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RICS APC QS (JL) > Accounting Principles and Procedures > Flashcards

Accounting Principles and Procedures Flashcards

1
Q

What is VAT?

A

Value added tax - consumption tax placed on product whenever value added at each stage of supply chain, from production to point of sale

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2
Q

What is corporation tax?

A

Paid by businesses in UK, calculated on annual profit in similar way to income tax for individuals

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3
Q

What is an audit?

A

Important term used in accounting, describes examination and verification of company’s financial records. Ensures financial information is represented fairly and accurately\

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4
Q

What is turnover?

A

Income / revenue a company receives from normal business activities (usually from sale of goods/services to customers)

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5
Q

What are management accounts?

A

Accounts prepared by company for internal management use / accounts prepared for a lender to evaluate how business will repay funding. Not audited externally

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6
Q

Management vs financial account

A
  • Financial accounts - required by UK law for public to see - Private limited companies in UK must file annual accounts with Companies House in line with Companies Act 2006. Each set of accounts should relate to a specific financial year
  • Management accounts - internal use Used by business owners and management for day-to-day and strategic decision making. Not required by law, don’t have to be filed with Companies House
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7
Q

Why does a business keep company accounts?

A
  • Tax purposes- required by law
  • Demonstrates company financial standing (supports loan/borrowing applications), ensure cash flow and profitability in company is being correctly managed
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8
Q

What is an escrow account?

A
  • Separate account owned by third party, held on behalf of 2 other parties
  • Defined contractual conditions for release of funds (mechanisms can include payment certificates)
  • Can be used as a project bank account
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9
Q

What is a project bank account?

A
  • Ring-fenced bank accounts allowing for payments to be made directly and simultaneously to main contractor and members of supply chain
  • Cashflow disbursement model design to protect project from risk of supply chain insolvency and to speed up payment times
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10
Q

What are business overheads?

A
  • Indirect costs / fixed expenses of operating a business
  • Rent/leasing costs, utility bills, additional staff, insurance
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11
Q

Explain the principle of tax depreciation

A

Depreciation expense claimed by taxpayer on tax return to compensate for loss in value of tangible assets (i.e. property, plant, equipment)

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12
Q

3 types of accounting ratios

A
  • Liquidity
  • Profitability
  • Gearing
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13
Q

What is liquidity ratio?

A
  • Oranisation’s ability to turn assets into cash to pay debts
  • Current assets / current liabilities
  • Ratio usually 1.5, depends on sector of activity - housebuilders often operate on liquidity ration over 3 as they retain high value assets in form of unsold houses
  • Liquidity ratio <0.75 can be early indicator of insolvency
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14
Q

What is profitability ratio?

A
  • Assess business’ ability to generate profits
  • Trading profit margin ratio = turnover - (cost of sales/turnover)
  • Low margins may be due to growth strategy from company (not necessarily bad management)
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15
Q

What is a financial gearing ratio?

A
  • Measures proportion of company’s borrowed funds to its equity
  • Helps measure solvency
  • Highly geared companies may rely mainly on borrowing
  • Interest payment reduces profit
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16
Q

What is financial leverage?

A
  • Investment strategy, using borrowed money
  • Using financial instruments / borrowed capital to increase potential return of investment
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17
Q

What are capital allowances?

A

Practice allowing taxpayers to get tax relief on tangible capital expenditure by allowing it to be deducted against annual taxable income (tools and equipment)

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18
Q

Difference between gross and net in accounting terms?

A
  • Gross = total amount of income before deductions
  • Net = total amount of income after deductions/adjustments
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19
Q

What is equity?

A
  • Value that an owner has in the business
  • Calculated by deducting total liabilities from total assets on company balance sheet
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20
Q

Why is it beneficial for surveyors to understand company accounts?

A
  • Assess financial health of competitors
  • Assess financial stability of tendering contractors and subconsultants
  • Aid in preparing company accounts within own surveying practice
  • Review internal profitability and sustainability
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21
Q

Debtors vs creditors?

