Accounting Principles

Question 1

What are the key financial statements?

Answer 1

1) Profits and loss accounts
2) Balance sheet
3) Cashflow statements

Question 2

What is a profits and loss account?

Answer 2

Demonstrates the sales, running costs and profits/ loss over a financial period.

Question 3

What is the purpose of a profits and loss account?

Answer 3

1) Helps to identify non-profitable work
2) Compare your P&L against past performance/ forecast future performance
3) Helps with budgeting
4) Helps with calculating taxation
5) Helps to compare against competitors.

Question 4

What is a balance sheet?

Answer 4

It demonstrates the value of a business and shows the value of everything they own (i.e. assets and liabilities).

Question 5

What are the differences between P&L and Balance sheets

Answer 5

P&L = Income and expenditures of a company and the resulting profit or loss.

Balance sheets = Shows company assets (what it owns) and its liabilities (what it owes).

Question 6

What is a cashflow statement?

Answer 6

A summary of actual or anticipated ingoing’s & outgoings of cash in a firm over an accounting period.

Helps to measure short term liability of firm to pay off its bills.

Question 7

What is insolvency?

Answer 7

Inability to pay debts, where liabilities exceed assets.

Question 8

What are sinking funds?

Answer 8

Funds set aside for future expense or long-term debt.

Question 9

What are Capital allowances?

Answer 9

Tax relief on certain items purchased for the business e.g. tools.

Question 10

What is companies house?

Answer 10

Agency that incorporates and dissolves limited companies within the UK.

Question 11

What are Financial Statements?

Answer 11

Forecast of income & expenditure, can help to identify shortfalls & surpluses.

Question 12

What is the difference between Debtors Vs. Creditors?

Answer 12

Debtors = Business’ that owe money to another entity.

Creditors = Business’ owed money by another entity they have borrowed to.

Question 13

What are Financial Gearing Ratios?

Answer 13

They measure financial structure of a company.

Good indicators for suppliers of dept. & equity, as well as internal managements.

Payment of interest = lower profit.

Question 14

What are Liquidity Ratios?

Answer 14

Measure a companies ability to pay off liabilities by converting assets into case.

Calculation = Current assets / current liabilities.

• Ratio is usually 1.5
• A ratio of less than 0.75 = early indicator of insolvency.

Question 15

What are Profitability Ratios?

Answer 15

Measure the performance of a company to generate profits.

Trading profit margin ratio calculation = Turnover - (cost of sales/ turn over)

• Low margins may be a growth strategy.

Question 16

What is the difference between Managements Vs. Financial accounts?

Answer 16

Management = Internal use of management teams.

Financial = Company accounts required by UK law.

Question 17

Why do we need to understand company accounts?

Answer 17

1) Aid in preparing own business accounts
2) To assess competition
3) Assess financial strength of contractors.

Question 18

What is a Cashflow forecast?

Answer 18

Summary amount of cash/ cash equivalents entering & leaving projects/ businesses.

Question 19

What is an S curve?

Answer 19

S = Standard

The shape of expenditure profile in graph form.

• Small financial outlay to begin
• Steep increase during the midpoint
• Tapers towards the end

Question 20

What is an Escrow account?

Answer 20

Separate account held by third party on behalf of two parties.

The bank account has defined contractual conditions for releasing funds.

Can be used as project bank account.

Releasing the funds can be done with a payment certificate.

Question 21

Why would you not want to recommend appointing a contractor with a low credit rating?

Answer 21

1) Increased risk of poor performance
2) Increased risk of contractors insolvency
3) Contractor may fail to provide materials and resources for a project.

Question 22

What would you do if a client wants a contractor with a low credit rating?

Answer 22

1) Performance bond - the client may call on if the contractor fails to perform
2) Review the tender submission to ensure not excessively front loaded
3) Review the interim valuations for anomalys
4) Look for project bank account to monitor.

Question 23

What are the signs of insolvency?

Answer 23

1) Low credit rating
2) Liquidity ratio below 0.75
3) Falling working capital ratio - implies the company has taken on too many contracts
4) Low return on equity
5) Highly geared company reliant on loads
6) Falling cashflows statement.

Question 24

What is the role of an auditor?

Answer 24

Undertaking regulatory assurance activities for all RICS individual members and RICS registered firms.

Report prepared by an auditor as an independent party confirms that the financial accounts of a company are fair and true. Under the Companies Act 2006, such reports must be prepared for all public limited companies (PLCs), unless they are dormant, or where companies’ articles of association or shareholders require them. However, small companies and micro entities may be exempt from the need for audits because of the reduced size and risk of these entities. The requirements for the exact parameters of the size of companies can be found on the UK government website.

Question 25

What are the Generally Accepted Accounting Principles?

Answer 25

Financial reporting framework adopted by some companies in the UK. It is issued by the Financial Reporting Council and has seven Financial Reporting Standards (FRS): 100, 101, 102, 103, 104 and 105. These provide guidance on the way financial reports are set out, with FRS 102 covering how property included in accounts is to be valued.

Question 26

What are International Accounting Standards (IAS)?

Answer 26

International Accounting Standards are a set of guidelines established by the International Accounting Standards Board (IASB). They aim to simplify financial reporting and enhance transparency and trust in the accounting process worldwide. IASs were replaced by International Financial Reporting Standards (IFRS)15.

Question 27

What does EBITDA stand for and what is it?

Answer 27

Earnings
Before
Interest
Taxes
Depreciation
Amortisation

Alternate measure of profitability to net income. It’s used to assess a company’s profitability and financial performance.

Question 28

What are International financial Reporting standards?

Answer 28

Set of accounting rules for the financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world.

The IFRS is issued by the International Accounting Standards Board (IASB).

Question 29

How do IFRS and GAAP differ?

Answer 29

IFRS is a principle of the standard-based approach and is used internationally, while GAAP is a rule-based system

Question 30

What is Equity?

Answer 30

The value that the owner – such as a company director – has in the business. This can be calculated by deducting total liabilities from total assets on a company balance sheet.

Question 31

What is the Hurdle rate?

Answer 31

Minimum rate of return required on an investment.

This can inform investment decisions, and could be established using a discounted cash-flow model or even an appraisal for development or refurbishment projects.

Question 32

What are Key Performance Indicators?

Answer 32

Used to measure performance and plan for the future e.g. budget variance, turnover by department, working capital and operating cash flow.

Question 33

What are the quarter days?

Answer 33

25 March, 24 June, 29 September and 25 December.