Accounting principles Flashcards
What is VAT?
- Value Added Tax.
- 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.
What is corporation tax?
- Corporation tax is paid by businesses in the UK.
- Calculated on their annual profit in a similar way to income tax for individuals.
What is an audit?
Munnas Notes: An audit is a systematic and independent examination of an organization’s books, accounts, statutory records, documents, and vouchers to ascertain how far the financial statements and non-financial disclosures present a true and fair view of the concern. APC Revision Guide: Process used to check a person or company’s compliance with policy, procedures & compliance with regulations. They are performed to ascertain the validity and reliability of information and asses of a system’s internal controls
What is turnover?
- Income or revenue that a company receives from its normal business activities.
- Usually from the sale of goods and services to customers.
What are management accounts?
Accounts prepared by a company for internal management use, or accounts prepared for a lender, such as a bank to evaluate how the business will repay funding. Management accounts will not be audited externally.
What is the difference between management and financial accounts?
- Financial accounting is meant for external stakeholders.
- Management accounting is presented internally.
Why does a business keep company accounts?
- Tax purposes ( required by law).
- Demonstrates the company’s financial standing (supports loan or borrowing applications).
- To ensure cash flow and profitability in a company is being correctly managed.
What is an escrow account?
- A sperate account owned by a third party, held on behalf of two other parties.
- Can be used as a project bank account.
What is a project bank account?
- Ringfenced bank account ( the money is held in escrow).
- Ensures contractors, key subcontractors and key members of the supply chain are paid on the contractually agreed dates.
- Usually, mechanisms are in place for the release of funds ( such as payment certificates ).
What are overheads?
The indirect costs of fixed expenses of operating a business:
- Rent/leasing costs.
- Utility bills.
- Staff salaries.
- Insurance.
Explain the principle of tax depreciation?
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.
Name three types of accountancy ratios?
- Liquidity ratios - The organisation’s ability to turn assets into cash in order to pay debts.
- Profitability ratios - Used to assess a business’s 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.
- Gearing ratio - Measures 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.
What is financial leverage?
- Financial leverage is an investment strategy of using borrowed money.
- Specifically, the use of various financial instruments or borrowed capital to increase the potential return of an investment.
What are capital allowances?
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.
What are the key financial statements/documents that companies produce?
- Profit and loss account
- Balance sheet
- Cash flow forecast
What is expenditure?
Expenditure represents a payment with either cash or credit to purchase goods or services.
What is capital expenditure?
- CAPEX ( capital expenditure ).
- Capital expenditure is spent to acquire or improve an asset such as equipment or buildings.
What is revenue expenditure?
- OPEX ( revenue expenditure ).
- Revenue expenses are costs in the day to day running of the business. For example, servicing a machine, spare parts etc.
Why are CAPEX and OPEX budgets split out in business accounts?
They have different tax obligations, for example CAPEX can benefit from capital allowances.
What is a balance sheet?
- A balance sheet is a ‘snapshot’ of a company’s financial position at a given point in time.
- It reports on a company’s assets, liabilities and ownership equity.
- ,It doesn’t show day-to-day transactions or
the current profitability of the business.
What is meant by assets and the liabilities?
- Assets = a van or land which is owned.
- Liability = a loan or debt.
What is a current asset?
Cash and other assets that are expected to be converted to cash within a year.
(OR)
“Assets which are money or near to money , (Can be converted into money within a short
period i.e.. In a year time.)”
What is a fixed asset?
Assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings and equipment.
(OR)
“Assets/objects has a book value more than a year. Assets which cannot be easily converted to cash and has an economic life of more
than 1 year”
What is the difference between debtors and creditors?
- Creditors - is an individual or business that has lent funds to a business and is owed money.
- Debtor - is an individual or business who has borrowed funds from a business and so owes it money.
What is a cash flow forecast?
A cashflow 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 can also help you understand when money will enter and leave your bank account.
What is the cash flow forecast used for?
- Understand the impact on future plans and possible outcomes.
- Keep track of overdue payments.
- Plan for upcoming cash gaps.
- Manage surplus cash.
- Track whether spending is on target.
Why is cash flow important for a construction project?
- 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.
- Can be used to estimate when external funding will be required.
- Acts as a check against valuations and can give early indication of financial difficulties.
How does a cash flow forecast help a company remain solvent?
Cash flow forecasts 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.
What is a profit and loss account?
A Profit and loss account shows a company’s revenue and 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 time period.
(OR)
“A profit and loss account is a summary of business
transactions for a given period.
By deducting total expenditure from total income, it
shows whether the business made a profit or loss at
the end of that period. shows the net result of a business for
a particular period “
What is the difference between a balance sheet and a profit and loss account?
- Balance sheet is a financial ‘snapshot’ at one given time showing the financial position of the company.
- Profit and loss account is showing the profit or over a determined period.
What is a insolvency?
- 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.
(OR)
“Insolvency is the inability to pay debts. liabilities exceed assets.
Insolvent does not mean bankrupt, or that the business will be liquidated.
Course of actions:
1. Company Voluntary Arrangements
2. Administration.
3. Receivership.
4. Winding up.”
Why would you not recommend the appointment of a contractor a with low credit rating?
- Risk of contractor or supply chain insolvency.
- Possibility of the contractor not performing satisfactorily or has restricted resources on site.
How could you determine the financial standing of a company prior to doing business with them?
A Dun & Bradstreet report creates a business credit report that could be viewed like a personal credit report for businesses.
What are the signs of contractor insolvency on a construction project?
- Slowing down works.
- Supply of materials drying up.
- Increase in defective work.
- Changes in management.
- Additional or inflated payment requests.
- Complaints from subcontractors.
Under what circumstance might a quantity surveyor encounter insolvency?
- A Project that you are working on may have a contractor or a subcontractor who is having serious financial difficulties which means they cannot pay their debts.
- You may be approached by a client who has a project where the contractor has ceased trading and needs advice.
- You could be appointed by an external body (generally a liquidator or administrator) to prepare a report on a commercial aspect of the project.
What steps would you take in the event of insolvency?
- Inform all parties involved and secure the site.
- Inform the bondsman (bank/insurance company).
- Stop any pending payment (can defend on grounds of counter claim for costs).
- Take ownership of materials off site (if paid for in valuations).
- Scheduled all plant and materials.
- Value completed works and value any defects.
- Monitor loss & expense incurred by employer.
- Terminate the building contract and employ others to complete.
What is liquidation?
In its simplest from 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.
(OR)
Company Might does not have enough cash but have assests, so assests are released (liquidated) to cash to pay debts.
What is the difference between administration and liquidation?
- Administration is where someone (the administrator) is appointed to manage the company’s affairs on behalf of the creditors.
- Liquidation involves the shutting down of a company and selling off the assets to pay off the creditors.
