Accounting Principles Flashcards
What is VAT?
VAT is value added tax, which is tax added to goods and services
What is corporation tax?
Corporation tax is paid by UK businesses, which is calculated on their annual profit
What is the GAAP?
- Generally accepted accounting principles
- Set out the accounting standards for the sharing of accounting information within the UK
What is the IAS?
A set of international accounting standards to promote transparency, accountability and efficiency in financial markets around the world 
What is the role of an auditor?
An auditor insures a company is compliant with procedures and policies
Audits can be undertaken on company’s accounts and quality management systems
What is an audit?
An audit is an inspection by an auditor to check accompanies compliance with policies and procedures
Different types of audits include quality system audit and financial account audit
Why is it important to undertake audits?
- Improves efficiency of operations
- Evaluate risks
- Ensures legal compliance
- Can be a requirement to continue compliance with financial and quality management systems
What would happen if an auditor found a problem with something in the company’s accounts?
- can stop company activities until the issue is resolved, especially if it was a legal requirement
- Can recommend ways in which the company can improve its methods to comply with policies and procedures
What is turnover?
Turnover is how much income of business has made, usually from the sales of goods and services
What is the difference between management and financial accounts?
- management accounts are presented internally
- Financial accounts are meant for external stakeholders
Why do businesses keep accounts?
- Tax purposes
- Demonstrates a company’s financial standing, for things such as loans
- To show solvent, profitability and helps maintain an accurate cash flow
- A legal requirement for HMRC
What is an escrow account?
An escrow account is a separate account owned by a third-party, held on behalf of two other parties
What is a project bank account?
A project bank account is a Ring fenced account that is used to ensure contractors, subcontractors and members of the supply chain are paid on contractually agreed dates
Mechanisms, such as payments certificates, are used to release the funds
What are overheads?
Overheads are the indirect costs of operating a building. Examples include:
- Rent
- Utilities
- Staff costs
- Insurances
What is a ratio analysis and why is it useful?
Ratio analysis is a way to analyse a company’s accounts
A ratio analysis is used to evaluate various aspects of a business’ operating and financial performance, such as liquidity, profitability and solvency
What are the three types of accountancy ratios?
Liquidity: to show the organisations ability to liquidate assets in order to pay debts
Profitability: to demonstrate the profitability of a business using balance sheets
Gearing: demonstrates how much debt accompany has against how much equity it has
What is financial leverage?
The use of borrowed funds to invest, to increase the potential return on investment
What is return on investment?
The amount of money that could or has been returned, after you’ve made an investment
What are capital allowances?
Capital allowances are a type of tax relief. Businesses can claim when they invest in long-term assets.
Capital allowances allow you to deduct part, or all, of the assets value from profits, therefore paying less tax
What is the difference between gross and net?
Gross: refers to the total amount of income before deductions
Net: the total after deductions
Why is it beneficial for surveyors to understand company accounts?
- Helps with assessing the financial health of tendering contractors
- Can help in preparing company accounts within their own surveying practice
- Can assess the financial health of competing surveying practices
Why are CAPEX and OPEX split out in business accounts?
They have different tax obligations, for example, CAPEX can benefit from capital allowances
What is a balance sheet? What does it show?
A balance sheet is a snapshot of the companies financial position at anyone given time.
It reports the companies assets, liabilities, and ownership equity.
Balance sheet can demonstrate a company solvency at one point in time
What is a current asset?
Current assets is cash, and anything that can be expected to be converted into cash within a year
What is a fixed asset?
I fixed asset is something that is not likely to be converted into cash quickly, for example, buildings, land and equipment
What is a cash flow?
Way of showing the expected income and expenditure of a business, over a given period of time
Why are cash flows important for clients?
- it can give the client an indication of the expected expenditure at each month
- It can enable a client to budget for their financial year
Why are cash flows important for contractors?
- It can help them understand when money is due from the client and when they need to pay subcontractors in their supply chain
- Can help them remain solvent by ensuring they are not paying all money out at once
- Allows them to understand when they can procure materials and pay salaries
How can a cash flow help accompany remain solvent?
- can forecast whether the business or project has money to pay out, and when money is expected to be paid in
- Can highlight if a business or project will have a negative cash flow, so they can do something about this in good time
How would you create a cash flow before contractor came on board?
I would use an indicative program and align the cost estimate to show the anticipated expenditure for each month, and when activities are anticipated to be completed
What items would you expect to find in a profit and loss account?
- Incomings: sales and services
- Expenditure: staff wages, rent and utilities
This would then provide a bottom line figure, showing a positive or negative number, therefore demonstrating a profit or loss
What is the difference between a balance sheet and a profit and loss account?
- Balance sheet is a financial snapshot to a companies financial position at any given time
- Profit and loss account shows the profit or loss of business over a set period of time
What is insolvency?
Insolvency is when a company can no longer meet their financial obligations and cannot pay their debtors
What are the steps taken when a contractor becomes insolvent?
- Stop all payments to the contractor.
- Secure the site.
- Take possession of any offsite materials.
- Value the works completed.
- Inform the bondsman, if required
- Terminate the contract.
- Begin the process of appointing another contractor to complete the works.
How could you determine the financial standing of a business before doing business with them. For example appointing a contractor for works?
- I could undertake a Dunn & Bradsheet report
- Undertake a credit check with an agency, such as Experian
- Speak to colleagues & the supply chain
What would you look for in a Dunn & Bradsheet report?
- Risk assessment to show the overall health of the business
- Maximum recommended value for the scheme
What signs might be present for a contractor going insolvent?
- Slowing down on site
- Supply materials drying up
- Increase in defective workmanship
- Changes in management
- Additional or inflated payment requests
- Complaints from subcontractors
Under what circumstances might a quantity surveyor encounter insolvency?
- you may be approached by a client where a contractor has cease trading and they need advice
- A contractor could become insolvent on one of your projects
- You could be appointed by an external body to prepare a report on the commercial aspect of a project
What is the difference between administration and liquidation?
- Administration is where a body is appointed to manage companies affairs on behalf of the creditors
- Liquidation involves the company shutting down and selling off its assets to pay its creditors
What is bankruptcy?
Bankruptcy is a way for individuals to deal with debts. Their assets are shared amongst creditors, and it allows them to make a fresh start debt free (with some restrictions)
