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ETHICS > Accounting principles > Flashcards

Accounting principles Flashcards

1
Q

What are the key financial statements that companies provide?

A

o Profit and loss accounts.
o Balance sheets.
o Cash flow statements.

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2
Q

What is the difference between management and financial accounts?

A
  • Management accounts are for the internal use of the management team.
  • Financial accounts are the company accounts that are required by UK law.
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3
Q

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

A
  • 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 (it’s assets) and what it owes (it’s liabilities) at a given point in time.
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4
Q

What is a cashflow statement?

A
  • It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
  • It measures the short-term ability of a firm to pay off its bills.
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5
Q

Explain your understanding of the following Terminology?

  • Capital Allowances
  • Sinking Finds
  • Insolvency
  • Companies House
A
  • Capital Allowances - Tax relief on certain items purchased for the business for example tools and equipment.
  • Sinking Finds – Funds that are set aside for future expense or long term debt.
  • Insolvency – An inability to pay debts where liabilities exceed assets.
  • Companies House – An agency that incorporates and dissolves limited companies within the United Kingdom.
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6
Q

What are Liquidity ratios?

A
  • Liquidity rations measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
  • Liquidity ratio calculation = current assets / current liabilities.
  • The ratio is usually around 1.5 but it depends on the sector of activity.
  • For example house builders often operate on a liquidity ratio over 3 because they retain high value assets in the form of unsold houses.
  • A liquidity ratio of less than 0.75 can be an early indicator of insolvency.
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7
Q

What are Profitability ratios?

A
  • Profitability ratios measure the performance of a company in generating its profits.
  • The trading profit margin ratio = turnover – (cost of sales /turnover).
  • Low margins may be due to a growth strategy from the company and do not always result from bad management.
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8
Q

What are Financial Gearing Ratios?

A
  • These measure the financial structure of the company which are crucial indicators for the external suppliers of debt and equity as well as for internal management.
  • They help to measure solvency.
  • Highly geared companies rely mainly on borrowing.
  • The payment of interests reduces the profit.
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9
Q

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

A
  • To aid in preparing their own business accounts.
  • For assessing the financial strength of contractors and those tendering for contracts.
  • For assessing competition.
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10
Q

What is the purpose of a P & L?

A
  • To monitor and measure profit (or loss).
  • To compare against past performance and against company budgets.
  • For valuation purposes and to compare against competitors.
  • To assist in forecasting with future performance.
  • To calculate taxation.
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11
Q

What is the difference between debtors and creditors?

A
  • Creditors are business entities that are owed money by another entity that they have extended credit to.

For example if you have provided services to a client and they owe payment of your fees, you become a creditor to that client.

  • Debtors are business entities that owe money to another respective company.

For example if you have used a sub-consultant and still owe them payment of their fees then
you become a debtor of the sub-consultant.

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12
Q

What are Management Accounts?

A
  • The accounts prepared by a company for internal management use.
  • Accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the
    funding.
  • These accounts are not be audited externally.
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13
Q

What is a Financial Statement?

A
  • Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses.
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14
Q

What is a Profit and Loss account?

A
  • They demonstrate a companies sales, running costs and profit or loss over a financial period (usually 1 year).
  • They are used to show sales vs expense (invoicing vs time and disbursements).
  • They can also be used to identify non-profitable work.
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15
Q

What is a Balance Sheet?

A
  • They shows the value of everything the company owns made up of its assets and liabilities.
  • The balance sheet demonstrates the value of the business at any given point in time.
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16
Q

What is a Cash Flow forecast?

A
  • A cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity.
  • On construction projects they usually show as an ‘S’ curve.
  • There is typically a small financial outlay at the start, a steep increase during the midway point and a taper towards the end.
17
Q

What is an S-Curve?

A
  • S-Curve means ‘standard’ and refers to the shape of the expenditure profile when shown in graphical form.
  • During the start of a project, the rate of expenditure is typically lower due to site setup and lower value enabling works.
  • As the scheme progresses to the middle of the programme, the rate of expenditure will typically increase as more expensive building components such as M&E and Structural Steel Work are installed.
  • Towards the back end of the programme, the rate of expenditure will slow down which is shown by the flattening of the S-Curve.
    S-Curve Example
18
Q

How are these used by Surveyors?

