Accounting principles and procedures

Question 1

What are the key financial statements that all companies must provide?

Answer 1

Profit and loss account
balance sheet
cash flow

Question 2

What is the difference between management and financial accounts?

Answer 2

Management accounts are for the internal use of the management team. Financial accounts are the company accounts required by law.

Question 3

What is the difference between a statement of comprehensive income and a statement of financial position?

Answer 3

A statement of comprehensive income shows the income, expenditure and profit or loss of the company

statement of financial position shows what a company owns (assets) and what it owes (liabilities) at a given point in time.

Question 4

5. What is liquidity?

Answer 4

The readiness and availability of cash within a business

Question 5

6. What is gearing?

Answer 5

Gearing, also known as leverage or financial leverage, is a financial metric that measures the proportion of a company’s capital structure that is financed through debt compared to equity.

It assesses the extent to which a company relies on borrowed funds to finance its operations and investment activities. A high gearing ratio indicates that a company has a significant portion of debt relative to its equity, meaning it is heavily reliant on borrowed funds.

Question 6

7. What is profitability?

Answer 6

A company’s ability to generate profit or financial gain from its operations over a certain period.

Question 7

8. Explain some of the IA techniques

Answer 7

• Payback Period
• Accounting rate of return
• Net Present Value
• Internal Rate of Return
• Profitability Index
• Discounted Cash Flow
• Sensitivity Analysis

Question 8

9. Stocks

Answer 8

Stocks, also known as shares or equities, represent ownership in a company. When someone purchases stock in a company, they become a shareholder or stockholder, which entitles them to certain rights and benefits.

Question 9

10. Debtor

Answer 9

A debtor refers to an individual, business, or entity that owes money to another party, known as the creditor. A debtor represents an outstanding receivable or an obligation to repay a debt.

Question 10

11. Creditors

Answer 10

Where your firm owes another firm money

Question 11

What is a balance sheet?

Answer 11

summarizes the assets, liabilities, and shareholders’ equity of a business or individual at a specific point in time

Question 12

What is an auditor?

Answer 12

’- Responsible for checking the accountants work.
- Often hired externally (quarterly or annually) to verify the accountants work.

Question 13

What are accounting records?

Answer 13

‘Every company, whether trading or not, must keep accounting records - they must contain:
- Entries showing all money received
- A record of all assets and liabilities of the company
- A profit and loss statement
- A balance sheet, signed by a director on behalf of the board
- Notes to the accounts
- A signed directors report, including a business review (if not a small company)
- A signed auditors report

Question 14

What is cashflow?

Answer 14

’- The net amount of cash into and out of a business
- If more money is coming into the business than is going out of it, cash flow is said to be ‘positive’. If more money is going out, this is negative cash flow
- In construction, the term ‘cash flow’ typically refers to an analysis of when costs will be incurred and how much they will amount to during the life of a project
- Predicting cash flow is important in order to ensure that an appropriate level of funding is in place and that suitable draw-down facilities are available

Question 15

What is a cash flow statement?

Answer 15

A snap shot of the income and expenditure within a business showcasing the financial health of a business

Question 16

What is a profit and loss statement?

Answer 16

’- Summarises a company’s income and expenditure and the resultant profit or loss
- Reviews revenue, costs and expenses over a specific period of time e.g. ONE YEAR

Question 17

Why does a business keep company accounts?

Answer 17

’- Record and measure profitability
- Tax calculation
- Required by legislation
- Encourages business growth by identifying profitable operations

Question 17

What are some key of accounting terms?

Answer 17

‘Solvency: The ability of a company to pay its debts. The possession of assets in excess of liabilities. A company will become insolvent if they cannot pay their debts.
You will be insolvent if your total liabilities exceed your total assets.

Equity: The value of the shares issued by a company. Stocks and shares that carry no fixed interest.
Depreciation: The reduction in value of an item over time due to wear and tear.
Gross Revenue = Total revenue earned i.e. the total income received for providing goods/services.

Question 18

What are some key accounting terms?

Answer 18

‘Net Revenue = Total revenue earned i.e. the total income received for providing goods/services - returns, discounts and any other direct selling expenses.
Gross Profit = Net Revenue - cost of producing goods/providing services.
Net Profit = Net Revenue - (cost of producing goods/providing services + other operating expenses, tax, interest etc.)

Accounts Receivable: The amount of money owed by customers or clients to a business after goods or services have been delivered/used.
Accounts Payable: The amount of money owed by a business to creditors (suppliers etc.) in return for goods or services they have received.
Current Assets: Assets that will be converted into cash within one year e.g. inventory, cash and accounts receivable.
Fixed Assets: Long-term assets that are likely to provide benefits for the company for more than one year e.g. real estate, land and machinery.

Question 19

What are some Arcadis-specific accounting terms?

Answer 19

‘Net Revenue = personnel cost x financial billability (utilisation) % x direct multiplier
- To increase net revenue, you can increase the above 3 elements.
- Revenue that Arcadis earns from the work of its own employees.

Utilisation = Number of chargeable hours / number of average hours. Amount of time delivering chargeable client work (excluding holidays).

Direct Multiplier = Net fee rate / net labour cost
- (The amount you charge the client for someone / amount you pay someone = DM)
- The multiplier is the number of £’s of net revenue earned for £ spent on direct labour

Financial billability = Direct labour cost / total labour cost to employ
- Proportion of our personnel costs that is charged to fee-earning projects as direct labour
- Takes an average of 30 days to bill a client + 60 days to then get paid.
- Measure of productivity (including holidays)
- FB is reduced when employees take holidays

Question 20

What’s the difference between a management account and a financial account?

Answer 20

’- Management: for internal use
- Financial: required by law. To be submitted to HMRC

Question 21

How can a business protect themselves financially?

Answer 21

’- Contingency plans
- Action plan and diversification on products/services
- Good level of liquidity
- Reduce costs: downsizing, cutting overheads, reducing staff numbers etc.

Question 22

How would you assess a contractor’s financial accounts?

Answer 22

’- Credit check
- Companies house
- References and previous work they’ve carried out
- Request copies of their company accounts for the past three years (to be assessed with the assistance of an accountant)

Question 23

What are overheads?

Answer 23

’- The operating costs of the business that are incurred on an ongoing basis
- Can be fixed or variable

Question 24

What is the difference between debtors and creditors?

Answer 24

’- Creditor - Where you owe money to another firm

• Debtor - Where another firm owes you money

Question 25

What is Administration?

Answer 25

‘A method of holding a business together, whilst plans are formed to either restructure the business of sell assets

Question 26

What are the signs of insolvency?

Answer 26

’- Overvaluing interim valuations
- Front loading the programme
- Dissatisfied workforce
- Asking for upfront payments

Question 27

What is the Construction Industry Scheme (CIS)?

Answer 27

‘Construction Industry Scheme (CIS)
Created by HM Revenue & Customs (HMRC) to collect tax from contractors and subcontractors
- Designed to minimize tax evasion within the construction industry
- Contractors deduct tax from payments to subcontractors and pass it HMRC
- All contractors must register with the scheme before work starts
- Subcontractors do not have to register, but deductions are taken from their payments at a higher rate if they’re not registered.

Question 28

What is the Companies Act 2006?

Answer 28

‘Companies Act 2006
- The main piece of legislation which governs company law in the UK
- Aims to: modernise and simplify company law, codify directors duties, grant improved rights to shareholders, and simplify the administrative burden carried by UK companies
- Companies must do the following:
- Provide an annual summary of their capital and shares by means of a statement of capital
- Provide an up-to-date list of directors with their names, service address and business occupation