Accounting principles and procedures Flashcards

Question

What are Profitability Ratios?

Answer 1

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 the management.

Answer 2

Financial Gearing Ratios measure the financial structure of the company which are crucial indicators for the external suppliers of debt and equity as well as for internal management. They help to measure insolvency. Highly geared companies rely mainly on borrowing. The payment of interests reduces the profits.

Answer 3

- To aid in preparing their own business accounts. - For assessing the financial strength of contractors and those tendering for contracts. - For assessing competition.

Answer 4

- 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

Answer 5

Creditors: business entities that are owed money by another entity that they have extended credit to. e.g. if you provided services to a client and they owe your fees, you are a creditor to that client. Debtors: business entities that owe money to another respective company. e.g. if you have used a sub-consultant and still owe them payment of their fees, you become a debtor of the subconsultant.

Answer 6

The accounts prepared by a company for internal management use. Accounts prepared for a lender e.g. a bank to evaluate how you repay funding. These accounts are not audited externally.

Answer 7

Shows the value of everything the company owns made up of its assets and liabilities. The balance sheet demonstrates the value of the business at any given point in time.

Answer 8

S-curve means STANDARD. Refers to the shape of the expenditure profile when shown in graphical form. - During the start of a project the rate of expenditure is typically lower due to site setup and lower value enabling works. -As the scheme progresses to the middle of the programme, the rate of expenditure increases as more expensive building components are installed. - Towards the back end of the programme the rate of expenditure will slow down which is shown by a flattening S-curve.

Answer 9

- 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.

Answer 10

A separate account owned by a third party, held on behalf of two other parties. A bank account with defined contractual conditions for the release of funds. They can be used as a project bank account. Mechanisms must be in place for the release of funds such as payment certificates.

Answer 11

To assess the financial strength of contractors at Pre-Qualification stage and tender stages.

Answer 12

- The client's accountants will carry out the detailed analysis but I can look at the warning signs by calculating ratios - I should 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.

Answer 13

I use the credit safe website or produce a dunn and bradstreet report to which my company subscribes to assess 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 all the information on to my client's accountants for further analysis.

Answer 14

- 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.

Answer 15

- I would explore the option of requesting a performance bond that my client could call on if the main contractor failed to perform. - I would review the tender submission to ensure it isn't excessively frontloaded. - 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.

Answer 16

Tax depreciation is where the declining value of an asset is offset against a company’s taxable profit. The depreciation in value can be recorded as an expense in order to reduce the amount of taxable income. This can be applied on things such as plant, tools, vehicles, computers, furniture and buildings.

Answer 17

Current assets can normally be converted into cash within one financial year and are regarded as assets that allow day to day operation of the business. Examples may include money owed to the company following sales of its products or services, inventory and prepaid expenses. Fixed assets typically cannot be converted into cash within one year. These kinds of assets are recorded on a company’s balance sheet as fixed assets the company owns on a long term basis. Examples include vehicles, office furniture, machinery, buildings and land.

Answer 18

Financial leverage is the concept of using borrowed funds in the form of debt to enhance business operations and increase the company’s profitability and rates of return. In the event that the rate of return invested via borrowed funds is higher that the interest on those funds then more profit can be generated.

Answer 19

Tax depreciation is where the declining value of an asset is offset against a companies taxable profit. The depreciation in value can be recorded as an expense in order to reduce the amount of taxable income. This can be applied on things such as plant, tools, vehicles, computers, furniture and buildings.

Answer 20

The terms overheads refers to the operating cost of the business that are incurred on an ongoing basis. Overheads can be both fixed or variable for example:- Fixed overheads could take the form of rent on office buildings or building insurance costs that do not change each month. Variable overheads tend to fluctuate depending on the activity of the business for example delivery or utility charges.

