ACCOUNTING PRINCIPLES

Question 1

What are the key financial statements that companies provide?

Answer 1

• The key financial statements are:-
  o Profit and loss accounts.
  o Balance sheets.
  o Cash flow statements.

Question 2

What is the difference between management and financial accounts?

Answer 2

• Management accounts are for the internal use of the management team.
• Financial accounts are the company accounts that are required by UK 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 incomes and expenditures of a company and the resulting profit or loss.
• The balance sheet shows what a company owns (it’s assets) and what it owes (it’s liabilities) at a given point in time.

Question 4

What is a cashflow statement?

Answer 4

• A summary of actual or anticipated ingoing and outgoing of cash in a firm over a period.
• It measures the short-term ability of a firm to pay off its bills.

Question 5

Explain your understanding of the following Terminology?

Answer 5

• Insolvency – An inability to pay debts where liabilities exceed assets.
• Companies House – An agency that incorporates and dissolves limited companies within the United Kingdom.

Question 6

Why do chartered quantity surveyors need to understand and be able to interpret company accounts?

Answer 6

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

Question 7

What is the purpose of a profit and loss account?

Answer 7

• 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.

Question 8

What is the difference between debtors and creditors?

Answer 8

• 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.

Question 9

What are Management Accounts?

Answer 9

• 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 be audited externally.

Question 10

What is a Financial Statement?

Answer 10

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

Question 11

What is a Profit and Loss account?

Answer 11

• They demonstrate a companies sales, running costs and profit or loss over a financial period (usually 1 year).
• They are used to show sales vs expense (invoicing vs time and disbursements).
• They can also be used to identify non-profitable work.

Question 12

What is a Balance Sheet?

Answer 12

• They shows 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 13

What is a Cash Flow forecast?

Answer 13

• A cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity.
• On construction projects they usually show as an ‘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.

Question 14

What is an S-Curve?

Answer 14

• S-Curve means ‘standard’ and refers to the shape of the expenditure profile when shown in graphical form.
• During the start of a project, the rate of expenditure is typically lower due to site setup and lower value enabling works.
• As the scheme progresses to the middle of the programme, the rate of expenditure will typically increase as more expensive building components such as M&E and Structural Steel Work are installed.
• Towards the back end of the programme, the rate of expenditure will slow down which is shown by the flattening of the S-Curve.

Question 15

How are S-Curve’s used by Surveyors?

Answer 15

• To track, analyse and assess business accounts and performance.
• For assessing the financial strength of contractors.
• To compare actual progress of the work against pre-contract predictions.

Question 16

What are Escrow Accounts?

Answer 16

What are Escrow Accounts?
* A sperate 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 17

When have you used company accounts in your work?

Answer 17

• To assess the financial strength of contractors at Pre-Qualification Stage and tender stages.

Question 18

How do you analyse a company’s accounts?

Answer 18

• The client’s accountants will carry out the detailed analysis but I can look at the warning signs by calculating ratios such as liquidity ratios, profitability ratios and gearing ratios.

Question 19

How do you carry out a credit check? Give an example.

Answer 19

Through Dun and Bradstreet or Experian.

Question 20

What are signs of insolvency in company accounts or credit checks?

Answer 20

• A low credit rating.
• 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 highly geared company that is heavily reliant on loans.
• A falling cashflow statement.

Question 21

Why would you not recommend the appointment of a contractor with a low credit rating?

Answer 21

• There may be an increased risk of the contractor not performing satisfactorily.
• It could present increased risk of the contractor failing to deploy sufficient resources and materials to the project.
• It could increase the risk of the contractor’s insolvency.

Question 22

What measures would you recommend if your client wanted to appoint a contractor with a low credit rating?

Answer 22

• I would explore the option of requesting a performance bond that my client could call on if they Main Contractor failed to perform.
• I would also review the tender submission to ensure this is not excessively front loaded.
• When reviewing interim valuations, I would ensure that these are accurate and not over claimed.
• A project bank account may also provide an additional level of assurance and should be considered.

Question 23

What are the financial reporting standards applicable to the UK?

Answer 23

International Financial Reporting Standards (IFRS Accounting Standards)
UK GAAP (Generally Accepted Accounting Practice)

Question 24

What is the Companies Act (2006)?

Answer 24

The primary piece of legislation relating to UK company law

Question 25

What is a liquidity ratio?

Answer 25

Determines a company’s ability to pay its short-term debt obligations.

Question 26

What is a gearing ratio?

Answer 26

Compares a company’s debt to its equity

Question 27

What is a profitability ratio?

Answer 27

Measures the ability of a company to generate income relative to revenue