Accounting Principles Flashcards
What is a profit & loss statement?
A profit & loss statement shows the income and expenditure of a company over a set period of time (normally the financial year).
What two kind of accounts do companies have to produce?
- Financial accounts: Show performance of a business, filed with Companies House (for external use).
- Management accounts: Day-to-day & used for strategic decision making by business owners. For internal use (any format, any time). Not required by law.
What are the Generally Accepted Accounting Principles (GAAP)?
Standards that incorporate the complexities and legalities of corporate business accounting
What are the principles under the GAAP?
Regularity
Consistency
Continuity
Periodicity
Good faith
What is a balance sheet?
A balance sheet is a document which shows the assets and the liabilities of a company at a given point in time.
What information would you expect to find in a financial account produced by a company?
Directors report
Cash flow statement
Balance sheet
Profit & loss statement
(Format required by law)
What is the difference between Capex and Opex?
Capex is the capital expenditure spent to improve assets (buildings or equipment).
Opex is the expenditure for running costs of the day to day business.
Capex can benefit from Capital Allowances.
What are Capital Allowances?
Taxpayers get tax relief on Capex by allowing it to be deducted against their annual taxable income.
Can you name the 3 types of accountancy ratios?
- Liquidity ratio - measures how easily the company can turn it’s assets into revenue - current assets / current liabilities (higher than 1)
- Profitability ratio - ability to generate earnings or measures how profitable the business is - net income : net expenditure (5-10%)
- Gearing ratio - measures the amount of borrowed or owed to others / measures debt ag
What do companies need to provide every year in accordance with the Companies Act 2006?
- Annual accounts within 6 months of the end of the financial year
- Strategic report
- Directors report
What is Insolvency?
Insolvency is the inability to pay off your debts.
What is Liquidation?
Liquidation is the formal process of closing a business, with all assets sold and no longer on Companies House.
What is Administration?
Administration is where someone is hired to manage a company’s affairs on behalf of the creditors.
What is Bankruptcy?
Bankruptcy only applies to individuals, not companies, and it is when they can’t pay their debts. Assets that you do have are shared amongst the creditors.
What is Receivership?
Receivership is when the people you owe money to hire someone to recover it off you.
What is a CVA?
A Company Voluntary Arrangement (CVA) is a formal insolvency procedure in the United Kingdom that allows a financially distressed company to reach an agreement with its creditors to pay off its debts over a fixed period of time, while continuing to operate. The goal of a CVA is to enable the company to avoid liquidation and recover from financial difficulties, while giving creditors a better chance of receiving some or all of the owed money.
What are the signs of administration?
- Subcontractors not being paid
- Overclaiming on applications
- Changes in resources
What steps would you take in the event of a contractor’s insolvency?
- Inform all parties and secure the site
- Notify the client and have them notify their insurers
- Inform the bondsman
- Consider stopping any pending payments
- Take ownership of materials off site
- Secure & schedule all onsite plant and materials
- Value completed works and any defects
- Monitor loss & expense incurred by the employer
- Terminate the building contract at the right time but seek legal advice first
- Employ others to complete
- Produce notional final account
What is VAT?
Type of consumption tax that is levied on goods and services at each stage of production or distribution, where value is added.
What is an audit?
Official examination and verification of a company’s financial records.
To ensure they are fair, accurate, and compliant with legal requirements, and adherence to accounting standards or internal policies.
What is an escrow account?
An escrow account is a financial arrangement where a third party holds and regulates the payment of funds or assets on behalf of two parties involved in a transaction.
What factors can affect a cashflow?
- Retention
- Sectional completion
- Advance payments
- Early material orders
- Defects liability period
How would you assess the financial stability of a company?
- Request a copy of the contractors accounts for the last 3 years
- High level financial checks from Companies House
- Request checks as part of PQQ
- Credit checks
- Dunn & Bradstreet website
What does the Dunn & Bradstreet website show?
Provides scores and ratings to help identify organisations that are likely to fail or pay late / assess high level financial stability.
What happens if there are errors found by the auditor?
Genuine errors - auditor will alert the directors of the company.
Fraudulent error - auditor will pass to the Financial Conduct Authority.
Why do you think it is important to understand the financial health of tendering contractors?
- Check they are able to undertake their responsibilities under the contract, with sufficient cashflow etc.
- Can minimise potential risk to the project
- To ensure there is a low risk of them becoming insolvent
- To ensure they have the financial capability to carry out a project
What is the role of the auditor under the GAAP?
To determine whether the financial statements are compliant with the GAAP.
What are overheads?
Indirect costs or fixed expenses of running a business
Rent, utilities, staff, insurance
Why would you have a separate project bank account?
Ring-fenced account to manage payments
- Timely Payments
- Financial Security: Funds are protected, even if the main contractor or client faces insolvency.
- Transparency: PBAs offer clear visibility of payment processes, helping to build trust among stakeholders
- Cost Savings: By ensuring timely payments and reducing disputes, PBAs can lead to cost savings on the overall project
What information would you be looking to obtain from an analysis of accounts?
- Company’s profitability - A review of the company’s financial standing
- Cashflow - Ensure that cash flow and profitability are being properly managed
Why would a company keep accounts?
Accounts are required by law for tax purposes.
(Companies Act 2006 requires annual accounts within 6 months of the financial year-end.)
Also to review their financial standing.
What is corporation tax?
Tax paid by UK companies based on annual profits
Why does a business keep accounts?
- Tax purposes (by law)
- Demonstrates company’s financial stability
- Ensure cashflow & profitability are managed correctly
What is financial leverage?
The use of borrowed money to finance purchase of assets with the expectation that the income (capital gain) from the new asset will exceed the cost of borrowing.
Why should surveyors understand company accounts?
1) Assess financial health of competing surveying practices
2) Assess financial stability of tendering contractors
3) Aid in preparing company accounts in own practice
Why are CAPEX and OPEX separate?
Different tax obligations
What is a current asset / liquid asset?
Short term - expect to sell within a year
What is the difference between a creditor and a debtor?
Creditor - lends funds
Debtor - borrows funds
Why is a cashflow important in a construction project?
1) Client understands financial commitment
2) Estimate when external funding is required
3) Check against valuations & early indication of financial difficulties
