Accounting Principles and Procedures

Question 1

Define what a profit and loss statement is?

Answer 1

A profit and loss (or income) statement lists your sales and expenses. It tells you how much profit you’re making, or how much you’re losing. You usually complete a profit and loss statement every month, quarter, or year

Question 2

What is included in a P&L Statement?

Answer 2

A P&L statement shows a company’s revenue minus expenses for running the business, such as rent, cost of goods, freight, and payroll

Question 3

What is a cashflow statement?

Answer 3

Tool used to manage finances by tracking the cash flow for an organization

Question 4

What is included in a cashflow statement?

Answer 4

Data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.

Question 5

What could have a negative impact on a contractors cashflow?

Answer 5

• Payment Terms
• Late payment
• Client does not pay in full
• Having to pay for material upfront

Question 6

What is a balance sheet?

Answer 6

a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.

Question 7

Why are balance sheets important?

Answer 7

Keeps you and key stakeholders informed of financial position, allowing you to make better management decisions

Question 8

Give examples of what would be included in a balance sheet?

Answer 8

Assets - stock
work in progress
money owed by customers cash in hand or at the bank short-term investments
pre-payments - eg advance rents

Liabilities - money owed to suppliers
short-term loans, overdrafts or other finance taxes due within the year - VAT

Question 9

What is the difference between management and financial accounts?

Answer 9

• Financial accounting is meant for external stakeholders
• Management accounting is presented internally

Question 10

Why keep company accounts?

Answer 10

1. Required by law (tax purposes)
2. Demonstrates the companies financial standing
3. To ensure cashflow and profitability is being correctly managed

Question 11

What are overheads?

Answer 11

The indirect costs or fixed expenses of operating a business
- Rent/leasing costs
- Utility bills
- Staff salaries
- Insurances

Question 12

Name the three types of accountancy ratios?

Answer 12

1. Liquidity ratios - conversions of assets into cash to pay of debt
2. Profitability ratios
3. Gearing ratios - proportion of assets to debts

Question 13

What are capital allowances?

Answer 13

Form of UK income and corporation tax reliefs

Question 14

What is CAPEX?

Answer 14

Capital Expenditure - expenditure spent to acquire or improve an assess such as equipment or buildings

Question 15

What is OPEX?

Answer 15

Operational Expenditure - Revenue expenditure is an amount that is expensed immediately (day to day running of a business)

Question 16

What is an acid-test ratio?

Answer 16

The acid-test ratio compares a company’s “quick assets” (cash and accounts receivable) to its current liabilities. It is one of six basic calculations used to determine short-term liquidity—the ability of a company to pay its bills as they come due.

Question 17

What is insolvency?

Answer 17

Insolvency is effectively the inability to pay off your creditors (the people you owe money to).
The term insolvency is often a generic term used to describe bankruptcy, liquidation, administration etc

Question 18

What steps would you take in the event of insolvency?

Answer 18

1. Inform parties involved
2. Inform bondsman
3. Stop any pending payment
4. Secure the site
5. Take ownership of materials
6. Value works completed
7. Monitor loss and expense incurred by employer
8. Terminate contract and employ others to do the works

Question 19

What is liquidation?

Answer 19

When a company is being wound up the assets must be sold to pay off creditors and to distribute any remaining funds to shareholders

Question 20

What is the difference between administration and liquidation?

Answer 20

Administration - where someone (the administrator) is appointed to manage the company’s affairs on behalf of the creditors

Liquidation - involves shutting down of a company and selling of assets to pay off creditors

Question 21

What is bankruptcy?

Answer 21

Is is a legally declared inability or impairment of ability of an individual or organisation to pay its creditors

Question 22

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

Answer 22

a Dun & Bradstreet report - creates a business credit report that could be viewed like a person credit report for businesses