Accounting Principles

Question 1

What is the Company’s Act 2006?

Answer 1

The company’s Act 2006 was the longest Act in British parliament history with 1,300 sections and covering 700 pages and containing 16 schedules but now surpassed by the Corporation Tax Act 2009.

It is the main legislation which governs company law in the U.K.

The prime aims are to modernise and simplify company law, to codify directors duties, to grant improved rights to shareholders, and to simplify the administrative burden carried by U.K. companies.

Part 15 chapters 1 and 2 require the preparation of company accounts and reports on a yearly basis.

Question 2

What is the difference between management and financial accounts?

Answer 2

Management accounting provides information to people within an organisation and is not required by law.

Financial accounting is mainly for those outside the organisation, such as shareholders, and is required by law.

Question 3

What is a profit and loss statement?

Answer 3

The P&L statement shows revenues and expenses during a set period of time. The income statement summarises the total revenue, expenses and P&L incurred during a set period.

It shows whether the bush was has made a profit or loss over the financial year.

It starts with a trading account which shows the income from sales and direct costs of making those sales. This leave gross profit. Expenses are then deducted. When overheads are taken off it leaves trading profit. After this interest needs to be deducted for net profit and then tax which leaves profit after tax.

It is the summary of transactions and prepared on an annual basis and is a financial statement.

Question 4

What is a balance sheet?

Answer 4

The balance sheet summarises a company for one specific point in time. A balance sheet does not involve time period. Instead it reports the value of all assets, liabilities and equity as at a given date.

It should the. Alie or the business at a particular date. It’s a snap shot in time. Shows what the business owns and owes by taking into account fixed assets, current assets, current liabilities, net assets employed and capital and reserves.

Assets include: cash and debtors
Liabilities include: borrowing, overdrafts, loans and creditors.

Question 5

What is a cash flow statement?

Answer 5

A CFS is a financial statement that shows how changes in balance sheets accounts and income affect cash.

The CFS compliments the balance sheet and income statement and records the amount of cash and cash equivalents entering and leaving the company.

The CFS allows investors to understand how a company’s operations are running, where its money is coming from and how it is being spent.

The CFS shows all the actual receipts and expenditure. It’s prepared for management purposes. It shows what cash you will have to pay the bill and when you will have cash by.

Question 6

What types of cash flows forecasts are there?

Answer 6

There are two main types of cash flow forecasts. These are:

1. The cash flow forecasts of a company
2. The cash flow forecast of a particular construction contract project. Aka project cash flow.

The cash flow forecasts for a company will review and analyse the predicted incoming and outgoing cash for a set period of time - usually a year - and is often used for business was and resource planning and for analysing the financial health of companies.

The cash flow forecast for a construction contract or project deal specifically with the payments due under a particular construction contract.

Question 7

How would you expect a construction cash flow to appear on a graph?

Answer 7

It would be in the shape of an ‘s’ which also stands for standard curve but when shown on a graph it will typically take the shape of an s. This represents the lower level of periodic expenditure at the beginning of a contract (due to site set up and relatively inexpensive enabling works) and the lower level of expenditure at the end of a contract (due to the vast majority of materials being on site, reduced number of trades on site and a reduction of contractors staff overheads).

Question 8

What can a company cash flow tell you?

Answer 8

1. Whether the business is viable
2. What size of overdraft/ borrowings are needed.
3. Early warning of turndown in business
4. Incentive to get money in ASAP
5. Whether you have excess cash available that might be better used.
6. Whether customers are taking too long to pay.
7. Whether you are Paying bills too quickly.

Question 9

What can a construction cash flow tell you?

Answer 9

When reviewing a cash flow, a number of questions could be raised from changes to a cash flow from its original.

1. Whether the project is behind programme
2. Whether subcontractors are behind programme.
3. Whether the contractor is having difficulty paying its bills resulting in subcontractors not committing materials or labour.
4. Whether the contractor is recouping the financial effects of change.
5. Whether the tender has been front loaded.
6. Whether the programme is wrong.

Question 10

What is a budget?

Answer 10

A budget estimates the amount of revenues and expenses a company may incur over a future period. Budgeting represents a business’ financial position, cash flows and goals.

A budget is a financial plan for a defined period, often one year. It may also include planned sales and volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of activities or events in measurable terms.

Question 11

What is a financial forecast?

Answer 11

A financial forecast is a fiscal management tool that presents estimated information based on past, current, and projected financial conditions. This will help identify future revenue and expenditure trends that may have an immediate or long term influence on government policies, strategic goals, or community services.

Question 12

What is ratio analysis?

Answer 12

It is a form of fundamental analysis that links together the three financial statements commonly produced.

Ratios provide useful figures that are comparable across industries and sectors.

Investors can develop a feel for a company’s attractiveness based on its competitive position, financial strength and profitability.

Question 13

What is liquidity?

Answer 13

The most common liquidity ratio is the current ratio, which is the ratio of current assets to current liabilities. This ratio indicates a company’s ability to pay its short term bills. Current assets/ current liabilities. The ideal ration is 2:1. A 1:1 ratio might suggest a company cannot meet its debt quickly.

Question 14

What types of ratios are you aware of?

Answer 14

1. Liquidity - indicates the companies ability to pay its short term bills.
2. Solvency - which indicate financial stability.
3. Profitability - indicate managements ability to convert sales into profits and cash flow.
4. Acid test ratio - a severe test of a firms capabilities to meet its debts.

Question 15

Why should you budget?

Answer 15

Because a budget provides:

1. Financial focus
2. Coordination of activities
3. Facilities control
4. Measures performance

They provide a guidance and a bench mark from which to gauge performance.

