Accounting Principles

Question 1

What is a Profit and Loss Statement?

Answer 1

A measure of company performance, which shows Company’s revenue and expenses over a period of time. Usually 12 months.

Question 2

What is a balance sheet?

Answer 2

A snapshot of a company’s financial position taking into account assets and liabilities.

Question 3

What is a cashflow forecast?

Answer 3

Plan that shows how much money a company or project is expected to receive and pay out over a set period.
Cashflow is lifeblood of a construction project.

Question 4

What are the benefits of a cashflow forecast?

Answer 4

• Allows client to gain an understanding of their financial commitments over a project’s duration and when it is likely to be spent.
• 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.

Question 5

What are the signs of insolvency in company accounts/ credit checks?

Answer 5

• Low credit rating
• Decreasing profits
• A current ratio below 0.75
• A falling working capital ratio suggesting that the company has taken on more contracts than it can finance
• Cant get bonds or are being charged a high premium.

Question 6

What is the difference between insolvency, administration, liquidation and bankruptcy?

Answer 6

• Administration: administrator come in and take over running of the company in an attempt to sort out the financial, continue to trade.
• Liquidation: Process of selling all assets.
• Insolvency: Company ceases to trade as cannot pay debts.
• Bankruptcy: Same as administration but for an individual.

Question 7

Are you aware of any ratios?

Answer 7

• Gearing ratio: dividing debt by any owners equity, a ratio of 25% or less is considered as low risk.
• Current Assets ratio: looks at if a company has enough assets to meet its short term financial needs.