Accounting Principles and Procedures

Question 1

What is VAT?

Answer 1

• Value-added tax.
• VAT is a tax added to most products and services sold by VAT-registered businesses.

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 indirect costs or fixed expenses of operating a business such as:
- Rent / leasing costs.
- Utility bills.
- Staff salaries.
- Insurance.

Question 6

Why does a business keep company accounts?

Answer 6

• 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 are correctly managed.

Question 7

What are management accounts?

Answer 7

• Management accounts are financial reports produced for business owners and managers.
• They summarise the business’ current financial health and are a valuable tool that can be used to make strategic decisions.

Question 8

What is the difference between management and financial accounts?

Answer 8

• Financial accounts describe the performance of the 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 9

What is an escrow account?

Answer 9

An escrow account is a type of legal holding bank account for monies, which can’t be released until predetermined conditions are satisfied.

Question 10

What is a project bank account?

Answer 10

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

Question 11

Can you explain the principle of tax depreciation?

Answer 11

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 12

Please name three types of accounting ratios?

Answer 12

• 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.
• 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.

Question 13

What is financial leverage?

Answer 13

Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing.

Question 14

What are capital allowances?

Answer 14

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 15

What are the core financial statements which companies might produce?

Answer 15

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

Question 16

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

Answer 16

• Gross refers to the total amount of income before deductions
• Net is the total after deductions or adjustments.

Question 17

Can you explain what shareholder equity is please?

Answer 17

• Equity represents the amount of money that would be returned to the company’s Shareholders if all of the assets were liquidated and all of the company’s debt was paid off in the case of liquidation.
• It is effectively the value that an owner (such as a company director) has in the business.

Question 18

What is UK GAAP?

Answer 18

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

Question 19

Why is it beneficial for surveyors to understand company accounts?

Answer 19

• 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 20

What is expenditure?

Answer 20

Expenditure represents a payment to purchase goods or services.

Question 21

What is capital expenditure?

Answer 21

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

Question 22

What is operating expenditure?

Answer 22

• Known as OPEX (operating expenditure).
• Operating expenses are costs incurred in the day-to-day running of the business. For example, servicing a machine, buying spare parts, etc.

Question 23

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

Answer 23

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

Question 24

What is a balance sheet?

Answer 24

• A balance sheet is a ‘snapshot of a company’s financial position at a given point in time.
• It shows the company’s net worth and overal financial health by recording assets, liabilities and shareholder equity.

Question 25

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

Answer 25

Assets - buildings, land, equipment, etc. owned by the company.

Liabilities - a loan or debt.

Question 26

What are current assets?

Answer 26

A current asset, sometimes called a liquid asset, is a short-term asset that a company expects to use up, convert into cash, or sell within one fiscal year or operating cycle.

Question 27

What are fixed assets?

Answer 27

• Fixed assets are resources purchased for long-term use in the business and are not likely to be sold for cash within 12 months.
• Fixed assets are typically used by a business to generate income. They may also be referred to as property, plant and equipment and recorded like that on a balance sheet.

Question 28

What is the difference between debtors and creditors?

Answer 28

• Creditor - an individual or business that has lent funds to a business and is owed money.
• Debtor - an individual or business who has borrowed funds from another and so owes it money.

Question 29

What is a cash flow forecast?

Answer 29

• A cash flow 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 identify when money will enter and leave a bank account.

Question 30

What is a cash flow forecast used for?

Answer 30

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

Question 31

Why is cash flow important for a construction project?

Answer 31

• Allows the client to gain an understanding of 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 32

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

Answer 32

• Cash flow forecasts can predict when a business or project has money to pay out and when money is coming in.
• This can highlight if the business or project will have negative cash flow, meaning they can do something about it in good time.

Question 33

What is a profit and loss account?

Answer 33

• A profit and loss account shows a company’s revenue and expenses over a particular period, typicaly 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 34

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

Answer 34

• 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 35

What is insolvency?

Answer 35

• 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 36

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

Answer 36

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

Question 37

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

Answer 37

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

Question 38

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

Answer 38

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

Question 39

Under what circumstances might a quantity surveyor encounter insolvency?

Answer 39

• 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 coule appointed by an external body (generally a liquidator or administrator) to prepare a report on a commercial aspect of the project.

Question 40

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

Answer 40

• 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 41

What is liquidation?

Answer 41

• 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 42

What is the difference between administration and liquidation?

Answer 42

• 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 its assets to pay off creditors.

Question 43

What is bankruptcy?

Answer 43

• 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).