Accounting Principles and Procedures

Question 1

What are management accounts?

Answer 1

Accounts prepared by a company for internal management use.

Question 2

What are financial accounts?

Answer 2

Financial Accounts are accounts for external stakeholders.

Question 3

What are overheads?

Answer 3

• Rent / Leasing Costs
• Utility Bills
• Staff Salaries
• Insurance

Question 4

What is a Liquidity Ratio?

Answer 4

The organisations ability to turn assets into cash in order to pay debts

Question 5

What are Profitability Ratios?

Answer 5

Used to assess a business’ ability to generate earnings, relative to its revenue, operating costs, balance sheet assets, using data from a specific point of time

Question 6

What is a Gearing Ratio?

Answer 6

Measures the proportion of a companies borrowed funds to its equity. The ratio indicates the financial risk to which a business is subjected.

Question 7

What are the key financial documents that companies produce?

Answer 7

• Profit and Loss account
• Balance Sheet
• Cash flow forecast

Question 8

Explain the difference between ‘gross’ and ‘net’ in accounting terms?

Answer 8

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

Question 9

What is expenditure?

Answer 9

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

Question 10

What is a balance sheet?

Answer 10

A ‘Snapshot’ of a companies financial position at a given point in time. It reports on a company’s assets, liabilities and ownership equity.

Question 11

What is a cash flow forecast?

Answer 11

A cashflow forecast is a plan that shows you how much money you expect your business or project to receive and pay out over a set period.

Question 12

What is the cash flow forecast used for?

Answer 12

• Understand the impact on future plans and possible outcomes
• Keep track of overdue payments
• Manage surplus cash
• Check whether spending’s / earnings are on track

Question 13

Why is a cash flow important for a construction project?

Answer 13

• Allows the Client to gain an understanding of their financial commitment over the duration of the project.
• 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 14

What is a profit and loss account?

Answer 14

Shows a companies revenues and expenses over a particular period of time and shows whether a business has made a profit or loss.

Question 15

What is the difference between a Profit and Loss and a Balance Sheet?

Answer 15

A Balance sheet in a financial snapshot at one given time whereas the profit and loss shows the profit or loss over a determined period.

Question 16

What is insolvency?

Answer 16

The inability to pay off debts or creditors. Generic term uses for bankruptcy.

Question 17

What are signs of Contractor insolvency on a construction project?

Answer 17

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

Question 18

What is the difference between administration and liquidation?

Answer 18

• Administration is where someone is appointed to manage the companies affairs on behalf of creditors
• Liquidation involves shutting down the company and selling of the assets to pay off the creditors.