Accounting principles and procedures

Question 1

If you were checking the financial standing of a contractor what would a balance sheet tell you?

Answer 1

• A snapshot of a company’s financial position at a given point in time
• P+L accounts can look great one year due to one off profits. Balance sheet gives a broader view of the companies health

Question 2

What is the difference between financial accounting and management accounting?

Answer 2

• Financial accounting is for those outside the company
• It is required by law
• Larger companies, public companies and state owned companies must be audited by a chartered accountant
• Management accounting provides information to people within an organisation
• Not required by law

Question 3

What is a balance sheet?

Answer 3

• A snapshot of a company’s financial position at a given point in time
• Reports on a company’s assets, liabilities, and ownership equity
• Assets = Liabilities + Equity
• Current assets are cash and other assets expected to be turned into cash within 1 year
• Fixed assets are purchased for long-term use and not likely to be converted quickly into cash, e.g. land, buildings, plant
• Current liabilities are obligations that are due and payable within 1 year
• Non-current liabilities are obligations listed on the balance sheet for >1 year, e.g. long-term loans

Question 4

What is a profit and loss account?

Answer 4

• A financial statement that summarises the revenues, costs and expenses incurred during a specific period of time, usually a year
• Demonstrates the company’s ability to generate a profit by increasing revenue, reducing costs, or both

Question 5

What is calculated in a P+L account?

Answer 5

Sales - Cost of sales = Gross profit

Gross profit - Operating costs/overheads = Operating profit or EBIT (earnings before interest and tax)

EBIT - interest - tax = Net profit

Net profit - dividends = Retained profits

Question 6

What is EBITDA?

Answer 6

• Earnings before interest, tax, depreciation and amortisation
• Depreciation of fixed assets
• Amortisation (depreciation of intangibles like loans)

Question 7

What is the IFRS 16?

Answer 7

• International financial reporting standards
• Standards issued to provide common global language for business affairs so company accounts are understandable/comparable worldwide

Question 8

What is a cash-flow forecast?

Answer 8

• A plan that shows how much money a business / project expects to receive and pay out over a set period

Question 9

How can contractors predict their cash flow before a project begins?

Answer 9

• S-Curve shows a high-level expected cash flow for a construction project; cash flow is flat at the start then increases with project maturity
• More accurate cash flows can be created between the contractor and sub-contractors by analysing the programme and working out when costs are going to be incurred

Question 10

Why are contractor cash flows useful for the client’s QS?

Answer 10

• Actual costs incurred at interim valuations can be charted against forecasted cash flow
• If actual cash flow is behind forecasted, project may be behind programme
• If actual cash flow is ahead of forecasted, project may be ahead of programme

Question 11

Name three types of accountancy ratios

Answer 11

• Liquidity: a company’s ability to turn assets into cash in order to pay debts
• Profitability ratios: a company’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders’ equity over time
• Gearing ratio: measures the proportion of a company’s borrowed funds to its equity

Question 12

What is insolvency?

Answer 12

Refers to the inability of a debtor to pay its debts

Question 13

What is the difference between technical and legal insolvency?

Answer 13

Technical insolvency = doesn’t have time to realise assets in order to pay creditors

Legal insolvency = couldn’t pay creditors even if all assets realised

Question 14

What is a statutory demand?

Answer 14

Where a creditor demands payment of a debt. This must be satisfied within 21 days.

Question 15

What should you do if a Contractor goes insolvent?

Answer 15

• Inform all parties involved
• Stop any pending payments
• Secure the site
• Value completed works
• Value any defects
• Take ownership of any material off site (if paid for)
• Schedule of plant and materials
• Monitor loss & expense by employer
• Terminate contract and employ others to complete the works
• Retention held to cover any losses

Question 16

What is liquidation?

Answer 16

• The process of bringing a business to an end and distributing its assets to claimants
• Occurs when a company goes insolvent

Question 17

What is administration?

Answer 17

• Administrator will try to stop the company being wound up/going into liquidation
• Protected you from legal action by creditors who are owed money in an 8 week moratorium
• Nobody can apply to wind up your company during administration
• Directors/secured lenders may appoint administrators through a court process in order to protect the company and their position

Question 18

What changes were made to the International Accounting Standards in Jan 2019?

Answer 18

Assets and liabilities of leases now have to be shown on balance sheets

Question 19

What is a project bank account?

Answer 19

• Ringfenced bank account
• Ensures contractors, key subcontractors and key members of the supply chain are paid on the contractually agreed dates
• Usually mechanisms in place to release funds (such as payment certificates)

Question 20

What is capital expenditure?

Answer 20

• Capex is spent to acquire or improve an asset such as equipment or buildings
• Capex can benefit from capital allowances

Question 21

What are the signs of contractor insolvency on a construction project?

Answer 21

• Slowing down works
• Supply of materials drying up
• Increase in defective work
• Changes in management
• Additional or inflated payment requests
• Complaints from subcontractors

Question 22

What is the role of the auditor?

Answer 22

• Identifies and assesses the risks of material misstatement of the entity’s financial statements
• Understand the internal controls
• Evaluate the appropriateness of accounting policies used
• Evaluates the overall presentation, structure and content of the financial statements

Question 23

What is UK GAAP and how does it treat property?

Answer 23

A single Financial Reporting Standard 102

An entity should recognise property when it is probable that future economic benefits associated with the property will flow to the entity

Question 24

How does UK GAAP and IAS reporting standards differ when it comes to property?

Answer 24

• Under GAAP property is revalued each year to fair market value. This is called the Fair Value Model. Changes in fair value are recognised in profit/loss as they occur.
• Under IFRS/IAS, you can also use the Cost Model, where the property is measured at cost less accumulated depreciation.

Question 25

Can you tell me about the Companies Act 2006?

Answer 25

• One of the longest pieces of UK Legislation that brings all company based law in to one place.
• Requires registration with Companies House and appointment of Directors etc.
• Requires submission of accounts by the Director on a yearly basis to HMRC.

Question 26

What is GAAP and what is the purpose of it?

Answer 26

Generally Accepted Accountancy Principles are a set of principles on how to produce company accounts in terms of presentation, content and process so that they are:

• Consistently filed
• Complete
• Comparable

Question 27

What is UITF40 revenue recognition?

Answer 27

o Finance Act 2006
o Value to include in accounts for contracts for services where the work is not finished at the accounting date
o Required businesses to bring into turnover, the value of work done under the service contract – revenue or income builds up over the life of the contract, rather than when the work is completed, or the client is invoiced