Accounting principles and procedures

Question 1

What are the key financial statements a company provides?

Answer 1

1. Profit & loss (income statement)
2. Balance sheets
3. Cash flow statements

Question 2

What is the difference between management and financial accounts?

Answer 2

1. Management accounts are for internal use - Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization’s goals.
2. Financial accounts are company accounts required by law - Financial accounting involves recording, summarizing, and reporting the stream of transactions and economic activity resulting from business operations over a period of time to the public or regulators. Audited by an accountant.

Question 3

What is a profit & loss account?

Answer 3

It shows the income and expense expenditure of a company and the resulting profit or loss i.e. to work out how much tax is likely

Question 4

What is a balance sheet?

Answer 4

It shows what a company owns (assets) and what it owes (liabilities) and the value of the business at any given point in time. i.e. shows VAT and dividends

Question 5

What is a cash flow statement?

Answer 5

It’s the summary of actual or anticipated ingoing and outgoing of cash over an accounting period

Question 6

What are capital allowances?

Answer 6

Tax relief on items purchased for the business

Question 7

What are sinking funds?

Answer 7

Funds set aside for future expense

Question 8

What is insolvency?

Answer 8

An inability to pay debts where liabilities exceed assets

Question 9

What is companies house?

Answer 9

An agency that incorporates and disolves limited companies

Question 10

What are liquidity ratios?

Answer 10

They measure the ability of a company to pay off its current liabilities by converting its assets into cash

Question 11

What are profitability ratios?

Answer 11

Measures the performance of a company in generating its profits

Question 12

Why is it important to understand accounting principles?

Answer 12

To aid in preparing business accounts and to assess the financial strength of contractors

Question 13

What is the purpose of a P&L?

Answer 13

1. To monitor and measure profit or loss, to help calculate tax and compare against past performance

Question 14

Is the difference between debtors and creditors?

Answer 14

Creditors are owed money by another entity, debtors owe money to another entity

Question 15

What is a financial statement?

Answer 15

Forecasts of income and expenditure that can be used to identify potential shortfalls and services

Question 16

What is a cash flow forecast?

Answer 16

A forecast of the amount of cash or cash equivalents entering and leaving company over a period of time

Question 17

What are escrow accounts?

Answer 17

1. An account owned by a third-party held on behalf of two other parties
2. Can be used as a project bank account
3. A payment certificate is required for the release of funds

Question 18

When have you used company accounts in your work?

Answer 18

I review my own company accounts prior to submission to HMRC

Question 19

How do you carry out a credit check?

Answer 19

There are online credit searching websites

Question 20

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

Answer 20

There is an increased risk of the contractor not performing satisfactorily or becoming insolvent during the contract

Question 21

What measures would you recommend if your client wanted to appoint a contract with a low credit rating?

Answer 21

I would suggest a performance bond and ensure that their interim valuations are accurate and not over client

Question 22

What is a performance bond?

Answer 22

A performance bond, also known as a contract bond, is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. If they fail to do so, the Surety company is responsible for completing the contract obligations, either by securing a new contractor to complete the job or by financial compensation.

Question 23

What are financial ratios?

Answer 23

Rations using info from financial statements to assess a company’s liquidity, profitablity, valuation etc

Question 24

What is an efficiency ratio?

Answer 24

Measures how well a company is utilising its assets and resources

Question 25

What are the UK auditing exemption qualification requirements for companies?

Answer 25

* annual turnover <£10.2m * assets worth less than £5.1m * 50 or fewer employees

Question 26

What is IFRS 2016?

Answer 26

It is the lease accounting standards - International Financial Reporting Standards published by IASB (International Accounting Standards Board) - applies from Jan 2019

Question 27

Who does IFRS 2016 apply to?

Answer 27

All companies who rent or lease assets for business purposes. Specifically, it applies to all leases with a term over 12 months, unless the underlying asset is of low value (which is unlikely to apply to most property transactions).

Question 28

How would you deal with a company's insolvency?

Answer 28

I would follow guidance from RICS and the UK government website

Question 29

What are examples of assets and liabilities?

Answer 29

Examples of assets: Cash, inventory, building, furniture, and accounts receivable. Examples of liabilities: Loans, accounts payable, sales tax payable, and debts.

Question 30

What do you understand by the term Generally Accepted Accounting Principles (GAAP)?

Answer 30

Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting.

Question 31

What is the Companies Act 2006?

Answer 31

The Companies Act 2006 is the piece of legislation that serves as the main source for company law governing the UK.

Question 32

How do companies know which reporting framework to comply with?

Answer 32

The Companies Act - Company law recognises two financial reporting frameworks – IFRS and UK and Ireland GAAP (generally accepted accounting practice)

Question 33

Can you tell me about a common financial measure?

Answer 33

Financial ratios such as liquidity ratios or profitability ratios

Question 34

Can you tell me what the role of an auditor is?

Answer 34

The auditor's objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes the auditor's opinion.

Question 35

When are audited accounts needed and why?

Answer 35

The primary purpose of an audit it to comply with legal regulations which seek to ensure companies are operating legitimately. It is carried out at the end of the financial year

Question 36

What is the difference between UK GAAP and IFRS?

Answer 36

The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based.

Question 37

How have changes to FRS102 impacted upon investment property?

Answer 37

Under FRS 102, investment property whose fair value can be reliably measured without undue cost or effort must be measured at that fair value at each balance sheet date with gains and losses recognised in profit and loss.

Question 38

What RICS guidance or Schemes relates to client money?

Answer 38

1. RICS Client money handling professional statement 2. Fraud response plan 3. Client money handling 4. RICS Client Money Protection Scheme for Surveying Services

Question 39

Explain your understanding of the VAT domestic reverse charge for building and construction services.

Answer 39

The VAT reverse charge is a requirement that (except in certain circumstances mentioned below) any VAT registered contractor paying for construction services that are within the scope of the construction industry scheme ("CIS") must pay the VAT payable on those construction services directly to HMRC, instead of paying them to the contractor/subcontractor or supplier.

Question 40

When do changes to the reverse charge apply from?

Answer 40

The VAT reverse charge on construction service came into effect on Monday 1 March 2021

Question 41

What is the impact of the reverse charge on VAT accounting?

Answer 41

The new reverse charge makes it the customer's responsibility to account for VAT meaning there is no opportunity for the supplier to disappear before paying their VAT bill to HMRC

Question 42

Is VAT included in a balance sheet or a profit & loss account?

Answer 42

Balance sheet