Accounting Principles and Procedures

Question 1

What is VAT?

Answer 1

Value Added Tax.

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 company receives from normal business activities.

Question 5

What are business overheads?

Answer 5

The indirect costs of operating a business. Rent/Leasing costs, utility bills, staff salaries, insurance.

Question 6

Why does a business keep company accounts?

Answer 6

Tax purposes, demonstrates the company’s financial standing, to ensure cash flow and profitability in a company are correctly managed.

Question 7

What are management accounts?

Answer 7

Financial reports produced for business owners and managers. They summarise business’ current financial health and are a valuable tool for making strategic decisions.

Question 8

What is the difference between management and financial accounts?

Answer 8

Financial accounts describe the performance of a business and must be filed with Company’s House. 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

It is a bank account that allow payments to be made directly and simultaneously to the contractor and members of the supply chain. 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 tax depreciation?

Answer 11

The depreciation expense claimed by a tax payer on a tax return to compensate for the loss in the value of tangible items. Examples include plant, property, and equipment.

Question 12

Please name three types of accounting ratios?

Answer 12

Liquidity = Current Assets / Current Liabilities
Profitability = Gross Profit (Revenue – Cost of goods sold / Revenue)
Gearing = Long term liabilities / Capital Employed

Question 13

What is financial leverage?

Answer 13

Financial leverage is the use of borrowed money to finance the purchase of assets with the expectation that 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, while net is the total after deductions.

Question 17

Can you explain what shareholder equity is?

Answer 17

Equity represents the amount of money that would be returned to the company’s shareholders if all the assets were liquidated and all of the company’s debts were paid off in the case of liquidation. Effectively, the value that an owner has in the business.

Question 18

What is UK GAAP?

Answer 18

Generally Accepted Accounting Practice, is the regulatory body that establishes how accounts and financial reports should be prepared in the UK.

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 my own practice.

Question 20

What is expenditure?

Answer 20

Payment to purchase goods or services.

Question 21

What is capital expenditure?

Answer 21

CAPEX. Money spent to acquire or improve an asset, such as equipment or a building.

Question 22

What is operating expenditure?

Answer 22

OPEX. Operating costs current in the day-to-day running of a business. For example, servicing a machine, buying spare parts.

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

How would you administer Termination under an NEC4 ECC Contract if a Contractor had become insolvent?

Answer 24

Clause 90. Gives a list of Reasons for the Client to be able to terminate.

Question 25

What is a balance sheet?

Answer 25

A snapshot of a company’s financial position at a given point in time. It shows a company’s assets, liabilities, and shareholder equity.

Question 26

What are current assets?

Answer 26

Assets which a company expects to turn into cash within one year.

Question 27

What are current liabilities?

Answer 27

Short term debt, utilities, payroll due within a year.

Question 28

What are fixed assets?

Answer 28

Resources purchased for long-term use, not likely to be sold within 12 months. Plant/Machinery.

Question 29

What are fixed liabilities?

Answer 29

Long-term loans, bonds. Payable over a term exceeding a year.

Question 30

What is a profit and loss account?

Answer 30

A profit and loss account shows a company’s revenue and expenses over a particular period of time. These figures show whether the business has made a profit or loss over that set period.

Question 31

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

Answer 31

Balance sheet is a financial ‘snap shot’ showing the financial position. Profit and loss account shows the profit or loss over a determined period.

Question 32

What is insolvency?

Answer 32

The inability to pay off debts or creditors

Question 33

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

Answer 33

A Dun & Bradstreet report, Experian.

Question 34

What are signs of contractor insolvency?

Answer 34

Slowing down of works, supply of material drying up, increase in defective work, complaints from subcontractor

Question 35

Under what circumstances might a quantity surveyor encounter insolvency?

Answer 35

A project where a contractor or subcontractor who is having serious financial difficulties cannot pay their debts. You may be approached by a client who has a project where the contractor has ceased trading and needs advice.

Question 36

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

Answer 36

Read the RICS Termination of Contract, Corporate Recovery and Insolvency guidance note. Inform all parties to secure the site, inform the bondsman, consider stopping payments and seek legal advice, take ownership of materials off-site, value work completed and value of any defects, terminate the building contract and appoint another Contractor to complete the work.

Question 37

What is liquidation?

Answer 37

Formal process which brings the closure of a limited company. All company assets will be sold for the benefit of creditors/shareholders, before the company is taken off Companies House.

Question 38

What is the difference between Administration and Liquidation?

Answer 38

Administration is where 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 of its assets to pay off its creditors.

Question 39

What is bankruptcy?

Answer 39

Bankruptcy is a way for individuals to deal with debts they cannot pay. It does not apply to companies. Assets are shared among those you owe money to (creditors). Allows the individuals to make a fresh start debt free (with restrictions).