Accounting Principles and Procedures

Question 1

What is VAT?

Answer 1

Value-Added Tax

Question 2

What is corporation tax?

Answer 2

Corporation tax is paid by UK limited companies and some other organisations. It is based on the annual profits that a company makes.

Question 3

What is a financial audit?

Answer 3

An audit is an important term used in accounting that describes the examination and verification of a company’s financial records. It is to ensure that financial information is represented fairly and accurately.

Question 4

What is turnover?

Answer 4

Income or revenue that a company receives from its normal business activities, usually from the sale of goods and services to customers.

Question 5

What are business overheads?

Answer 5

The direct costs or fixed expenses of operating a business such as:
- Rent/leasing cost
- Utility bills
- Staff salaries
- Insurances

Question 6

Why does a business keep company accounts?

Answer 6

• Tax purposes (required by law)
• Demonstrates the company’s financial standing (support loan or borrowing applications)
• To ensure cash flow and profitability in a company are correctly managed

Question 7

What are management accounts?

Answer 7

• Management accounts are financial reports produced for business and must be filed with Companies House. They give precise data to external stakeholders such as investors, tax officials and business regulators.
• Management accounts are used by business owners and management for day-to-day and strategic decision making. They aren’t required by law, and they don’t have to be filed with Companies House.

Question 8

What is an escrow?

Answer 8

An escrow account is a type of legal holding bank account for monies, which can’t be released until predetermined conditions are satisfied. Typically, items are held in escrow until the process involving a financial transaction has been completed.

Question 9

What is a project bank account?

Answer 9

• These are ring-fenced bank accounts that allow for payments to be made directly and simultaneously to a main contractor and members of the supply chain.
• It is a cash flow disbursement model designed to protect the project from risk of supply chain insolvency and speed up payment times.

Question 10

Can you explain the principle of tax depreciation?

Answer 10

Tax depreciation is the depreciation expense claimed by a taxpayer on a tax return to compensate for the loss in the value of tangible assets. Examples include property, plant and equipment.

Question 11

Please name three types of accounting ratios?

Answer 11

• Liquidity ratio - the organisation’s ability to turn assets into cash in order to pay debts.
• Profitability ratio - used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders’ equity over time, using data from a specific point in time.
• Gearing ratio - Measures the proportion of a company’s borrowed fund to its equity. The ratio indicates the financial risk to which a business is subject, since excessive debt can lead to financial difficulties.

Question 12

What is financial leverage?

Answer 12

Financial leverage is an investment strategy of using borrowed money.
The use of various financial instruments or borrowed capital to increase the potential return of an investment.

Question 13

What are capital allowances?

Answer 13

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 14

What are the key financial statements/documents that companies produce?

Answer 14

• Profit and loss account
• Balance sheet
• Cash flow forecast

Question 15

Can you explain the difference between ‘gross’ and ‘net’ in accounting terms?

Answer 15

Gross refers to the total amount of income before deductions, while net is the total after deductions or adjustments.

Question 16

Can you explain what equity is?

Answer 16

It is effectively the value that an owner (such as a company director) has in the business. This can be calculated by deducting total liabilities from total assets on a company balance sheet.

Question 17

What is UK GAAP?

Answer 17

UK GAAP, short for Generally Accepted Accounting Practice in the UK, is a regulatory body that establishes how accounts and financial reports should be prepared in the UK.

Question 18

Why is it beneficial for surveyors to understand company accounts?

Answer 18

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

Question 19

What is expenditure?

Answer 19

Expenditure represents a payment with either cash or credit to purchase goods or services.

Question 20

What is capital expenditure?

Answer 20

• CAPEX (capital expenditure)
• Capital expenditure is spent to acquire or improve an asset such as equipment or buildings

Question 21

What is revenue expenditure?

Answer 21

• OPEX (Revenue expenditure)
• revenue expenses are costs incurred in the day-to-day running of the business. For example, servicing a machine, spare parts etc.

Question 22

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

Answer 22

They have different tax obligations; for example, CAPEX can benefit from capital allowances.

Question 23

What is a balance sheet?

