Accounting principles and procedures

Question 1

What is a cash flow forecast?

Answer 1

This is the forecast of money coming in and out of a business. In construction terms it is the forecast of the money going to from the client to the contractor at valuation intervals.
It measures the short term ability of a firm to pay off its bills.
It is the summary of the actual/anticipated ingoing/outgoing of cash in a firm over the accounting period.

Question 2

What are two other financial statements that a company has to produce on an annual basis?

Answer 2

Balance sheets and profit and loss statements.

Question 3

What is a balance sheet?

Answer 3

This is a financial statement that reports company’s assets, liabilities and equity at a moment in time, it is essentially a snapshot of a company’s assets and financial status.

Question 4

Asset

Answer 4

a resource with economic value that an individual or company owns or controls with the expectation that it will provide a future benefit

Question 5

Liability

Answer 5

debts or financial obligations that a business owes to another entity. Liabilities can be money, goods, or services that a business is obligated to pay.

Question 6

Equity

Answer 6

the value of a business that remains after subtracting its liabilities from its assets.
a company’s book value, which is the difference between liabilities and assets on the balance sheet

Question 7

What is a profit and loss sheet?

Answer 7

This is a company’s revenue, costs and expenses across a financial year.

Question 8

How do you compile a cashflow?

Answer 8

Initially generate an S-curve indicating spend across a period of time, or an accurate analysis of construction activities using the programme and key milestones/critical path, and the costs associated with these packages of work.

Question 9

Why do we produce a cashflow?

Answer 9

This is to forecast spend for a client to help ensure money is in the bank/ help them to manage their accounts and advise funders where necessary.

Question 10

What accounts and documents are required for firms to send to HMRC?

Answer 10

Tax returns which includes balance sheets, profit and loss accounts and auditors reports.

Question 11

What is a locum?

Answer 11

This is a professional who temporarily fulfils the position of another when they are unable to. This agreements enables an individual to be a signatory to a client account even if they do not work for the firm.

Question 12

What is IFRS?

Answer 12

International Financial Reporting Standards- accounting rules and standards

Question 13

What is the difference between profit and revenue?

Answer 13

Profit is after expenses and OH&P whereas revenue is the total income of a company over a set amount of time.

Question 14

Why is high turnover important to a company?

Answer 14

For winning business and to portray that as a company they are performing well- this encourages work winning and acquiring funding/insurances to prove overall growth.

Question 15

What are signs of insolvency?

Answer 15

1. Overvalued applications for payment
   2 Requesting to not use bonds or insurances
   3 Slow progression of works
   4 Front loading
   5 Silly amounts of variation claims

Low credit score
Liquidity Ratio less than 0.75
Falling working capital ratio
Low return on equity
highly geared company reliant on loans
falling cashflow statement

Question 16

What can be done to plan/mitigate risk of insolvency pre and post contract?

Answer 16

Pre-contract: financial checks and checking of frontloading of costs in cashflow, dunn and Bradstreet reports and credit checks
Post contract: value works properly and carefully, check materials on and off site properly.

Question 17

If a contractor went insolvent during construction, what would you advise your client?

Answer 17

Important to not pay the valuation and issue a pay less notice where a cert has recently been issued. Terminate the contract and start to secure the site and materials. Contact any necessary subcontractors and suppliers re continuing works. Novate the contract to a new contractor or form a new contract, depending on the stage.

Question 18

What is the difference between management accounts and financial accounts?

Answer 18

Management accounts are for the internal use of the management team whereas financial accounts are the company accounts that are required by UK law.

Question 19

What are capital allowances?

Answer 19

Tax relief on certain items purchased for the business e.g. tools and equipment.

Question 20

What are sinking funds?

Answer 20

Funds set aside for future expense or long term debt.

Question 21

What is meant by insolvency?

Answer 21

An inability to pay debts where liabilities exceed assets.

Question 22

What is Companies House?

Answer 22

An agency that incorporates and dissolves limited companies within the UK.

Question 23

What is HMRC?

Answer 23

His Majesties Revenue and Customs.

Question 24

What are Liquidity Ratios?

Answer 24

Liquidity ratios measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
LIQUIDITY RATIO = CURRENT ASSETS/CURRENT LIABILITIES
It is usually around 1.5 but depends on the sector of activity.
A ratio below 0.75 could be an early indicator of insolvency.

Question 25

What are Profitability Ratios?

Answer 25

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.

Question 26

What are Financial Gearing Ratios?

Answer 26

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.

Question 27

Why do Chartered quantity surveyors need to understand and be able to interpret company accounts?

Answer 27

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

Question 28

What is the purpose of Profit & Loss?

Answer 28

• 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

Question 29

What is the difference between debtors and creditors?

Answer 29

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.

Question 30

What are Management Accounts?

Answer 30

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.

Question 31

What is a balance sheet?

Answer 31

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.

Question 32

What is an S-Curve?

Answer 32

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.

Question 33

How are S-Curves used by Surveyors?

Answer 33

• 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.

Question 34

What are Escrow Accounts?

Answer 34

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.

Question 35

When have you used Company Accounts in your work?

Answer 35

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

Question 36

How do you analyse a company’s accounts?

Answer 36

• 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.

Question 37

How do you carry out credit checks with example?

Answer 37

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.

Question 38

If you client wanted to appoint a contractor with a low credit score what would you advise?

Answer 38

• 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.

Question 39

What measures would you recommend if your client insisted on appointing a contractor with a low credit rating?

Answer 39

• 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.