Accounting Principles Flashcards
What are the key financial statements that companies provide?
- The key financial statements are:-
o Profit and loss accounts.
o Balance sheets.
o 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 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.
What is a cashflow statement?
- It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
- It measures the short-term ability of a firm to pay off its bills.
Explain your understanding of the following Terminology?
(Capital Allowances, Sinking Funds, Insolvency, Companies House, HMRC)
- Capital Allowances - Tax relief on certain items purchased for the business for example tools and equipment.
- Sinking Finds – Funds that are set aside for future expense or long-term debt.
- Insolvency – An inability to pay debts where liabilities exceed assets.
- Companies House – An agency that incorporates and dissolves limited companies within the United Kingdom.
- HMRC - Her Majesties Revenue and Customs.
What are Liquidity ratios?
- Liquidity rations measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
- Liquidity ratio calculation = current assets / current liabilities.
What are Profitability ratios?
- Profitability ratios measure the performance of a company in generating its profits.
- The trading profit margin ratio = turnover – (cost of sales / turnover).
What are Financial Gearing Ratios?
- These 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.
Why do chartered quantity surveyors need to understand and be able to interpret company accounts?
- To aid in preparing their own business accounts.
- For assessing the financial strength of contractors and those tendering for contracts.
- For assessing competition
What is the purpose of a P & L?
- 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 are Management Accounts?
- 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.
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 are used to show sales vs expense (invoicing vs time and disbursements).
- They can also be used to identify non-profitable work
What is a Balance Sheet?
- 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.
What is a Cash Flow forecast?
- 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.
What is an S-Curve?
- 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.
When have you used company accounts in your work?
To assess the financial strength of contractors at Pre-Qualification Stage and tender stages
How do you analyse a company’s accounts?
- 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.
- I should always calculate the ratios myself as those included in the company accounts may have been manipulated.
Describe to me the role of an auditor.
An auditor will review and verify financial reporting, internal controls and risk management systems.
They ensure accuracy and compliance to standards and regulations in place and evaluate the effectiveness to help identify any errors, fraud or improvements that can be made.
They help maintain transparency, trust and accountability within organisation.
