Accounting Principles and Procedures

Question 1

What are the 3 key financial statements?

Answer 1

1. Balance Sheet
2. Cash Flow Statement
3. Profit & Loss Statement

Question 2

What is a Balance Sheet?

Answer 2

A balance sheet provides a snap shot of a company’s assets, liabilities and equity at a specific point in time.

It can be used to assess its financial health, and be compared with previous balance sheets to identify trends.

Demonstrates the value of the business at any given point in time

Question 3

What is a Cash Flow Statement?

Answer 3

It shows cash moving in and out of a company over a specific period.

The statement will show the net cash-flow position, which helps assess liquidity and shows changes in assets, liabilities and equity.

Measures the short-term ability of a company to pay off its bills

Question 4

What is a Profit & Loss Statement?

Answer 4

Also known as the income statement. It shows the income and expenditure of the company over a specific period.

Can be used to calculate the company’s profit margin and how how efficiently the company converts revenue into profit.

Allows you to monitor profit (or loss), compare against past performance and budgets, forecast for the future

Question 5

What is a credit check?

Answer 5

It is a check of the potential risk of lending money to someone and what the likelihood is of them failing to pay back.

A method of ascertaining the financial reliability of the entity by checking their recent finance history and repayment record. The higher the score the better.

Question 6

Why is a credit check important?

Answer 6

Helps to mitigate procurement risks.

Can highlight potential future issues, such as the contractor failing to pay subcontractors or suppliers, delaying the project.

For new clients - an indicator of whether they will actually pay for the work you do for them.

Question 7

How do you carry out a credit check?

Answer 7

TFT have a credit team to do this, they use D&B Finance Analytics.

A live report is produced which breaks everything down into digestible data, such as maximum credit recommendation and risk level.

Question 8

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

Answer 8

Increased risk of the contractor not being able to performance their contracted duties.

Increased risk of the contractor’s insolvency (the inability to pay debts and when your liabilities exceed your assets).

It could present increased risk of the contractor failing to deploy sufficient resources and materials to the project.

Question 9

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

Answer 9

I would explore the option of requesting a performance bond that my client could call on if they Main Contractor failed to perform.

I would also review the tender submission to ensure this is not excessively front loaded.

When reviewing interim valuations, I would ensure that these are accurate and not over claimed.

Question 10

What is a Fee Proposal?

Answer 10

A crucial document used to make sure that you and the client are on the same page.

It sets out the services that you propose to undertake and the fee that the client will be charged for this.

Clarifies timescales and exclusions (to prevent scope creep).

Question 11

Why are accounting principles important to a building surveyor?

Answer 11

Allows you to assess the financial strength of a contractor who is tendering for a contract.

Important if you decide to go solo and need to fulfil your legal obligations as a sole trader or an employer.

Question 12

What do companies need to provide every year in accordance with the Companies Act 2006?

Answer 12

Annual accounts must include:
- Balance sheet
- Profit and loss account
- Directors report
- Cash flow statement

Question 13

Why do you need to keep accounts?

Answer 13

To keep track of money coming and money going out so they know they can pay their bills and suppliers etc.

So you can monitor profit and loss and company performance.

For future business planning.

To u se the information to highlight any problem areas so they can be investigated and solved.

So they can submit annual financial statements to Companies House.
In accordance with Companies Act 2006 limited companies must provide their year-end accounts in accordance with a legal format.

Question 14

What is the difference between Management and Financial Accounts?

Answer 14

Management accounts are used internally to measure performance. These are not externally audited.

Financial accounts required by UK law and these company accounts have to be provided each year.

Question 15

What is meant by the terms Gross and Net?

Answer 15

In salary terms, In salary terms, Gross is your total salary and Net is your total salary minus tax and all other deductions.

Question 16

What is the Construction Industry Scheme (CIS)?

Answer 16

A scheme (set out in legislation) that requires contractors to make tax deductions on behalf of their subcontractors.

These deductions count towards the subcontractors’ tax and National Insurance, spreading the payments out over time instead of one lump sum at the end of the tax year.

Designed to minimise tax evasion within the construction industry.

Question 17

What are KPIs?

Answer 17

Measurable markers that help to provide a strategic focus for a particular activity and gauge success.

Question 18

What are the different kinds of Financial Ratios?

Answer 18

Profitability ratios measure how much profit an organisation makes, such as gross profit which is (gross profit / sales revenue) x 100.

Liquidity ratios measure the ability of a company to pay off its current liabilities. Liquidity rate = current assets / current liabilities. The ratio is expected to be around 1.5, a ratio of less than 0.75 is an indicator of insolvency.

Gearing ratios a type of financial ratio that helps when analysing a company’s capital structure and financial leverage. It represents the proportion of debt finance relative to equity held in a company. A high gearing ratio is above 50%, a low ratio is below 25%.

Question 19

What is the difference between debtors and creditors?

Answer 19

Debtor - business entities that owe money to another company. If you have a sub-contractor that you owe payment to - you are a debtor to them.

Creditor - business entities that are owed money by another entity that they have extended credit to - if you have provide services to a client and they owe you payment - you are a creditor to that client.

Question 20

What is meant by ‘drawdown’?

Answer 20

Typically in property development finance it can refer to the incremental or periodic funding of a project. A drawdown on financing (such as a loan) may be taken in stages to finance a project.

Question 21

What is the difference between a Sole Trader, Partnership, Limited, and a LLP?

Answer 21

Sole Trader
A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses (unlimited liability).
Partnership
A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business.
Limited
In a limited company, the shareholders’ liability is limited to the capital they originally invested. If such company becomes insolvent, the shareholders personal assets remain protected. Shares in a private limited company are not offered to the general public (distinguishing it from a public limited company - plc.)
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.

Question 22

What is Insider Training?

Answer 22

The trading of a public company’s stock or other securities (such as bonds or stock options) by individuals with access to private non-public information about the company.

Question 23

What is an auditor?

Answer 23

The person responsible for ensuring that a company’s financial statements are in good order and in compliance with generally accepted accounting principles (GAAP).

Question 24

What are GAAP?

Answer 24

Generally Accepted Accounting Principles
10 principles including:
- Principal of regularity (accountants adhere to rules and laws)
- Principal of consistency (standards are applied throughout)
- Principal of materiality (reports are a true full representation)
- Principal of utmost good faith (all parties are acting honestly)

Question 25

What are IAS?

Answer 25

International Accounting Standards
Adopted by most major financial markets around the world, however the USA follows GAAP.

Differences to GAAP - whats included on a balance sheet and cash flow statement is different, IAS is more flexible and GAAP is more prescriptive