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RICS APC Revision > Accounting principles and procedures > Flashcards

Accounting principles and procedures Flashcards

1
Q

What is VAT?

A
  • Value Added Tax
  • VAT is consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
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2
Q

What is corporation tax?

A
  • Corporation tax is paid by businesses in the UK

- Calculate on their annual profit in a similar way to income tax for individuals

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3
Q

What is an audit?

A
  • Process used to check a person or companies’ compliance with policy, procedures & compliance with regulation
  • Audits are performed to ascertain the validity and reliability of information; also, to provide an assessment of system’s internal control
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4
Q

What is turnover?

A
  • Income or revenue that a company receives from its normal business activities
  • Usually from the sale of goods and services to customers
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5
Q

What are management accounts?

A

Accounts prepared by a company for internal management use, or accounts prepared for a lender, such as a bank to evaluate how the business will repay funding. Management accounts will not be audited externally.

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6
Q

What is the difference between management and financial accounts?

A
  • Financial accounting is meant for external stakeholders.

- Management accounting is presented internally

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7
Q

Why does a business keep company accounts?

A
  • Tax purpose (required by law).
  • Demonstrates the company’s financial standing (supports loan or borrowing applications).
  • To ensure cash flow and profitability in a company is being correctly managed.
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8
Q

What is an escrow account?

A
  • A separate account owned by a third party, help on behalf of two other parties.
  • Can be used as a project bank account.
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9
Q

What is a project bank account?

A
  • Ringfenced bank account (the money is held in escrow)
  • Ensures contractors, key subcontractors and key members of the supply chain are paid on the contractually agreed dates.
  • Usually, mechanisms are in place for the release of funds (such as payment certificates).
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10
Q

What are overheads?

A

The indirect costs or fixed expenses of operating a business:

  • Rent/Leasing costs.
  • Utility bills
  • Staff salaries
  • Insurance
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11
Q

Explain the principle of tax depreciation?

A

Tax depreciation is the depreciation expense claimed by a taxpayer on a tax return to compensate for the loss in the value of tangible assets. Examples include property, plant and equipment.

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12
Q

Name three types of accountancy ratios?

A
  • Liquidity ratios - The organisation’s ability to turn assets into cash in order to pay debts.
  • Profitability ratios - Used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders’ equity over time, using data from a specific point in time.
  • Gearing ratio - Measures the proportion of a company’s borrowed funds to its equity. The ratio indicates the financial risk to which a business is subjected, since excessive debt can lead to financial difficulties.
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13
Q

What is financial leverage?

A
  • Financial leverage is an investment strategy of using borrowed money.
  • Specifically, the use of various financial instruments or borrowed capital to increase the potential return of an investment.
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14
Q

What are capital allowances?

A

The practice of allowing taxpayers to get tax relief on their tangible capital expenditure by allowing it to be deducted against their annual taxable income

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15
Q

What are the key financial statements/documents that companies produce?

A
  • Profit and loss account
  • Balance sheet
  • Cash flow forecast
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16
Q

What is expenditure?

A

Expenditure represents a payment with either cash or credit to purchase goods or services

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17
Q

What is capital expenditure?

A
  • CAPEX (Capital expenditure)

- Capital expenditure is spent to acquire or improve an asset such as equipment or buildings.

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18
Q

What is revenue expenditure?

A
  • OPEX (revenue expenditure).
  • Revenue expenses are costs in the day to day running of the business. For example, servicing a machine, spare parts etc.
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19
Q

Why are CAPEX and OPEX budgets split out in business accounts?

A

They have difference tax obligations, for example CAPEX can benefit from capital allowances.

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20
Q

What is a balance sheet?

A
  • A balance sheet is a ‘snapshot’ of a company’s financial position as a given point in time
  • It reports on a company’s assets, liabilities and ownership equity.
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21
Q

What is meant by assets and the liabilities?

A
  • Asset = a van or land which is owned

- Liability = a loan or debt

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22
Q

What is a current asset?

A

Cash and other assets that are expected to be converted to cash within a year.

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23
Q

What is a fixed asset?

A

Assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings and equipment.

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24
Q

What is the difference between debtors and creditors?

A
  • Creditors - is an individual or business that has lent funds to a business and is owed money.
  • Debtor - is an individual or business who has borrowed funds from a business and so owes it money.
25
Q

What is a cash flow forecast?

