Accounting Principles and Procedures Flashcards
What is VAT?
Value Added Tax
What is an audit?
Process used to check a peron or companies’ compliance with policy, procedures and compliance with regulations. They are performed to essess how valid and reliable the information is and show the companies’ internal control
What is turnover?
Income / revenue received from normal business activities. Usually from sale of goods / services
What are management accounts?
Accounts prepared by a company for internal management use, or for a lender to evelauate hiw a business will repay a loan. These are not audited externally
What is the difference between management and financial accounts?
Financial accounting is meant for external stakeholders
Management accounting is presented internally
Why does a business keeo company accounts?
Tax purposes - required by law
Demonstrates company’s financial standing (helps get loans)
Ensures cash flow and profitability are being correctly managed
What is an escrow account?
A separate account owned by a third party held on behalf of two other parties
Can be used as a project bank account
What is a project bank account?
Money is held separately
Ensures contractors etc are paid on agreed dates
Mechanisms are often in place for the release of funds
Whar are overheads?
Indirect costs / fixed expenses to the business. E.g. rent, utilities, salaries and insurance
Explain the principle of tax depreciation
The depreciation expense claimed by a taxpayer on a tax return to compensate for the loss of value of the asset (e.g. equipment)
Name 3 accountancy ratios
Liquidity ratios - show the firm’s ability to turn assets into cash to pay debts
Profitability ratios - assess a business’s ability to generate earnings over time relative to income / balance sheet
Gearing Ratio - measured the proportion of the companies borrowing to its equity - indication financial risk
What is financial leverage?
Investment strategy of using borrowed money, specifically the use of various financial instruments or borrowed capital to increase the return of an investment
What are capital allowances?
The practice of allowing taxpayers to get tax relief on their tangible capital expenditure by allowing it to be deducted against their annual income
Whare are the key financial tatements a company produces?
Profit and loss account
Balance Sheet
Cash Flow Forecast
What is expenditure?
A payment to purchase goods / services
What is capital expenditure?
CAPEX
spent to acquire or improve an asset
What is renue expenditure?
OPEX
For the day to day running of a business (spare parts etc)
Why are capex and opex split in the business accounts?
Different tax obligations (capex can benefit from capital allowance)
What is a balance sheet?
A snapshot of a company’s financial position at any moment in time
Shows assets and liabilities
What is meant by assests and liabilities?
Asset - something you now own
Liabilities - a loan or debt
What is a current asset?
An asset that is expected to turn to cash within the year
What is a fixed asset?
Long term asset (such as property)
What is the difference between a debtor and a creditor?
Creditors - you owe them money
Debtors - they owe money
What is a cash flow forecast?
A plan that shows the money you expect to receiv and pay out over a set period. Helps you plan what you expect to happen fiscally
What is a cash flow forecast used for?
Understand impact of future plans and possible outcomes Track overdue payments Plan for any cash gaps Manage any surplus cash Track if spending is on budget
Why is cash flow important for.a construcion project?
Allows the client to gain understanding of their financial committment over the duration of the project
Can be used to estimate when external funding will be required
Acts as a check against valuations
How does a cash flow forecast help a company remain solvent?
Cash flow forecasts can predict when a business has money to pay out and when it is coming in. This measn they can identigy negative cash flow so the company can do something about it in good time
What is a profit and loss account?
Shows a company’s revenue and expenses over a particular period of time
What is the different between a profit and loss account and a balance sheet?
Balance sheet is a financial snapshot at one given time
Profit and loss account shows the profit and loss over a determined period
What is insolvency?
The inability to pay off debts. A generic term that is used to descrive bankruptcy, liquidation and administration
Why would you not recommend the appointment of a contractor with a low credit rating?
Risk of contractor / supply chain insolvency
Possibility the conractor has restricted resources on site
How could you determine the financial standing of a company prior to doing business with them?
A Dun & Bradstreet report creates a business credit report that could be reviewed like a personal credit report for businesses
What are signs of contractor insolvency on a construction project?
Slowing down works Supply of materials drying up Changes in management Complaints from subcontractors Additional / inflated payment requests
Under what circumstances might a QS encounter insolvency?
A project i’m working on may have a contractor / sub contractor who cannot pay their debts
I may be approached by a client who needs advice on a contractor who has ceased trading
What steps would you take in the case of insolvency?
Inform all parties involved
Inform bank / bondsman / insurance
Stop any pending payments
Secure the site
Take ownership of materials off site (if paid for)
Schedule all plants and materials
Value completed work and any defects
Monitor loss and expense incurred by employer
Terminate the building contract and employ others to complete
What is liquidation?
The formal process to clost a limited company. All assets will be sold (liquidated) for the benefit of any creditors and shareholders before the company is dissolved from the register held at Companies House
What is the difference between administration and liquidation?
Administration - someone is appointed to manage the company’s affairs on behalf of the creditors
Liquidation - shutting down the company and selling off the assets to pay off the creditors
What is bankruptcy?
One way individuals can deal with debts they cannot pay - it does not apply to companies.
Assets are shared among creditors
Allows the individual to make a fresh start
