Accounting Principles Flashcards
Key Financial Statments Companies provide?
Profit and Loss Account
Balance Sheet
Cash Flow Statements
Difference between Management and Financial Accounts?
Management: internal use for management of company
Financial: company accounts required by law
Difference between Profit and Loss Account and a Balance Sheet?
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]
What is a Cashflow Statement?
Summary of ingoing and outgoing of cash in a firm over period and measures short term ability of company to pay bills
Why QSs need to be able to interpret company accounts?
Prepare own accounts
Assessing contractors
Assessing competition
Purpose of a Profit and Loss Account?
Measure profit
Compare past performance
Compare with other competitors
Assist in forecasting
Calculate taxation
Difference between Debtors and Creditors?
Creditors are owed money; Debtors owe money
What are Management Acounts?
Accounts for internal use eg for a lender; not audited externally
What is a Financial Statement? (forecasting)
Forecasts of income and expenditure to identify shortfalls and surpluses (this is a projected cash flow forecast them?)
Explain Capital Allowances?
Tax relief on certain items purchased eg tools, equipment
Explain Sinking Funds?
Funds set aside for future expense
What is Insolvency?
Inability to pay debts, and liabilities exceed assets (ie a negative working capital)
Explain Companies House?
Agency that incorporates and dissolves Limited companies
HMRC?
His Majesty’s Revenue and Customs
What are Liquidity Ratios?
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
What are Profitability Ratios?
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]
What are Gearing Ratios?
Measure financial structure and help to measure solvency
Highly geared - relies on borrowing (and payments of interest reduces profits - structure)
What are Escrow Accounts?
3rd party account with contractual conditions for release of funds eg Certificates
When have you used company accounts in your work?
Assess financial strength of contractors at PQQ stage
How do you analyse a company’s accounts?
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
How do you carry out a Credit Check?
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
Signs of insolvency in company accounts or credit checks?
Low credit rating
Liquidity ratio below 0.75
A falling working capital ratio
Low return on equity
Heavily Geared
Falling cashflow statement
Why not recommend contractor with a low credit rating?
Risk of not performing satisfactorily
Failing to deploy sufficient materials/resources
Contractor’s insolvency
What measures if contractor appointed with low credit rating?
Performance Bond
Tender submission not front loaded
Interim Valuations not overclaimed
A project bank account
What is Working Capital?
Current Assets-Current Liabilities
Negative Working Capital = Insolvent