Question 16

What are essential features of a budget?

Answer 16

Essential features of a budget include:

1. They provide policies to be pursued to meet overall objectives
2. They contain both qualitative and financial data
3. The data is documented
4. They cover a defined period or event

Question 17

What is revenue?

Answer 17

Revenue is income from business activities usually from the sales of goods and services.

Question 18

What is capital expenditure?

Answer 18

Capital expenditure is money spent by a business to acquire fixed assets such as land, buildings or equipment.

Question 19

What are the basics of cash flow management?

Answer 19

The basic principles are to ensure that sufficient cash is held to meet the firms payment obligations. It involves an analysis of money coming in versus money going out over a given period or timeline to calculate liquidity.

Question 20

How can a cash flow be used?

Answer 20

The purpose of a cash flow forecast is to ensure that the employer has an accurate assessment of payments, and at what periods. In the construction industry the most common use of a cash flow forecast is to monitor progress of the worms. Monitoring progress against cash flow forecast should o my be co side red as indicative.

Question 21

What is the difference between a balance sheet and a profit and loss statement?

Answer 21

A balance sheet is a statement of the assets, liabilities and capital of a business at a particular point in time, like a snapshot. It details the balance of income and expenditure ie assets = liabilities + equity

Question 22

What are examples of company overheads?

Answer 22

Overhead expenses are all costs on the income statement except for direct labour, direct materials, and direct expenses. They include accounting fees, advertising, insurance, interest, legal fees, labour burden, rent, repairs, supplies, taxes, telephone bills, travel expenditure and utilities.

Question 23

What’s the difference between budgeting and financial forecasting?

Answer 23

Both are financial planning techniques that help a business in the decision making process.

The difference between them include:

Budgeting uses estimation to quantify the expectation of revenues a business wants to achieve for a future period. Essentially they detail where a business wants to go.

Financial forecasting is used to estimate the amount of revenues that will be achieved, the forecasting indicates where the business is actually headed.

Question 24

How are project fees forecasted?

Answer 24

By the amount of resource working on the project at certain times. I.e. design time might have a lot more involvement then over the construction period.

Question 25

What is a project drawdown?

Answer 25

This shows expenditure on professional fees and contractor fees. It starts with a cash flow which projects all invoices due from the consultants and eventually the contractor. It should always match the total professional fees agreed. If there are discrepancies, these will be obviously as the drawdown totals won’t align and you will be able to see if there is an over payment. This might be because there has been an agreed additional fee that has not been added to the drawdown, which should’ve been noted and the cash flow re-forecasted. It also includes a master schedule which shows what has been billed to date in total and for each consultant, it shows cumulative figures and what is left to bill by each consultant. An invoice schedule shows invoices in this particular drawdown and then finally there is a certificate to certify our recommendation for the invoices to be paid.

Question 26

What is a contractor cash flow?

Answer 26

A construction cash flow tells the PM and QS important information about the project. It can tell us if the project could be behind programme or if a subcontractor is behind or maybe the contractor is having difficulty paying a bill or whether the tender is being front loaded. It shows what the contractor intends to invoice each month to depending on procurement and work activities undertaken.

Question 27

What do company account include?

Answer 27

• Profit and lostt account
• Balance sheet
• Cashflow statement

Question 28

Define an income statement and balance sheet.

Answer 28

The income statement is also known as the P&L account. This measures your business performance over a given period of time, usually a year. It compares the income of your business against the cost of goods and services and expenses incurred in earning that revenue.
The balance sheet on the other hand is a snap shot in time. It shows your business assets (what you own and what you are owed) and your liabilities (what you owe) on a particular day. It shows fixed assets (land, buildings and equipment), current assets (cash and anything expected to be converted into cash), liabilities (amounts due to be paid to creditors).

Question 29

What is Tax bulletin 53?

Answer 29

TB53 is a guidance note issued by the Inland Revenue in June 2001 addressing interaction of tax and accountancy.

Question 30

What is Deferred Revenue?

Answer 30

This is allowable revenue expenditure which has been accounted for by posting the expense somewhere on the balance sheet rather than writing it off immediately to the P&L account as it is incurred.

Question 31

What do you understand by depreciation?

Answer 31

It is the reduction in the value of an asset over time, due to wear and tear

Question 32

What is capitalised revenue?

Answer 32

This is another word for deferred revenue. It means that expenditure is taken to the balance sheet because it relates to a later year.

Question 33

What is the difference between revenue and capital?

Answer 33

Capital expenditure generates future economic benefits but the revenue expenditure generates benefits for the current year only. Capital expenditure is a one time investment of money and revenue expenditure occurs frequently.

Question 34

Define the term provision?

Answer 34

A provision is recognition of a liability but precise information about timing and expense is uncertain.

Question 35

When would you as a PM use company accounts.

Answer 35

I would review company accounts when assessing the financial stability of a company. This would generally be on occasion when company accounts have been provided by tendering contractors during the Pre qualification questionnaire stage.

Question 36

What are the main documents required for company reports?

Answer 36

P&L
Balance sheet
Cash flow statement 
Directors report
Auditor report

Question 37

What are examples management accounts?

Answer 37

Sales, purchases, fixed asset register, employee records.

Question 38

How do accounts help make financial decision?

Answer 38

Financial accounting allows a business to keep track of all its financial transactions.
It provides investors with comparison data and the ability to assess financial health.
It’s helps creditors assess solvency, liquidity and creditworthiness of businesses.
It helps make decisions, along with managerial accounting, about how to allocate scarce resources.

Managerial accounting can help business decisions that increase the organisations operational effectiveness and efficiency. It helps make improvement within the company. It can help plan, forecasts and budget.