A
  • Debtor = individual / business who’s borrowed funds from a business so it owes money
  • Creditor = individual / business who’s lent funds to business and is owed money
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22
Q

What is UK GAAP?

A

Generally Accepted Accounting Practice in the UK - regulatory body establishing how accounts and financial reports should be prepared in the UK

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23
Q

When have you used company accounts in your work?

A

Assess financial strength of contractors at pre-qual stage and tender stages

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24
Q

What is expenditure?

A

Represents payment with either cash/credit to purchase goods / services

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25
Q

What is capital expenditure?

A

CAPEX - spent to acquire / improve assett i.e. equipment or buildings - upfront cost

26
Q

What is revenue expenditure?

A

OPEX - day-to-day (operational) costs for running business, i.e. servicing machine, spare parts etc.

27
Q

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

A

Different tax obligations i.e. CAPEX can benefit from capital allowances

28
Q

What is Companies House?

A

Agency incorporating and dissolving limited companies in the UK

29
Q

What is HMRC?

A

His Majesty’s Revenue and Customs

30
Q

What is a financial statement?

A

Forecast of income and expenditure that can be used as analytical tool to identify potential shortfalls and surpluses

31
Q

What are the key financial statements/documents that companies have to produce in the UK?

A
  • Profit and loss account
  • Balance sheet
  • Cashflow forecast
32
Q

What’s included in an income statement?

A

Company revenue, costs, profits, expenses, taxes paid

33
Q

What is a balance sheet?

A
  • ‘Snapshot’ of company financial position at given point in time
  • Reports on company’s assets, liabilities, ownership equity
  • Used to assess financial position / health and can be compared with prev balance sheets to identify trends - provides basis for ratios
34
Q

What can you tell from a balance sheet?

A

How much a business is worth at any given point (i.e. if business owes more than it owes, assets)

35
Q

What is meant by assets and liabilities?

A
  • Asset = materials / land / property owned, i.e. vans, cars, buildings
  • Liability = loan / debt
36
Q

What is a current asset?

A

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

37
Q

What is a fixed asset?

A

Assets purchased for long-term use, unlikely to be converted quickly into cash (i.e. land, buildings, equipment)

38
Q

What is a cash flow forecast / statement?

A
  • Document showing how much money a business / project is expected to receive and pay out over set period
  • Helps plan sales / spending
  • Helps understand when money will enter and leave bank account
  • Measures short-term ability of firm to pay off bills
  • Broken down to operating, investment and financing activities

Construction
- Usually shown as ‘S’ curve - small financial outlay at start, steep increase during midway point and tapering towards end

39
Q

What is the cashflow forecast used for?

A
  • Understand impact on future plans, possible outcomes
  • Keep track of overdue payments
  • Plan/manage upcoming cash gaps / surplus
  • Track whether spending is on target
40
Q

Why is cashflow important for a construction project?

A
  • Allows client to gain understanding of financial commitment over duration of project and when likely to spend the money
  • Can be used to determine when external funding is required
  • Acts as a check against valuations, can give early indication of delays / financial difficulties
41
Q

How does a cashflow forecast help a company remain solvent?

A
  • Can predict when a business/project has money to pay out and when money is coming in
  • Highlights if business/project has negative cashflow- they can do something about it in good time
42
Q

What is an S-Curve?

A
  • ‘Standard’ curve - shape of expenditure profile looks like an S
  • At start of project, rate of expenditure typically lower due to site setup and lower value enabling works
  • Middle of programme - higher expenditure, more expensive building components i.e. M&E, steel, materials being installed
  • End - expenditure slows down (less to do) - curve flattens
43
Q

How are S-Curves used by surveyors?

A
  • Track, analyse and assess business accounts and performance
  • Assess financial strength of contractors
  • Compare actual progress of work against pre-contract predictions
44
Q

What is a profit and loss account?

A
  • Shows company revenue and expenses over particular period (i.e. consolidated months over a year)
  • Show whether business has made a profit or loss over that period (sales vs expense)
  • Can identify non-profitable work
  • Indicates how revenues transformed into nett income (nett profit)
45
Q

Purpose of a profit and loss account?