Answer 21

A Project Bank Account (PBA) is a dedicated, ring-fenced bank account used in construction projects to manage payments securely and transparently. It is designed to ensure that all parties involved in a project including subcontractors, suppliers, and the main contractor receive payments directly and promptly from the account, minimising the risk of late or non-payment. A PBA is set up at the start of a construction project, with agreements in place between the employer, main contractor, and participating subcontractors on how payments are made. The employer deposits funds into the PBA for work completed with payments then made simultaneously to all parties listed in the PBA agreement based on pre-agreed terms which bypasses the traditional hierarchical payment flows from Client to Main Contractor down to supply chain level.

Answer 22

Escrow accounts are contractual agreements that are used as financial instruments within a transaction. The asset or currency being transferred between two primary parties is held by an intermediary third party. The currency being exchanged is held securely by the third party until each of the 2 parties have met their contractual obligations allowing the money to then be transferred. This is often used by mortgage lenders when completing on the buying or selling of the real estate being exchanged.

Answer 23

Company accounts are required in order to:- Record and measure a companies profitability. For tax calculation purposes including calculating taxable deductions. Legislation requires companies to keep accurate records. Business Growth is encouraged by identifying profitable operations whilst also allowing management to minimise any loss making activities.

Answer 24

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 (its assets) and what it owes (its liabilities) at a given point in time.

Answer 25

It is the summary of the actual or anticipated ingoing and outgoing cash in a firm over the accounting period. It is broken down into operating, investing and financing activities. It measures the short term ability of a firm to pay off its bills.

Answer 26

A cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity. On construction projects they usually show as an ‘S’ curve. There is typically smaller financial outlay at project commencement, a steep increase during the midway point and a tapering off towards the end.

Answer 27

This is required in order to:- Review and have an understanding of their own firms accounts. To assess the financial strength of contractors and those tendering for contracts. For reviewing the profitability and sustainability of the businesses they engage with. Credit insurers and bond insurers may also require input from surveyors on any policies they provide.

Answer 28

Creditors are companies that another firm owes money to for example if you owe a sub-consultant a payment for their fees then they are a creditor. Debtors are companies that owe money to another firm for example a client who is due to make a payment of their fees is a debtor.

Answer 29

GAAP, which stands for Generally Accepted Accounting Principles, is a set of standardized accounting rules and practices used to guide how companies prepare and present financial statements.

Answer 30

IFRS is used globally, while US GAAP is primarily used in the United States.

Answer 31

International Financial Reporting Standards: International Financial Reporting Standards, are a set of globally used accounting standards that provide a framework for preparing financial statements.

Answer 32

accrual principle, the matching principle, the historical cost principle, the conservatism principle, the going concern principle.

Answer 33

Costs should be reported when they are known, not when the cash/monies are received. This concept states that transactions should be recorded when they occur, not when cash changes hands. For example, if a company provides services in December but receives payment in January, the revenue is recorded in December.

Answer 34

This principle requires expenses to be matched and recorded with their respective revenues in the period they were incurred, not when they are paid. In line with accrual principle

Answer 35

This principle dictates that assets should be recorded at their original cost when acquired, rather than their current market value.

Answer 36

This concept encourages accountants to be cautious in their estimates and judgments, particularly when there is uncertainty.

Answer 37

This principle assumes that a business will continue operating indefinitely. It means that the business is not in a state of liquidation or dissolution, and financial statements are prepared with this assumption in mind.

Answer 38

A way for individuals to deal with debts that they cannot pay. a legal process that allows individuals who cannot repay their debts to have those debts, in most cases, cancelled or written off

Answer 39

a specific timeframe used for tracking and reporting a company's financial performance and position

Answer 40

means that the business is treated as a separate entity from its owners, even if it's a sole proprietorship. This concept ensures that the business's financial records and assets are distinct from the personal finances and property of the owner(s).

Answer 41

Administration aims to rescue a failing company by restructuring it and allowing it to continue trading, while liquidation is a process of winding up a company and selling its assets to repay creditors.

Accounting principles and procedures Flashcards

(65 cards)