Accounting Principles

Question 1

What is the difference between a profit and loss account and the balance sheet?

Answer 1

A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss

The balance sheet shows what a company owns and what it owes at a given point in time

Question 2

What are the key financial statements that all companies must provide?

Answer 2

The key financial statements to be provided by companies are profit and loss account balance sheets and cash flow statements

Question 3

What is a cash flow statement?

Answer 3

It is the summary of the actual anticipated ingoing and outgoing of cash in the firm over the accounting period it is broken down into operating investing and financing activities.

It measures the short term ability of a company to pay its debts.

Question 4

Why do chartered surveyors need to understand and be able to interpret company accounts?

Answer 4

• for reviewing their own firms account
• for assessing the financial strength of contractors and those tendering for contracts
• For reviewing profability and sustainability

Question 5

What is the purpose of a profit and loss account?

Answer 5

– Monitor and Measure profit or loss. Significant problems can arise if the information is an accurate either through incompetence or deliberate fraud.

•  compared to its past performance compared to the budget and compared to other businesses
• assist in forecasting future performance
• Used for calculating taxation

Question 6

What is the difference between debtors and creditors? 

Answer 6

Creditors - your firm owes another firm money e.g. if you owe a sub-consultant fees then they are a creditor

Debtors - A firm who owes your firm money e.g. a client who owes you fees is a debtor

Question 7

What are financial statements? 

Answer 7

Forecasts of income and expenditure can be used as an analytical tool to identify potential shortfalls and surpluses.

Question 8

What are profit and loss accounts?

Answer 8



Shows companies cost and profit/loss of the financial year. Used to show sales versus expense.

Question 9

What are balance sheets?

Answer 9

• Shows the value of everything the company owns owes and is owed.
• Shows the value of the business at any given point.
• Summarises the assets and liabilities.

Question 10

What are signs of insolvency in company account/credit checks?

Answer 10

Low credit rating

A falling working capital ratio suggesting that the company has taken on more contracts that it can finance