A
  • To track, analyse and assess business accounts and performance.
  • For assessing the financial strength of contractors.
  • To compare actual progress of the work against pre-contract predictions.
19
Q

What are Escrow Accounts?

A
  • A sperate account owned by a third party, held on behalf of two other parties.
  • A bank account with defined contractual conditions for the release of funds.
  • They can be used as a project bank account.
  • Mechanisms must be in place for the release of funds such as payment certificates.
20
Q

When have you used company accounts in your work?

A
  • To assess the financial strength of contractors at Pre-Qualification Stage and tender stages.
21
Q

How do you analyse a company’s accounts?

A
  • The client’s accountants will carry out the detailed analysis but I can look at the warning signs by calculating ratios such as liquidity ratios, profitability ratios and gearing ratios.
  • I should always calculate the ratios myself as those included in the company accounts may have been manipulated.
  • I should always use the group or consolidated accounts rather than the company accounts unless it is a limited company.
22
Q

How do you carry out a credit check? Give an example.

A
  • I use the Credit Safe website to which my company subscribes to access a company’s accounts.
  • I considered both the group accounts and the company accounts.
  • If the credit rating is low, I calculate some key ratios and pass on all the information to my client’s
    accountants for them to analyse further.
23
Q

What are signs of insolvency in company accounts or credit checks?

A
  • A low credit rating.
  • A liquidity ratio below 0.75.
  • A falling working capital ratio suggesting that the company has
    taken on more contracts than it can finance.
  • A low return on equity.
  • A highly geared company that is heavily reliant on loans.
  • A falling cashflow statement.
24
Q

Why would you not recommend the appointment of a contractor with a low credit rating?

A
  • There may be an increased risk of the contractor not performing satisfactorily.
  • It could present increased risk of the contractor failing to deploy sufficient resources and materials to
    the project.
  • It could increase the risk of the contractor’s insolvency.
25
Q

What measures would you recommend if your client wanted to
appoint a contractor with a low credit rating?

A
  • I would explore the option of requesting a performance bond that my client could call on if they Main
    Contractor failed to perform.
  • I would also review the tender submission to ensure this is not excessively front loaded.
  • When reviewing interim valuations, I would ensure that these are accurate and not over claimed.
  • A project bank account may also provide an additional level of assurance and should be considered.
26
Q

What do you understand by the term Generally Accepted Accounting Principles (GAAP)?

A

GAAP, is the overall body of regulation establishing how company accounts must be prepared in the the UK.

27
Q

Which reporting framework do public limited companies have to comply with?

A

IFRS

28
Q

Tell me something you understand from the Companies Act 2006.

A

The Companies Act 2006 is the main piece of legislation which governs company law in the UK. The prime aims of the Act are: to modernise and simplify company law, to codify directors duties, to grant improved rights to shareholders, and to simplify the administrative burden carried by UK companies.

29
Q

Tell me what it means to prepare accounts in accordance with IFRS.

A

It means that you are complying with the Companies Act 2006.

30
Q

What is the difference between UK GAAP and IFRS?

A

IFRS set out different parts of a transaction and account for these seperately. Whereas UK GAAP allow for a bundle to be accounted for as a signle stream.

31
Q

What is the basis of valuation under IFRS 13?

A

IFRS 13 defines fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements.

32
Q

What is fair value?

A

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

33
Q

What has changed in relation to lease accounting / IFRS 16?

A

The new Standard eliminates a lessee’s classification of leases as either operating leases or finance leases. Instead, almost all leases are ‘capitalised’ by recognising a lease liability and right-of-use asset on the balance sheet.

34
Q

What is FRS 102? What changes have been made to it?

A

FRS 102 applies to financial statements that are intended to give a true and fair view of a reporting entityÕs financial position and profit or loss for a period. It applies not only to companies but also to public benefit and other types of entity. FRS 102 was amended to require entities to recognise changes in operating lease payments that occur as a direct consequence of the COVID-19 pandemic

ETHICS (5 decks)

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