A

A cashflow forecast is a plan that shows how much money you expect your business or project to receive and pay out over a set period. It can help you plan how much you expect to make in sales and spend in costs. It can also help you understand when money will enter and leave your bank account.

26
Q

What is the cash flow forecast used for?

A
  • Understand the impact on future plans and possible outcomes
  • Keep track of overdue payments
  • Plan for upcoming cash gaps
  • Manage surplus cash
  • Track whether spending is on target
27
Q

Why is a cash flow important for a construction project?

A
  • Allows the client to gain an understanding of their financial commitment over the duration of the project and when they are likely to spend the money.
  • Can be used to estimate when external funding will be required
  • Acts as a check against valuations and can give early indication of financial difficulties.
28
Q

How does a cash flow forecast help a company remain solvent?

A

Cash flow forecasts can predict when a business or project has money to pay out and when money is coming in. This can highlight if the business or project will have negative cash flow, meaning that can do something about it in good time.

29
Q

What is a profit and loss statement?

A

A profit and loss account shows a company’s revenue and expenses over a particular period of time, typically either one month or consolidated months over a year. These figures show whether the business has made a profit or a loss over that time period.

30
Q

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

A
  • Balance sheet is a financial ‘snapshot’ at one given time showing the financial position of the company.
  • Profit and loss account is showing the profit and loss over a determined period.
31
Q

What is insolvency?

A
  • Insolvency is effectively the inability to pay off debts or creditors (the people you owe money to)
  • The term ‘insolvency’ is often a generic term used to describe bankruptcy, liquidation, administration etc.
32
Q

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

A
  • Risk of contractor or supply chain insolvency

- Possibility of the contractor not performing satisfactory or has restricted resources on site.

33
Q

How could you determine the financial standing of a company prior to doing business with them?

A

A Dub & Bradstreet report creates a business credit report that could be viewed like a personal credit report for businesses.

34
Q

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

A
  • Slowing down works
  • Supply of materials drying up
  • Increase in defective work
  • Changes in management
  • Additional or inflated payment requests
  • Complaints from subcontractors
35
Q

Under what circumstance might a quantity surveyor encounter insolvency?

A
  • A project that you are working on may have a contractor or a subcontractor who is having serious financial difficulties which mean they cannot pay their debts.
  • You may be approached by a client who has a project when the contractor has ceased trading and needs advice.
  • You could be appointed by an external body (generally liquidator or administrator) to prepare a report on a commercial aspect of the project
36
Q

What steps would you take in the event of insolvency?

A
  • Inform all parties involved
  • Inform the bondsman (bank / insurance company)
  • Stop any pending payment (can defend on grounds of counter claim for costs)
  • Secure the site
  • Take ownership of materials off site (if paid for in valuations)
  • Schedule all plant and materials
  • Value completed works and value and defects
  • Monitor loss & expense incurred by employer
  • Terminate the building contract and employ others to complete.
37
Q

What is liquidation?

A

In its simplest form liquidation is a formal process which brings about the closure of a limited company. As part of the process all company assets will be sold - or ‘liquidated’ - for the benefit of outstanding creditors and/or shareholders before the company is struck off - or dissolved - from the register held at Companies house.

38
Q

What is the difference between administration and liquidation?

A
  • Administration is where someone (the administrator) is appointed to manage the company’s affairs on behalf of the creditors.
  • Liquidation involves the shutting down of a company and selling off the assets to pay off the creditors.
39
Q

What is bankruptcy?

A
  • Bankruptcy is one way for individuals to deal with debts they cannot pay. It does not apply to companies or partnerships.
  • Assets are shared among those you owe money to (creditors)
  • Allows the individual to make a fresh start free from debt (with some restrictions)
40
Q

In terms of business planning, what tools does your company use to ensure you are making a profit?

A
  • Timesheets.
  • Using resource planners (to ensure full utilisation)
  • Fee/cost reconciliation tools
  • Project reviews
  • Yearly performance reviews
  • Team meetings
  • Direct one to ones.
41
Q

What is benchmarking (on a construction project)?

A

A process by which the estimated performance (often cost) of a project is compared to other similar projects. This can highlight areas of design that are not offering good value for money; or, if the price offered by the contractor is in line with the wider market

42
Q

What is a PESTLE analysis?