A
  • Monitor and measure profit/loss
  • Compare against past performance and company budgets
  • Valuation purposes, compare against competitors
  • Forecast future performance
  • Calculate taxation

Significant problems if info inaccurate (incompetence/fraud)

46
Q

Difference between a balance sheet and profit and loss account?

A
  • Balance sheet is ‘snapshot’ at one given time, showing financial position of company (assets and liabilities)
  • Profit and loss shows profit/loss over determined period
47
Q

What is insolvency?

A
  • Inability to pay off debts / creditors
  • Generic term to describe bankruptcy, liquidation, administration etc.
48
Q

Signs of insolvency in company accounts / credit checks?

A
  • Low credit rating
  • Liquidity ratio <0.75
  • Falling working capital ratio (suggests company has taken on more contracts than it can finance)
  • Low return on equity
  • Highly geared company heavily reliant on loans
  • Falling cashflow statement
  • Can’t get bonds / being charged at high premium
49
Q

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

A
  • Risk of contractor / supply chain insolvency
  • Possibility the contractor might not perform satisfactorily / restricted resources on site
50
Q

What would you recommend if client wanted to appoint contractor with low credit rating?

A
  • Request performance bond for client to call on if main contractor failed to perform
  • Review tender submission to ensure not excessively front loaded
  • When reviewing interim valuations, careful consideration that these are accurate and not over-claimed
  • Project bank account can provide additional level of assurance, should be considered
51
Q

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

A
  • Dun & Bradstreet report creates business credit report
  • Score between 80-100 would have lower risk of late/default on payment
52
Q

How do you carry out a credit check? Give example

A
  • Use credit safe website to which my company subscribes to access company’s accounts
  • Consider both group and company accounts
  • If credit rating is low, I calculate key ratios and pass on all information to my client’s accountant for them to analyse further
53
Q

How do you analyse a company’s accounts?

A
  • Client’s accountants undertake detailed analysis
  • As a QS I can look at warning signs, calculating ratios, i.e. liquidity, profitability, gearing
  • Use group / consolidated accounts over company accounts (unless it’s a limited company)
54
Q

What are signs of contractor insolvency on a project?

A
  • Slowing down works
  • Supply of materials drying up
  • Increase in defective work
  • Changes in management
  • Additional / inflated payment requests
  • Complaints from subcontractors
55
Q

Under what circumstance might QS’ encounter insolvency?

A
  • Project where contractor/subcontractor has serious financial difficulties and can’t pay their debts
  • Client may have a project where contractor has ceased trading and needs advice
  • May be appointed by external body (liquidator / administrator) to prepare report on a commercial aspect of project
56
Q

What steps would you take in the event of contractor insolvency?

A
  • Inform all parties involved (inc bondsman i.e. bank / insurance company), secure site
  • Consider stopping pending payments and seek legal advice
  • Take ownership of materials off-site paid for in valuation
  • Schedule all plant and materials
  • Value completed works and value any defects
  • Monitor loss and expense incurred
  • Terminate building contract, employ others to complete
57
Q

What is administration?

A

Administrator will take over running the company to attempt to sort out financial situation - company will continue to trade

58
Q

What is liquidation?

A

Formal process bringing about closure of limited company. All company assets sold for benefit of outstanding creditors and/or shareholders before company struck off/dissolved from Companies House register

59
Q

Administration vs liquidation?

A
  • Administration - administrator appointed to manage company’s affairs on behalf of creditors
  • Liquidation - shutting down of company and selling off assets to pay creditors
60
Q

What is bankruptcy?

A
  • Way for individuals to deal with debts they can’t pay
  • Doesn’t apply to companies / partnerships
  • Assets shared among those you owe money to
  • Allows individual to make a fresh start free from debt (with some restrictions)
61
Q

RICS guidance on accounting principles?

A

Capital allowances

RICS APC QS (JL) (23 decks)

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