Accounting Principles

Question 1

What are the key financial statements that companies provide?

Answer 1

The key statements are:
- Profit and loss accounts
- Balance Sheets
- Cash flow statements

Question 2

What is the difference between management and financial accounts

Answer 2

• Management accounts are for internal use of the management team
• Financial accounts are the company accounts required by law

Question 3

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

Answer 3

• A profit and loss account shows the income and expenditures of a company and the resulting profit and loss
• The balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point

Question 4

What is a cash flow statement?

Answer 4

• 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

Question 5

Explain your understanding of the below
- Capital allowances
- Sinking Funds
- Insolvency
- Companies house
- HMRC

Answer 5

• Capital allowances
  tax relief of certain items purchased for business eg tools
• Sinking Funds
  funds that are set aside for future expense or long term debt
• Insolvency
  an inability to pay debts where liabilities exceed costs
• Companies house
  an agency that incorporates and dissolves limited companies within the united kingdom
• HMRC
  Her majesties Revenue and Customs

Question 6

What are liquidity ratios?

Answer 6

• Liquidity ratios measure the ability of a company to pay off its current liabilities by converting 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 over 3 because they retain high value assets
• a liquidity ratio of less than 0.75 can be an early indicator of insolvency

Question 7

what are profitability ratios

Answer 7

• 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

Question 8

What are financial gearing rations

Answer 8

• 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

Question 9

Why do chartered QS need to understan and be able to interpret company accounts?

Answer 9

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

Question 10

What is the purpose of a profit and loss statement

Answer 10

• TO monitor and measure profit or loss
• To compare against past performance and against company budgets
• For valuation purposed and to compare against competitors
• To assist in forecasting with future performance
• To calculate taxation

Question 11

What is the difference between creditors and debtors

Answer 11

• 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 you money you become a creditor
• Debtors are business entities that owe money to another company
• For example. if you have used a sub contractor and still owe them money then you become a debtor to that contractors

Question 12

What are management accounts?

Answer 12

• 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 to be audited externally

Question 13

What is a financial statement?

Answer 13

Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses

Question 14

What is a profit and loss account?

Answer 14

• They demonstrate a companies sales, running costs and profit or loss over a financial period
• they are used to show sales vs expense (invoicing vs times and disbursements
• they can also be used to identify non-profitable work

Question 15

What is a balance sheet?

Answer 15

• they show 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

Question 16

What is a cash flow statement

Answer 16

• A cash flow forecast summarized the amount of cash or cash equivalents entering and leaving a company or project

Question 17

What are escrow accounts

Answer 17

• A separate bank 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

Question 18

How do you carry out a credit check?

Answer 18

I use credit safe website to access a companies accounts

Question 19

what are the signs of insolvency

Answer 19

• a low credit ratings
• 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 falling cash flow statement