A
  • PESTLE is an acronym for Political, Economic, Social, Technological, Legal and Environmental.
  • It is a way of understanding and reviewing how external forces may impact the business.
43
Q

What is a SWOT analysis?

A
  • SWOT analysis is a strategic planning method used to evaluate Strengths, Weaknesses, Opportunities and Threats involved in a project or business venture.
  • SWOT analysis can be used as a basis for business strategy.
44
Q

What are the issues relating to staff turnover?

A
  • It can be expensive and time consuming to hire staff, often having to pay agency fees to help find the right people.
  • Training new people is time consuming and expensive.
  • Turnover can also affect team dynamics, productivity and continuity.
45
Q

What are SMART targets/objectives as part of a business plan?

A

Objectives which are:

  • Specific
  • Measurable
  • Achievable
  • Realistic
  • Time related
46
Q

What things do you need to consider when setting up this business?

A
  • Advise the RICS that you are starting a business and comply with the Rule of Conduct for members and firms.
  • Create a business plan
  • Create a H&S policy
  • Register the business with Companies House and inform HMRC
  • Set-up company and client bank accounts
  • Set-up a Complaints Handling Procedure.

Get the relevant insurances in place such as:

  • Professional indemnity & run off cover
  • Directors’ liability
  • Buildings insurance
  • Public liability insurance
47
Q

What is an investment appraisal?

A

An investment appraise is used to assess whether a business or project would be a worthwhile investment in terms of return (both financially and/or value added)

Considerations

  • Rate of return
  • Payback period
  • Net present value (NPV)
48
Q

Give examples of fee earning and non-fee earning staff?

A
  • Fee earning - QS, PM, Architect

- Non fee earning - Administration staff, IT technicians

49
Q

What is the purpose of an organisation chart?

A
  • A graphical representation of the roles, responsibilities and relationship between individuals within the organisation
  • It can be used to depict the structure of an organisation as a whole or broken down by smaller business units
50
Q

How do you contribute to your company’s goals?

A
  • Sharing knowledge within my team(s).
  • Keeping up to date with new technologies and systems.
  • Delivering and exceeding my responsibilities
  • Understanding my personal/project objectives, exceeding expectations where possible.
  • Bringing in new business
  • Focus on safety
51
Q

What is meant by business strategy?

A
  • A business is an outline of the actions and decisions a company plants to take to reach its business goals and objectives
  • The strategy defines what the business needs to do to reach its goals, which can help guide the decision-making process for hiring and resource allocation
52
Q

What is meant by strategic planning?

A

The managerial process of developing a maintaining a strategic fit between the organisation objectives, resources and changing market opportunities

53
Q

What is the difference between business strategy and business planning?

A
  • A business strategy is concerned with the entire organisation, such as what it produces, where is competes and how it allocates resources. It deals with the fundamental choices that will affect the entire organisation
  • Business plans are concerned with the detailed implementation after the big choices have been made. A business plan deals with the detailed implementation of specific aspects of the overall strategy.
54
Q

What is the difference between a business vision statement and mission statement?

A
  • A vision statement focuses on tomorrow and what an organisation wants to ultimately become.
  • A mission statement focuses on today and what an organisation does to achieve it.
55
Q

What is a business plan?

A
  • A business plan is a document that summarises the operation and financial objectives of a business. It is a business’s road map to success with detailed plans and budgets that show how the objectives will be realised.
    -Likely timescale of three to five years (at least).
    Written business plans are often required to obtain a ban loan or other financing.
56
Q

What would typically be included in a business plan?

A
  • Executive summary
  • Marketing strategy
  • Vision and mission statements
  • Products and services
  • Management team and personnel
  • Financial forecasts
  • Responsibilities and targets
  • Training, resource strategy and hierarchy plans
  • SWOT analysis
57
Q

What is a business model?

A

A business model is the plan implemented by a company to generate revenue and make a profit from operations.

A business model may contain:

  • The product/service the business believes has value for the customer
  • The market niche and main target demographic.
  • The expense of bringing your product/service to the target market
58
Q

How can a business plan help a company in the current economic climate?

A
  • To help secure additional funding from banks or external investors
  • To gain new clients and commissions
  • To help focus the businesses priorities and respond to change
  • Focus on key priorities
  • For budgeting
  • For setting targets for staff

RICS APC Revision (19 decks)

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