Accounting Principles and Procedures Flashcards
What is a profit and loss statement?
A profit and loss statement summaries all the activity recorded in your income and expenses accounts over the specified time.
What is a balance sheet?
Reports a company’s assets, liabilities, and shareholder equity at a specific point in time.
What is a cashflow statement?
Financial statement that summarizes the movement of cash and cash equivalents (CCE) that come in and go out of a company.
How is the cashflow statement used?
The cash flow statement paints a picture as to how a company’s operations are running, where its money comes from, and how money is being spent.
How does a balance sheet work?
Asset = liability + shareholder equity
How does a P&L statement work?
Show how much profit or loss was generated by a business?
What is the difference between management and financial accounts?
Management accounts are for the internal use of the management team.
Financial accounts are the company accounts required by law.
What is the Company Act 2006?
It is a comprehensive piece of legislation that regulates all aspects of private and public companies.
This includes general guidance on accountancy obligations and details of accounts that companies must return annually.
What is the difference between a profit and loss account and a balance
sheet?
- A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss.
- The balance sheet shows what a company owns (it’s assets) and what it owes (it’s liabilities) at a given point in time.
What are Liquidity ratios?
- Liquidity rations measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
- Liquidity ratio calculation = current assets / current liabilities.
- The ratio is usually around 1.5 but it depends on the sector of activity.
- For example house builders often operate on a liquidity ratio over 3 because they retain high value assets in the form of unsold houses.
- A liquidity ratio of less than 0.75 can be an early indicator of insolvency.
What are Profitability ratios?
- Profitability ratios measure the performance of a company in generating its profits.
- The trading profit margin ratio = turnover – (cost of sales / turnover).
- Low margins may be due to a growth strategy from the company and do not always result from bad
management.
What is the purpose of a P & L?
- To monitor and measure profit (or loss).
- To compare against past performance and against company budgets.
- For valuation purposes and to compare against competitors.
- To assist in forecasting with future performance.
- To calculate taxation.
What is the difference between debtors and creditors?
Creditors are business entities that are owed money by another entity that they have extended credit to.
Debtors are business entities that owe money to another respective company
What are Management Accounts?
- The accounts prepared by a company for internal management use.
- Accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the funding.
- These accounts are not be audited externally.
What is an S-Curve?
S-Curve means ‘standard’ and refers to the shape of the expenditure profile when shown in graphical form.
Start of the project - lower
Mid point - Expenditure increase
Back end - Slows down
How is a S curved use by surveyors?
- To track, analyse and assess business accounts and performance
- For assessing the financial strength of contractors.
-To compare actual progress of the work against pre-contract predictions.
When have you used company accounts in your work?
To assess the financial strength of contractors at Pre-Qualification Stage and tender stages.
How do you analyse a company’s accounts?
- The client’s accountants will carry out the detailed analysis but I can look at the warning signs by calculating ratios such as liquidity ratios, profitability ratios and gearing ratios.
- I should always calculate the ratios myself as those included in the company accounts may have been manipulated.
- I should always use the group or consolidated accounts rather than the company accounts unless it is a limited company.
How do you carry out a credit check? Give an example.
- I use the Credit Safe website to which my company subscribes to access a company’s accounts.
- I considered both the group accounts and the company accounts.
- If the credit rating is low, I calculate some key ratios and pass on all the information to my client’s accountants for them to analyse further.
What are signs of insolvency in company accounts or credit checks?
- A low credit rating.
- A low return on equity.
- A falling cashflow statement
Why would you not recommend the appointment of a contractor with
a low credit rating?
- There may be an increased risk of the contractor not performing satisfactorily.
- It could present increased risk of the contractor failing to deploy sufficient resources and materials to the project.
- It could increase the risk of the contractor’s insolvency.
What measures would you recommend if your client wanted to
appoint a contractor with a low credit rating?
- 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. - A project bank account may also provide an additional level of assurance and should be considered.
- I would request a PCG.
