Accounting Principles Flashcards
What are the key financial statements that companies provide?
- Profit and loss accounts
- balance sheet
- Cash flow statement
What is the difference between management and financial accounts?
- Financial are submitted to the HMRC for tax purposes
- Management accounts are used to help run the business
What is the difference between a profit and loss account and a balance sheet?
- ## A profit and loss sheet shows the incoming and outgoings of the business, showing whether the business has made a profit or a loss over a period of time.A balance sheet shows a company’s assets and liabilities at a single given time.
What is a cash flow statement?
A cash flow statement shows the actual or forecast ingoings and outgoings of cash over the accounting period to demonstrate the short-term ability to pay bills.
Explain your understanding of the following terminology -
Capital allowances
sinking funds
insolvency
companies house
HMRC
- Capital allowances tax relief available to business on certain items
- sinking funds - funds that are set aside for future expense or long term debt
- insolvency when a company cannot cover its debts
- companies house the registry of all incorporated in the UK
- HMRC His majesties revenue and customs
What are liquidity ratios?
- Liquidity ratios measure the ability of a company to pay off its current liabilities
- Current assets are divided by liabilities
- 1.5 is a typical ratios
- a rate of 0.75 or lower can be a indicatory of insolvency
What are profitability ratios?
Profitability ratios are financial metrics that measure a company’s ability to generate profit relative to its expenses, assets, and equity
What are financial gearing ratios?
financial metrics that compare a company’s debt to its equity, or capital
Why do QS’s need to be able to understand company accounts?
- To aid in preparing their own accounts
- For assessing the financial strength of contractors and those tendering for contracts
-For assessing competition
What is the purpose of a Profit and loss
- To monitor and measure profit (or loss)
- To compare against past performance and against company budgets
-For valuation purposes and to compare against competitors
-To assist in forecasting with future performance
-To calculate taxation
What is the difference between debtors and creditors?
- Debtors owe money for a service
- creditors have provided a service requiring payment
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/ statement?
- They demonstrate the company’s sales, running costs and profit or loss over a financial period
What is a balance sheet?
- They show the value of everything the company owns made up of its assets, liabilities and share holder equity at any given point in time
- it is a comparison of what is owned vs what is owed
What is a cash flow forecast?
It shows the expect expenditure of a project over a period of time.
What are escrow accounts?
a separate account held by a third party on behalf of two parties that can be used as a project bank account. Agreed mechanisms, such as payment certificates, allow for the release of funds.
When have you used your company accounts in your work?
- To assess the financial strength of contractors at the pre-qualification stage of a tender.
How do you analyse a company accounts?
The clients accountants will carry out the detailed analysis, but I can look for warning signs by calculating ratios such as profitability or liquidity.
How do you carry out a credit check?
you can use the credit safe website to access a companies accounts
looking at the group and company accounts
If the credit rating is low I provide the information to the client for detailed analysis
What are the signs of insolvency in company accounts?
- a low credit rating
- a liquidity rating below 0.75
- a falling working capital ratio
- a Low return on equity
- a highly geared company (high loan debt)
- a failing cashflow statement
Why would you not recommend the appointment of a contractor with a low credit rating?
- They are likely to have underpriced the work to win the project, and may attempt to make up the costs during the project
-The contractor could go insolvent during the works
What Measures would you recommend if your client wanted to appoint a contractor with a low credit rating?
- request a performance bond
- I would look closely at the tender return for front loading of the costs
- at interim valuations, I will be careful to ensure the contractor is not over-claiming. Or out of sequence working
-A project bank account may also provide a secure way of managing the monies.
What are the generally accepted accounting principles?
The standards that emcompass the details complexies and legalities of corporate accounting?
What are managment accounts?
Detail reports that show the bussiness finical health and operational perfomance.
they used for the day to day running of a bussiness and plotting the business strategy.
When should managment accounts be prepared?
this is often monthly or quartly depending on need.
What are annual accounts for a private limited company?
The finaical accounts prepared submitted for tax purposes to the HMRC and companies house every year.
They consist of:
the balance sheet
the profit and loss statment
cash flow statement
on a balance sheet what is a asset?
Somthing that is owned or provides benifit to the organisation
fixed assests are long term holding of things
Current assets inculde stock, cash in the bank
On a blance sheet what is a liability?
an obligation such as a debt, Somthing that costs the bussiness
Long term liabilities: money not due within year
current liability: duue within a year
When is a statutory finical audit required?
For companies above the audit threshold this is yearly
They check that accounts are correctly perpared and in line with stanadrds
it must be carried out by a indepent party who is registered auditor in line with compliance standards.
