Accounting Principles Flashcards
What are the key financial statements that companies need to provide?
- Profit and loss accounts
- Balance sheets
- Cash flow statements
What is the difference between management accounts and financial accounts?
Management accounts are for the internal use of the management team
-Financial accounts are the company accounts required by UK 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 and 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?
Summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period- measures the short-term ability of a firm to pay off its bills
What are capital allowances
Tax relief on certain items purchased for the business e.g. tools & equipment
What are sinking funds?
funds that are set aside for future expense or long-term debt
What is insolvency?
An inability to pay debts where liabilities exceed assets
What is company’s house?
An agency that incorporates and dissolves limited companies within the UK
What is the HMRC?
Her majesties revenue and customs
What are liquidity ratios?
Measure the ability of a company to pay off its current liabilities by converting assets into cash.
Current assets/current liabilities
usually around 1.5
What are profitability ratios?
Measure the performance of a company in generating its profits
Trading profit margin ration=turnover-cost of sales
Low margins may be due to growth strategy, not always bad management
What are financial gearing ratios?
Measure the financial structure of the company including solvency
Why do chartered quantity surveyors need to understand and be able to interpret company accounts?
Aid in preparing own business accounts
-Assessing financial strength of contractors and tendering for contracts
- Assessing competition
What is is the purpose of profit and loss accounts?
- Monitor and measure profit-based performance
- Compare against past performance and budgets
- For valuation purposes
- Assist in forecasting future performance
What is the difference between debtors and creditors?
Creditors are business entities that are owed money by another entity they have extended credit to
Debtors are business entities that owe money to another respective company
What are management accounts?
Accounts prepared by a company for internal management use
Accounts prepared for a lender to evaluate if you will be able to repay any funding
Not audited
What is a financial statement?
Forecasts of income and expenditure that can be used to identify shortfalls
What is a profit and loss account?
They demonstrate a company’s sales, running costs and profit or loss over a financial period (usually a year)
They are used to show sales vs expense
They can also be used to identify non profitable work
What is a balance sheet?
Shows the value of the company’s assets and liabilities and demonstrates the value of the business
What is a cash flow forecast?
Summarises the amount of cash entering and leaving a company or project
Usually show an S curve on construction projects
What is an S-Curve?
Refers to the shape of the expenditure profile when shown in graph form
Start of a project expenditure is low, middle of the project expenditure is high due to more expensive aspects e.g. steelwork/M&E
S curve flattens as the project comes up to completion
How can an S Curve be used by a surveyor?
Track and analyse a projects expenditure
Assess the financial strength of contractors
What are escrow accounts?
A separate account owned by a 3rd party held on behalf of two parties, has defined contractual conditions for the release of funds. Can be used as a project bank account.
What would you use company accounts for?
To assess the financial strength of the company
How do you analyse a company’s accounts?
Calculating liquidity and profitability ratios
How do you carry out a credit check?
- Credit safe subscription,
- group, and company accounts,
- calculate ratios
Why would you not recommend the appointment of a contractor with a low credit rating?
increased risk of the contractor not performing, contractor may not be able to deploy resources and materials, increased risk of contractor’s insolvency
What measures would you recommend if your client wanted to appoint a contractor with a low credit rating?
- Explore the option of requesting a performance bond
- review the tender submission to ensure it is not front loaded
- when reviewing interim valuations ensure they are not over claims project bank account
What is taxation?
Money owed to the HMRC based on a company’s profit
What is revenue?
Income generated from sales of products or services
What is capital expenditure?
Money spent on acquiring or maintaining fixed assets
What is auditing?
Examining and verification of a company’s financial records- ensure they are in line with accounting standards
How do you ensure healthy cashflow?
Ensure cash coming in is greater than going out
What is accounting?
Process of keeping financial accounts
What is bankruptcy
Legal process where debts are unpaid and unable to be paid, a company may seek relief. Court ordered and remained on file for 10 years.
What is VAT?
Value added tax
What is the standard rate of VAT?
20%
When should a company be registered for VAT?
Taxable turnover greater than £85,000.00
