer 26

1) CREDITOR - is an individual or business that has LENT FUNDS to a business and is owed money.
2) DEBTOR - is an individual or business who has BORROWED funds from a business and so owes it money.

Question 27

236 - What is a cash flow forecast?

Answer 27

A cash flow forecast is a PLAN that SHOWS how much money you expect your business or project to RECEIVE and PAY OUT over a set PERIOD. It can help you plan how much you expect to make in sales and spend in costs. It an also help you understand when money will enter an leave your bank account.

Question 28

237 - What is the cash flow forecast used for? (5)

Answer 28

1) Understand the IMPACT on future PLANS and possible OUTCOMES.
2) Keep TRACK of overdue payments.
3) PLAN for upcoming CASH GAPS.
4) Manage SURPLUS CASH.
5) TRACK whether spending is ON TARGET.

Question 29

238 - Why is a cash flow (projection) important for a construction project? (3)

Answer 29

1) Allows the client to gain an UNDERSTANDING of their FINANCIAL COMMITMENT over the duration of the project and WHEN they are LIKELY TO SPEND the money.
2) Can be used to estimate when EXTERNAL FUNDING will be required.
3) Acts as a CHECK AGAINST VALUATIONS and can give early indication of financial difficulties.

Question 30

239 - How does a cash flow forecast help a company remain solvent?

Answer 30

Cash flow forecast can PREDICT when a business or project has money to PAY OUT and when money is COMING IN. This can HIGHLIGHT if the business or project will have NEGATIVE CASH FLOW, meaning they can do something about it in good time.

Question 31

240 - What is a profit and loss account?

Answer 31

A profit and loss account shows a company’s REVENUEand EXPENSES over a particular PERIOD OF TIME, typically either one month or consolidated months over a year. These figures show whether the business has made a profit or a loss over that period.

Question 32

241 - What is the difference between a balance sheet and a profit and loss account? (2)

Answer 32

1) Balance sheet is a FINANCIAL “SNAPSHOT” at one given time showing the financial position of the company.
2) Profit and loss account is showing the profit and loss OVER a determined PERIOD.

Question 33

242 - What is insolvency?

Answer 33

Insolvency is effectively the INABILITY TO PAY OFF DEBTS or creditors (the people you owe money to). The term “insolvency” is often a generic term used to describe bankruptcy, liquidation, administration etc.

Question 34

243 - Why would you not recommend the appointment of a contractor with a low credit rating? (2)

Answer 34

1) RISK of contractor or supply chain INSOLVENCY.
2) Possibility of the contractor NOT PERFORMING SATISFACTORILY or has restricted resources on site.

Question 35

244 - How could you determine the financial standing of a company prior to doing business with them?

Answer 35

A Dun & Bradstreet report creates a business credit report that could be viewed like a personal credit report for businesses.

Question 36

245 - What are the signs of contractor insolvency on a construction project? (6)

Answer 36

1) SLOWING down works.
2) SUPPLY OF MATERIALS drying up.
3) Increase in DEFECTIVE WORKS.
4) Changes in MANAGEMENT.
5) Additional or inflated PAYMENT REQUESTS.
6) COMPLAINTS from subcontractors.

Question 37

246 - Under what circumstances might a quantity surveyor encounter insolvency? (3)

Answer 37

1) A project that you are working on may have a CONTRACTOR or a SUB-CONTRACTOR who is having serious FINANCIAL DIFFICULTIES which mean they cannot pay their debts.
2) You may be approached by a CLIENT who has a project where the CONTRACTOR has CEASED TRADING and needs advice.
3) You could be APPOINTED by an EXTERNAL BODY (generally liquidator or administrator) to PREPARE a REPORT on a commercial aspect of the project.

Question 38

247 - What steps would you take in the event of contractor insolvency? (8)

Answer 38

1) INFORM all parties involved and SECURE THE SITE.
2) INFORM the BONDSMAN (bank / insurance company).
3) Consider STOPPING PENDING PAYMENTS to the contractor and seek legal advice.
4) Take OWNErSHIP OF MATERIALS off-site (if paid for in valuations).
5) SCHEDULE all plant and materials.
6) VALUE COMPLETED WORKS and value any defects.
7) Monitor LOSS & EXPENSE incurred by the EMPLOYER.
8) TERMINATE the building CONTRACT and employ others to complete.

Question 39

248 - What is liquidation?

Answer 39

In its simplest form liquidation is a FORMAL PROCESS which brings about the CLOSURE of a LIMITED COMPANY. As part of the process all company ASSETS will be SOLD - or “liquidated” - for the benefit of outstanding creditors and / or shareholders before the company is struck off - or dissolved - from the register held at Companies House.

Question 40

249 - What is the difference between administration and liquidation? (2)

Answer 40

1) Administration is where someone (the administrator) is APPOINTED TO MANAGE the company’s affairs on behalf of the creditors.
2) Liquidation involves the SHUTTING DOWN of a company and SELLLING off the ASSETS to pay off the creditors.

Question 41

250 - What is bankruptcy? (3)

Answer 41

1) Bankruptcy is one way for INDIVIDUALS to deal with debts they cannot pay. It does not apply to companies or partnerships.
2) ASSETS are SHARED among those you owe money to (creditors).
3) Allows the individual to MAKE a FRESH START free from debt (with some restrictions).