ACCOUNTING PRINCIPLES Flashcards
Q+A Mock Interview
What are the key financial statements that all companies must
provide? / What are company accounts?
The key financial statements to be provided by companies are Profit and loss
account, balance sheet and cash flow statement.
What is the difference between management and financial accounts?
Management accounts are for the internal use of the management team. Financial
accounts are the company accounts required by law.
What is the difference between a profit and loss account and a
balance sheet?
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 (assets) and what it owes
(liabilities) at a given point in time.
What is a cashflow statement?
It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period. It is broken down into operating, investing and financing activities.
It measures the short term ability of a firm to pay off its bills.
What are the main types of ratio analysis used to assess a company’s
financial strength?
Management Operating Ratios - these cover the liquidity and profitability aspects of the company and, to many builders, liquidity ratios are the prime ratios.
Liquidity ratios
Measure the ability of the company to pay off his current liabilities by converting its current assets into cash.
Current (current assets / current liabilities)
Usually around 1.5 but it depends on the sector of activity (house builders over 3
because they have high assets in unsold houses). Less than 0.75 suggest insolvency.
Acid test (30-day cash and near cash/current liabilities)
How much of the assets can be converted into cash within 30 days. It depends on
the sector of activity. Once again low ratio for house builders because can’t sell all
their lands and houses in the short term.
Debtor ratio & creditor ratio (nr of days to receive payments / pay off debts)
The creditor ratio is usually 30 days and the debtor ratio is often higher which is why good cashflow management is essential.
Work in progress (nr of days to complete a piece of work ready for a sale)
Contractors receive interim payments (there is a retention applied) but developers
and house builders don’t. It can take a year before the work is complete which can
cause liquidity issues.
What is working capital (assets – liabilities / turnover)
Measures how much more capital may be needed to finance the operations. A falling ratio may mean that the company has taken on more work than it can finance and may be heading for cashflow difficulties.
What is profitability ratios
Measure the performance of the company to generate profits.
Return on equity (profit after tax / equity (capital in shares)) – BEST RATIO
Return on capital employed (operating (overheads deducted) profit / capital
employed) – BEST RATIO
A low return can be wiped out in recession; or loan interests may be higher than
profit; useful to decide to invest or not, or take-over a company.
Trading profit margin (turnover – cost of sale / turnover)
Low margins may be due to a growth strategy from the company, not always bad
management.
Operating profit margin (operating profit / turnover)
Capital employed = share capital + reserves + long term and short-term loans +
overdrafts + creditors etc.
Financial Gearing Ratios
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.
Debt / equity (capital in shares) – BEST RATIO
Debt/ capital employed
Interest cover (profit/loan interests)
Investment Ratios
These relate to the financial returns that a company is achieving and the resultant
ratios will determine the demand for shares and the availability of new equity finance for the builder. (it is about investment by the shareholders not by the company’s management team)
Why do chartered quantity surveyors need to understand and be able
to interpret company accounts?
For own business accounts.
For assessing the financial strength of contractors and those tendering for contracts.
For assessing competition.
What is the purpose of a P & L?
1) Monitor and measure profit (or loss). Significant problems can arise if the
information is inaccurate, either through incompetence or deliberate fraud.
2) Compared to its past performance, compared to the budget and compared to
other businesses.
3) Assist in forecasting future performance (next periods budget).
4) Calculate Tax
What is the difference between debtors and creditors?
Creditors - Your firm owes another firm money - e.g. If you owe a sub-consultant fees then they are a creditor.
Debtors - A firm who owes your firm money - e.g. a client who owes you fees is a
debtor.
What are Management Accounts?
The accounts prepared by a company for internal management use, or accounts
prepared for a lender, such as a bank to evaluate how you will be able to repay the
funding. They will not be audited externally.
What does the role of a Service Delivery Manager involve?
Review of project finances - report to team leader on gross profit margins. Review of resources booking to project. Compilation of monthly invoice/application for
submission to finance/client. Interface with client to ensure payment rec in
accordance with payment terms. Arrange CPF to review clients satisfaction with
service received.
What is the Late Payment of Commercial Debts (Interest) Act 1998 and
Late Payment of Commercial Debts Regulations 2002
Statute that allows the recovery of interest at the Bank of England Base Rate plus
8% on debts which are not paid by the agreed payment date.
Standard forms of contract will usually include express provisions for dealing with this issue. These will supersede the above:
NEC3 ECC:
Clause 51.1 - Interest is paid on late payment at a rate stated in the Contract Data
Part 1 - should not be less than 2% plus the rate of a stated bank.
ICE (6th Edition):
Clause 60 (7) - Interest paid at 2% above base lending rate of bank stated in
Appendix to Form of Tender.
JCT SBC/Q:
Clause 4.13.6 Interim Certificates and 4.15.6 Final Certificates
5% above the Bank of England dealing rate.
