Accounting Principles and Procedures

Question 1

What is VAT?

Answer 1

Value added tax - consumption tax placed on the purchase of products whenever value is added at each stage of the supply chain, from production to point of sale`

Question 2

What is an audit?

Answer 2

The process used to check a person or companies compliance with procedures/policy/regulation. Used to ascertain validity and reliability of information.

Question 3

What is turnover?

Answer 3

Income or revenue a company receives from its normal business activities

Question 4

What are management accounts?

Answer 4

Accounts prepared for internal or management use. Will not be audited externally

Question 5

Difference between management and financial accounts?

Answer 5

Management accounts are for internal use, financial accounts are for external stakeholders

Question 6

Why do businesses keep company accounts?

Answer 6

Required by law to demonstrate a companies financial standing (helps with borrowing) and to ensure cashflow and profitability are being managed correctly

Question 7

What is an escrow account?

Answer 7

A separate account managed by a third party on behalf of the other two parties. Can be used as a project bank account.

Question 8

What are overheads?

Answer 8

Indirect costs of operating a business such as rent, bills, salaries and insurance.

Question 9

Three types of accountancy ratios?

Answer 9

1) Liquidity ratios: the organisations ability to turn assets into cash in order to pay debts.
2) Profitability ratios: used to assess a business’s ability to generate earnings relative to its operating costs, balance sheet assets and shareholder equity over time.
3) Gearing ratio: measures the proportion of a company’s borrowed funds to its equity. Indicated financial risk

Question 10

What are capital allowances?

Answer 10

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.

Question 11

Why is it beneficial for surveyors to understand company accounts?

Answer 11

• For assessing the financial health of competing surveying practices
• To assess the finacial stability of tendering contractors and subcontractors
• To aid in preparing company accounts within their own surveying practice

Question 12

What is a balance sheet?

Answer 12

A snapshot of a company’s financial position at any given point in time. Reports include assets, liabilities and ownership equity.

Question 13

What are assets and liabilities?

Answer 13

Assets: can provide future economic benefit (stock, land, vehicles)
Liabilities: what you owe others (debts, loans)

Question 14

Current vs fixed assets?

Answer 14

Current assets can be turned into cash within a year i.e., stock.

Fixed are purchased for long term use i.e., land.

Question 15

Debtors vs creditors

Answer 15

Debtor: someone who owes money to a business

Creditor: business owed money after lending

Question 16

What is a cashflow forecast?

Answer 16

A forecast of how much money a business or project is expected to receive and pay out over a set period.

Question 17

What is a cashflow forecast used for?

Answer 17

• Anticipate upcoming cash shortages
• Track expenditure
• Support informed decision making
• Monitor late paying clients

Question 18

Why is a cashflow important for a construction project?

Answer 18

• Allows client to understand their financial commitment over a period of time
• Can be used to determine whether external funding is required
• Can be used to check against valuations to indicate programme delay/ financial difficulties

Question 19

What is a profit and loss account?

Answer 19

Shows a companies revenue and expenses over a particular period of time to indicate whether a company has made profit or loss

Question 20

Profit and loss vs balance sheet?

Answer 20

Balance sheet is a snapshot of one point in time. Profit and loss is over a determined period.

Question 21

What is insolvency?

Answer 21

The inability to pay off debts or creditors.

Question 22

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

Answer 22

Risk of contractor or supply chain insolvency

Question 23

How would you determine the financial standing of a company?

Answer 23

A dun and bradstreet report (business credit report)

Question 24

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

Answer 24

• Slowing down works
• Increase of defective work
• Changes in management
• Inflated payment requests

Question 25

What steps must be taken in the event of contractor insolvency?

Answer 25

• Inform all parties and secure site
• Inform bondsman
• Consider stopping pending payments and consult legal advice
• Take ownership of materials off site
• Schedule all plant and materials
• Value completed work and any defects
• Monitor loss and expense incurred by client
• Terminate the building contract and employ others to complete

Question 26

Gross and Net profit

Answer 26

Gross = total sales - cost of goods sold

Net = gross profit - working expenses

Question 27

What is included in a company account?

Answer 27

P&L statement
Balance sheet
Cashflow statement
Report
Audit report

Question 28

Bankruptcy, liquidation, administration?

Answer 28

All types of insolvency;

Bankruptcy: Individuals assets shared between creditors when they cannot pay debts.

Liquidation: process which brings about the closure of a limited company. Assets sold ‘liquidated’ for the benefit of creditors/ shareholders.

Administration: when an administrator is appointed to manage the company’s affairs on behalf of creditors.

Question 29

What is capital expenditure?

Answer 29

Cash or credit spent to acquire or improve or maintain physical assets

Question 30

What is operational expenditure?

Answer 30

Costs in the day to day running of a business

Question 31

Why are CAPEX and OPEX budgets split in business acounts?

Answer 31

They have different tax obligations. CAPEX can benefit from capital allowances

Question 32

Liquidity vs solvency

Answer 32

Solvency is the ability to meet long term financial obligations.

Liquidity is a measure of the ability to pay off debts instantly

i.e., a company could be solvent due to large amounts of stock, but have low liquidity due to little to no assets in cash.

Question 33

What are the different levels of VAT?

Answer 33

Standard rate: 20% (most goods)
Reduced rate: 5% (e.g., energy)
Zero rate: 0% (most food, children’s clothes)

Question 34

Name 3 types of tax

Answer 34

VAT, INCOME, CORPORATION

Question 35

What is SDLT?

Answer 35

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is a progressive tax paid when purchasing a freehold, leasehold or shared ownership residential property over £250,000

Question 36

What are the SDLT rates?

Answer 36

Based on property value:

<£250k - 0%
The next £675k (£250k-£925k) - 5%
The next £575k (£925-£1.5m) - 10%
The remaining amount >£1.5m - 12%

Corporate is the same except 0% on <£125k and 2% on £125-£250k

Question 37

Internal vs external audits

Answer 37

External auditing is an independent examination of financial statements prepared by an organisation. Required by law and carried out by a registered firm of accountants.

Internal auditing is an internal review of strengths, weaknesses and management of risk. Not required by law.