Accounting Principles Flashcards
What are accounts?
Record of the past, or forecast for the future
What are company accounts?
Summary of an organisation’s financial activity over a 12 month period
They show:
• Tracking of money (what’s coming in and out)
• Monitor profit & loss (company performance)
• Use info for future business planning
• Highlight problem areas
• Submit annual financial statements to companies house
What is companies house?
- UK’s register of companies
* Used to maintain corporate transparency, understand policy impact and enables govt to levy corporation tax (18%)
What are the basic components in a company’s accounts?
- Profit and loss
* Balance sheet
What is profit and loss?
- Summary of business’ transactions (income & expenditure) for a given year or period
- Shows income / turnover –> less cost of sales –> less operating expenses (indirect or fixed costs) = gives operating profit or losses (net margin)
What are balance sheets?
• Summary of the financial balances at the end of the financial year. It shows how well assets/ liabilities are managed.
• Includes:
- Fixed assets – equipment & facilities (more than 1 year to convert to cash)
- Current assets – amounts prepaid for the future (converted to cash in 1 year)
- Long term liabilities – amounts owed in more than a years’ time
- Current liabilities – amounts owed (accrued but not yet invoiced)
- Working capital – net current assets and liabilities in use in the business
- Shared capital – long term investment by the shareholders
- Reserves – retained profits left in business
What is a cashflow? Why is it used?
Record of cash receipts (inflows) and cash payments (outflows). An increase or decrease in cash balances or borrowings.
What is the difference between management and statutory accounts?
Management accounts are:
- Information to people in the company
- Include KPIs (eg. Utilisation (resource via timesheets) and recovery (cover of cost against billing)
- Personalised to suit the company and can be in any format for any period of time
- Looks forward / forecasting (business planning)
Statutory accounts:
- Information for external people
- Statutory requirement - format and standards
- Covers entire organisation
- Typically annual
- Filed to Company House
What is the role of an auditor?
- An auditor reviews accounts of companies and organisations to ensure the validity and legality of their financial records. They confirm accounting practices are genuine and following correct and consistent principles.
- In the UK - in line with GAAP (Generally Accepted Accounting Principles) - ensure minimum level of consistency in a company’s financial statements.
- They can also act in an advisory role to recommend possible risk aversion measures and cost savings that could be made.
Why is it important to understand accounts in your role?
· It is relevant for PMs to be able to understand the financial health of a project, consultant or contractor to protect the client’s interests.
· It is also important for:
· Assessing business accounts
· Assessing financial strength of contractors and those tendering for contracts
· Assessing covenant strength of potential tenants and landlords
· As a PM, it is also important to caveat any client advice on a company’s financial position and recommend further advice is provided by a qualified accountant.
How do you manage and report your project expenditure?
- Use a cashflow to record cash receipts / payments.
- Report to the client on a monthly basis against the agreed budget
- Use it to monitor and manage expenditure
- Advise the client if more budget is required.
How would you analyse accounts?
- Ratio analysis - looks at trends over a number of years to obtain an indication of a company’s financial performance in key areas.
- Looks at key trends such as: liquidity, profitability, return on capital employed.
