Accounting Principles

Question 1

Key Financial Statments Companies provide?

Answer 1

Profit and Loss Account
Balance Sheet
Cash Flow Statements

Question 2

Difference between Management and Financial Accounts?

Answer 2

Management: internal use for management of company
Financial: company accounts required by law

Question 3

Difference between Profit and Loss Account and a Balance Sheet?

Answer 3

Profit and Loss: Shows incomes and expenditure - profit or loss
Balance Sheet: Shows what company owns (assets) and what it owes (liabilities) at a given point [net worth]

Question 4

What is a Cashflow Statement?

Answer 4

Summary of ingoing and outgoing of cash in a firm over period and measures short term ability of company to pay bills

Question 5

Why QSs need to be able to interpret company accounts?

Answer 5

Prepare own accounts
Assessing contractors
Assessing competition

Question 6

Purpose of a Profit and Loss Account?

Answer 6

Measure profit
Compare past performance
Compare with other competitors
Assist in forecasting
Calculate taxation

Question 7

Difference between Debtors and Creditors?

Answer 7

Creditors are owed money; Debtors owe money

Question 8

What are Management Acounts?

Answer 8

Accounts for internal use eg for a lender; not audited externally

Question 9

What is a Financial Statement? (forecasting)

Answer 9

Forecasts of income and expenditure to identify shortfalls and surpluses (this is a projected cash flow forecast them?)

Question 10

Explain Capital Allowances?

Answer 10

Tax relief on certain items purchased eg tools, equipment

Question 11

Explain Sinking Funds?

Answer 11

Funds set aside for future expense

Question 12

What is Insolvency?

Answer 12

Inability to pay debts, and liabilities exceed assets (ie a negative working capital)

Question 13

Explain Companies House?

Answer 13

Agency that incorporates and dissolves Limited companies

Question 14

HMRC?

Answer 14

His Majesty’s Revenue and Customs

Question 15

What are Liquidity Ratios?

Answer 15

Measure ability to pay off current liabilities
Converting current assets into cash
Ratio:
current assets/current liabilities (usually around 1.5, but for housebuilders 3.0 retained housing stock)
less 0.75 early indicator of insolvency

Question 16

What are Profitability Ratios?

Answer 16

Measure performance in generating profits
RoI=(net profit/investment)x100%
eg - ((100-50)/50)x100%=100%
Lower margin may be due to growth strategy [infiltrating the market]

Question 17

What are Gearing Ratios?

Answer 17

Measure financial structure and help to measure solvency
Highly geared - relies on borrowing (and payments of interest reduces profits - structure)

Question 18

What are Escrow Accounts?

Answer 18

3rd party account with contractual conditions for release of funds eg Certificates

Question 19

When have you used company accounts in your work?

Answer 19

Assess financial strength of contractors at PQQ stage

Question 20

How do you analyse a company’s accounts?

Answer 20

Detailed by client’s accountant, however:
can look for worrying signs by calculating ratios ie Liquidity, Profitability, Gearing
calculated by myself to avoid company report manipulation
always use group accounts rather than subsidiary

Question 21

How do you carry out a Credit Check?

Answer 21

Use:
Credit Safe [or Dun & Bradstreet] website to access company’s accounts considering both the group and company accounts
if credit rating low - I calculate key ratios and pass on to my client’s accountants for further analysis

Question 22

Signs of insolvency in company accounts or credit checks?

Answer 22

Low credit rating
Liquidity ratio below 0.75
A falling working capital ratio
Low return on equity
Heavily Geared
Falling cashflow statement

Question 23

Why not recommend contractor with a low credit rating?

Answer 23

Risk of not performing satisfactorily
Failing to deploy sufficient materials/resources
Contractor’s insolvency

Question 24

What measures if contractor appointed with low credit rating?

Answer 24

Performance Bond
Tender submission not front loaded
Interim Valuations not overclaimed
A project bank account

Question 25

What is Working Capital?

Answer 25

Current Assets-Current Liabilities
Negative Working Capital = Insolvent