Accounting principles and procedures Flashcards
Can you explain the key components of a balance sheet?
Balance Sheet Components: A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It includes three main components: assets, liabilities, and equity. Assets are what the company owns, liabilities are what it owes, and equity represents the owner’s stake in the company.
Why are balance sheets important in assessing a company’s financial position?
It is crucial because it shows the company’s net worth and financial stability. Assessors might be interested in how you use this information to evaluate a contractor’s ability to meet obligations on a project.
How would you use a profit and loss statement to assess a company’s performance?
By analyzing the P&L statement, you can determine the company’s profitability, cost efficiency, and revenue streams. For instance, consistent profits indicate financial stability, which is crucial for ongoing projects. It’s important to consider trends over multiple periods rather than just one.
What is a profit and loss Statement ?
This statement shows the company’s revenues, costs, and expenses over a period, leading to a net profit or loss
What is Cashflow management?
Cashflow management ensures that a company has enough liquidity to meet its short-term obligations, which is critical for keeping projects on track.
What is Cashflow forecast?
A cashflow forecast predicts the flow of cash in and out of a business over a specific period. It is used to evaluate whether the company will have sufficient cash to meet project needs. Proper management of cashflow can prevent delays due to insufficient funds.
How do you use liquidity ratios to assess financial performance?
These ratios, like the current ratio or quick ratio, measure a company’s ability to meet short-term obligations. A higher ratio indicates better liquidity, which is crucial for project continuity.
How do you use profitability ratios to assess financial performance?
Ratios like net profit margin or return on assets measure the efficiency of a company in generating profit relative to revenue, assets, or equity. They help assess whether the company can sustain profitability in the long term.
What are credit checks?
Credit checks assess a contractor’s financial health and creditworthiness, ensuring they are capable of fulfilling their contractual obligations. This reduces the risk of project delays or defaults.
What are Dunn & Bradstreet Reports?
D&B reports provide a comprehensive overview of a company’s financial health, including credit scores, payment history, and public records.
What strengths and weaknesses might you find in a Dunn & Bradstreet (D&B) report?
Strengths: They offer an extensive analysis of a company’s creditworthiness and financial stability, which can be valuable in decision-making.
Weaknesses: The data might not be up-to-date, and smaller contractors might not have extensive records, potentially leading to incomplete assessments.
What financial contractual safeguards would you recommend for a project and why?
- Performance Bonds
- Retention Bonds
- Parent Company Guarantees
These safeguards help mitigate financial risk by ensuring there is a financial recourse if the contractor fails to meet contractual obligations.
What are Performance Bonds?
These are guarantees from a third party ensuring the contractor completes the project as per the contract. They protect against contractor default.
What are retention bonds?
These replace retention money with a bond, ensuring that funds are available to fix any defects after project completion.
What are parent company guarantees?
These provide a guarantee from the parent company of the contractor, ensuring project completion or covering losses if the contractor fails.
Can you explain how IFRS impacts the financial reporting of construction companies?
International Financial Reporting Standards (IFRS) impact construction companies by providing a framework for consistent financial reporting.
How do profit and loss statements and cash flow statements differ?
The Profit and Loss Statement (P&L), or income statement, shows a company’s revenues, expenses, and profits over a specific period. It indicates how well the company is performing operationally by reflecting profitability.
The Cash Flow Statement details the cash inflows and outflows from operating, investing, and financing activities. It shows how cash is generated and used, providing insight into the company’s liquidity and ability to meet short-term obligations.