Answer 23

• A balance sheet is a ‘snapshot’ of a company’s financial position at a given point in time. It reports on a company’s assets, liabilities and ownership equity.
• It can be used to assess its financial position or health and be compared with previous balance sheets to identify trends.

Question 24

What is meant by assets and liabilities, please can you provide examples?

Answer 24

Asset = a van or land which is owned
Liability = a loan or debt

Question 25

What is a current asset?

Answer 25

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

Question 26

What is a fixed asset?

Answer 26

Assets that are purchases for long-term use and are not likely to be converted quickly into cash, such as land, buildings and equipment.

Question 27

What is the difference between debtors and creditors?

Answer 27

Creditors = is an individual or business that has lent funds to a business and is owed money.
Debtor = is an individual or business who has borrowed funds from a business and so owes it money

Question 28

What is a cash flow forecast?

Answer 28

A cashflow forecast is a document which shows how much money you expect your business or project to receive and pay out over a set period. It can help plan how much you expect to make in sales and also spend in the future. It can also help you understand when money will enter and leave your bank account.

Question 29

What is the cash flow forecast used for?

Answer 29

• Understand the impact on future plans and possible outcomes.
• Keep track of overdue payments
• Plan for upcoming cash gaps
• Manage surplus cash
• Track whether spending is on target

Question 30

Why is cash flow important for a construction project?

Answer 30

• Allows the client to gain an understanding or their financial commitment over the duration of the project and when they are likely to spend the money.
• Can be used to estimate when external funding will be required
• Acts as a check against valuations and can give an early indication of financial difficulties.

Question 31

How does a cash flow forecast help a company remain solvent?

Answer 31

Cash flow forecast can predict when a business or project will have a negative cash flow, meaning they can do something about it in good time

Question 32

What is a profit and loss account?

Answer 32

A profit and loss account shows a company’s revenue and expenses over a particular period, typically either one month or consolidated months over a year. These figures show whether the business has made a profit or a loss over that period.

Question 33

What is the difference between a balance sheet and a profit and loss account?

Answer 33

• a balance sheet is a financial ‘snapshot’ at one given time showing the financial position of the company
• a profit and loss account shows the profit or loss over a determined period.

Question 34

What is insolvency?

Answer 34

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

Question 35

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

Answer 35

• Risk of contractor or supply chain insolvency
• Possibility of the contractor not performing satisfactory or having restricted resources.

Question 36

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

Answer 36

A Dun & Bradstreet report creates a business credit report that could be viewed like a personal credit report for businesses.

Question 37

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

Answer 37

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

Question 38

Under what circumstances might a quantity surveyor encounter insolvency?

Answer 38

• A project that you are working on may have a contractor or a subcontractor who is having serious financial difficulties which means they cannot pay their debts.
• You may be approached by a client who has a project where the contractor has ceased trading and needs advice.
• You could be appointed by an external body (generally a liquidator or administrator) to prepare a report on a commercial aspect of the project.

Question 39

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

Answer 39

• inform all parties involved and secure the site
• inform the bondsman (bank/insurance company)
• consider stopping pending payments to the contractor and seek legal advice
• take ownership of materials off-site (if paid for in valuations)
• schedule all plant and materials
• value completed works and value any defects
• monitor loss & expense incurred by the employer
• terminate the building contract and appoint another contractor to complete the work

Question 40

What is liquidation?

Answer 40

Liquidation is a formal process which brings about the closure of a limited company. As part of the process all company assets will be sold - or ‘liquidated’ - for the benefit of outstanding creditors and/or shareholders before the company is struck off - or dissolved - from the register held at Companies House.

Question 41

What is the difference between administration and liquidation?

Answer 41

• Administration is where someone (the administrator) is the appointed to manage the company’s affairs on behalf of the creditors.
• Liquidation involves the shutting down of a company and selling off its assets to pay off creditors.

Question 42

What is bankruptcy?

Answer 42

• bankruptcy is one way for individuals to deal with debts they cannot pay. It does not apply to companies or partnerships
• Assets are shared among those you owe money to (creditors)
• allows the individual to make a fresh start free from debt (with some restrictions)