Accounting Principles and Procedures

Question 1

What is the difference between management and financial accounts?

Answer 1

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

Question 2

Why does a business keep company accounts?

Answer 2

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

Question 3

What is a project bank account?

Answer 3

Ringfenced bank account (the money is held in escrow).
Ensures contractors, key subcontractors and key members of the supply chain are paid on the contractually agreed dates.
Usually, mechanisms are in place for the release of funds (such as pavment certificates).

Question 4

Explain the principle of tax depreciation?

Answer 4

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

Question 5

Name three types of accountancy ratios?

Answer 5

Liquidity ratios - The organisation’s ability to turn assets into cash in order to pay debts.
Profitability ratios - 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 funds to its equity. The ratio indicates the financial risk to which a business is subjected, since excessive debt can lead to financial difficulties

Question 6

What is financial leverage?

Answer 6

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

Question 7

What are capital allowances?

Answer 7

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 8

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

Answer 8

Profit and loss account
Balance sheet
Cash flow forecast

Question 9

Can you explain the difference between “gross” and “net”?

Answer 9

Gross = total before deductions
Net = total after deductions

Question 10

Why is beneficial for surveyors to understand company accounts?

Answer 10

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

Question 11

What is expenditure?

Answer 11

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

Question 12

What is capital expenditure?

Answer 12

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

Question 13

What is revenue expenditure?

Answer 13

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

Question 14

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

Answer 14

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

Question 15

What is a balance sheet?

Answer 15

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.

Question 16

What is meant by assets and the liabilities, please give examples?

Answer 16

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

Question 17

What is a current asset?

Answer 17

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

Question 18

What is a fixed asset?

Answer 18

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

Question 19

What is insolvency?

Answer 19

The inability to pay off debts or creditors

Question 20

Under what circumstance might a quantity surveyor encounter insolvency?

Answer 20

A project that you are working on may have a contractor or a subcontractor who is having serious financial difficulties which mean 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 21

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

Answer 21

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 employ others to complete.

Question 22

What is liquidation?

Answer 22

In its simplest form 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 23

What is the difference between administration and liquidation?

Answer 23

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

Question 24

What is bankruptcy?

Answer 24

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).