Accounting Principles And Procedures

Question 1

What is a Profit and Loss Statement?

Answer 1

A statement that shows income and expenditure for a project or company to show what profit or loss is being made

Question 2

What is a Cash Flow Statement?

Answer 2

It is concerned with the flow of cash in and out of the business or project.

Useful in determining the short term viability of a company or project.

Question 3

What is a Balance Sheet?

Answer 3

A statement of the assets, liabilities and capital of a business or other organisation at a particular time.

Details the balance of income and expenditure over the preceding period.

Gives an idea of what the company owns and owes

Question 4

What is a Business Plan?

Answer 4

A formal statement of the business goals, reasons why they are attainable and the plan for reaching the goals

Question 5

What is the role of an auditor?

Answer 5

Reviews accounts of companies and organisations to ensure the validity and legality of financial records

Question 6

What are the key financial statements that all companies must
provide?

Answer 6

The key financial statements to be provided by companies are Profit and loss
account, balance sheet and cash flow statement.

Question 7

What is the difference between management and financial accounts?

Answer 7

Management accounts are for the internal use of the management team. Financial
accounts are the company accounts required by law.

Question 8

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

Answer 8

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 (assets) and what it owes
(liabilities) at a given point in time.

Question 9

What are the main types of ratio analysis used to assess a company’s
financial strength?

Answer 9

Management Operating Ratios - these cover the liquidity and profitability aspects of
the company and, to many builders, liquidity ratios are the prime ratios.

Question 10

What are Liquidity ratios

Answer 10

Measure the ability of the company to pay off his current liabilities by converting its
current assets into cash.

Question 11

What is Working capital? (assets – liabilities / turnover)

Answer 11

Measures how much more capital may be needed to finance the operations. A falling
ratio may mean that the company has taken on more work than it can finance and
may be heading for cashflow difficulties.

Question 12

What are Profitability ratios?

Answer 12

Measure the performance of the company to generate profits.
Return on equity (profit after tax / equity (capital in shares)) – BEST RATIO
Return on capital employed (operating (overheads deducted) profit / capital
employed) – BEST RATIO
A low return can be wiped out in recession; or loan interests may be higher than
profit; useful to decide to invest or not, or take-over a company.
Trading profit margin (turnover – cost of sale / turnover)
Low margins may be due to a growth strategy from the company, not always bad
management.
Operating profit margin (operating profit / turnover)
Capital employed = share capital + reserves + long term and short-term loans +
overdrafts + creditors etc.

Question 13

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

Answer 13

For own business accounts.
For assessing the financial strength of contractors and those tendering for contracts.
For assessing competition.

Question 14

What is the difference between debtors and creditors?

Answer 14

Creditors - Your firm owes another firm money - e.g. If you owe a sub-consultant fees then they are a creditor.
Debtors - A firm who owes your firm money - e.g. a client who owes you fees is a debtor.

Question 15

What are Management Accounts?

Answer 15

The accounts prepared by a company for internal management use, or accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the funding. They will not be audited externally.

Question 16

What does the role of a Service Delivery Manager involve?

Answer 16

Review of project finances - report to team leader on gross profit margins. Review of resources booking to project. Compilation of monthly invoice/application for submission to finance/client. Interface with client to ensure payment rec in accordance with payment terms. Arrange CPF to review clients satisfaction with service received.

Question 17

Purpose of Financial Statements?

Answer 17

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

Question 18

What is an Escrow Account?

Answer 18

A separate 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.
Can be used as a project account.
Mechanisms must be in place for the release of funds such as; payment certificates.
Ratio Analysis
Assesses financial strength.
Evaluates operating and financial performance over time or compared against
competitors.

Question 19

What is an LLP?

Answer 19

In a Traditional Partnership - Joint liability - all Partners accountable for another’s
mistake.
LLP - technically they are ‘Members’ of the LLP and not ‘Partners’
Provides additional protection through limited liability. Only liable for your own
negligence/default etc.
Governed by the Limited Liability Partnership Regulations 2001

Question 20

When have you used company accounts in your work or when do you
think you may in the future?

Answer 20

To assess the financial strength of contractors at PQQ and tender stages

Question 21

How do you analyse company’s accounts?

Answer 21

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.
I should always use the group or consolidated accounts rather than the company
accounts unless it is a limited company.

Question 22

Why do you analyse companies’ accounts?

Answer 22

To assess a company’s financial performance over a period of time and against
similar companies.
To verify the solvency and financial suitability of potential tenderer s for a project

Question 23

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

Answer 23

I use the Credit Safe website to which my company subscribes to access company’s
accounts.
I considerer both the group accounts and the company accounts. If the credit rating
is a bit low, I calculate some key ratios and pass on all the information to my client’s
accountants for them to analyse further.

Question 24

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

Answer 24

Low credit rating.
A current 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
Highly geared company (rely on loans)
A falling cashflow statement

Question 25

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

Answer 25

Risk of contractor not performing satisfactorily
Risk of contractor to restrict his resources on site
Risk of contractor or supply chain insolvency

Question 26

What measures would you recommend if your client wants to appoint
a contractor with low credit rating? / How do you deal with
contractor’s cash flow issues?

Answer 26

Request a bond
Check that the tender is not excessively front loaded
Make sure that work is accurately valued at interim valuations
Consider opening a project bank account

Question 27

Give me some examples of how you forecast your individual fee income.

Answer 27

Work out hours to be billed to the client and cost rate/margin

Question 28

Give me some examples of the subject areas of the RICS guidance on Conflicts of Interest.

Answer 28

Record keeping
Informed consent
confidential information

Question 29

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

Answer 29

The profit and loss statement is an ongoing recording of the business’ revenues, expenses and end of period profit. The balance sheet, on the other hand, is a portrayal of the firm’s financial situation as at the date in which it is prepared, which is usually the year-end

Question 30

What do companies need to provide every year to comply with the Companies Act 2006?

Answer 30

Annual accounts

Question 31

Give me some examples of the subject matter of the RICS Guidance Note on Practice Management (Management of Surveying Businesses - you have not mentioned this document, but I suggest you familiarise yourself with it).

Answer 31

It’s now archived.

Shows how to develop a business plan
How to market and business development
Developing staff and skills

Question 32

When does a company need to become VAT registered?

Answer 32

When earning over £85,000

Question 33

What is UK company law?

Answer 33

The United Kingdom company law regulates corporations formed under the Companies Act 2006.