Accounting Principles Flashcards
What are the key financial statements that companies provide?
1 - Profit & Loss Accounts
2 - Balance Sheets
3 - Cash Flow Statements
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 that are 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 (its assets) and what it owes (its liabilities) at a given point in time.
What is a cashflow statement?
It is the summary of the actual anticipated ingoing and outgoing of cash in a firm over the accounting period. It measures the short term ability of the firm to pay off its bills.
What are Capital Allowances?
Tax relief on certain items purchased for the business; for example, tools and equipment.
What are sinking funds?
Funds that are set aside for future expenses or long-term debt.
What is insolvency?
An inability to pay debts where liabilities exceed assets.
What is Companies House
An agency that incorporates and dissolves limited companies within the UK.
What is HMRC?
His Majesties Revenue and Customs.
What are liquidity ratios?
Liquidity ratios measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
Liquidity ration calculation = Current Assets / Current Liabilities
The ratio is usually around 1.5 but depends on the sector of activity. House builders often operate a liquidity ratio over 3 because they retain high value assets in the form of unsold houses.
A liquidity ratio of less than 0.75 can be an early indicator or insolvency.
What are profitability ratios?
Profitability ratios measure the performance of a company in generating its profits.
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.
What are Financial Gearing Ratios?
They 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.
Why do Chartered Quantity Surveyors need to understand and be able to interpret company accounts?
1 - To aid in preparing their own business accounts.
2 - For assessing the financial strength of contractors and those tendering for contracts.
3 - For assessing competition.
What is the purpose of a P&L?
1 - To monitor and measure profit (or loss).
2 - To compare against past performance and against company budgets.
3 - For valuation purposes and to compare against competitors.
4 - To assist in forecasting with future performance.
5 - To calculate taxation.
What is the difference between debtors and creditors?
Creditors are business entities that are owed money by another entity that 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 (such a bank) to evaluate how you will be able to repay the funding.
These accounts are not to be audited externally.
What is a Financial Statement?
Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses.
What is a profit and loss account?
They demonstrate a companies sales, running costs and profit (or loss) over a financial period (usually 1 year).
They show sales vs expenses and can be used to identify non-profitable work.
What is a balance sheet?
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.
What is a cashflow forecast?
It summarises the amount of cash or cash equivalents entering a company or project entity. On construction projects they are usually known as the “S” curve.
There is typically a small financial outlay at the start, a steep increase during the midway point and a taper towards the end.
How are cashflow forecasts used by surveyors?
1 - To track, analyse and assess business accounts and performance.
2 - For assessing the financial strength of contractors.
3 - To compare actual progress of the work against pre-contract predictions.
What are Escrow Accounts?
A separate account owned by a 3rd party, held on behalf of two other parties. It will usually have defined contractual conditions for the release of funds and can be used as a project bank account.
Mechanisms must be in place for the release of funds such as payment certificates.
When have you used company accounts in your work?
When assessing the financial strength of contractors at pre-qualification stage and tender stages.
How do you analyse a company’s accounts?
The client accountants will carry out the detailed analysis but I can look out for warning signs by calculating ratios, such as liquidity ratios, profitability ratios and gearing ratios.
When i do this I should always calculate the ratios myself as those included in the company accounts may have been manipulated.
I should use the group (or consolidated) accounts rather than the company accounts unless it is a limited company.
