Accounting Principles and Procedures

Question 1

What is the Companies Act 2006?

Answer 1

1. Main piece of UK legislation that govern how UK companies are managed, run and financed.

Question 2

What are they key points included in the Companies Act 2006?

Answer 2

1. Annual accounts must be issued including a profit and loss account, a balance sheet and cash flow statements.
2. Requires companies to keep accounting records i.e. when, where, how much, to who etc.
3. Confirmation statements – annual statements required.

Question 3

What must a business provide each year?

Answer 3

1. Annual accounts must be issued including a profit and loss account, a balance sheet and cash flow statements.

Question 4

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

Answer 4

1. A balance sheet shows the value of everything the company owns made up of its assets and liabilities. This demonstrates the value of the business at any given time.
2. A profit and loss account demonstrates a company’s sales, running costs, and profit or loss over a financial period (year). Used to show sales VS expense and to identify non-profitable work.
3. A cashflow statement is the summary of the actual or anticipated ingoing and outgoings of cash in a firm over the accounting period. It measures short-term ability to pay off its bills.

Question 5

What is a Dunn and Bradstreet report? What is the purpose of this?

Answer 5

A commercial credit report about a company’s financial health, payment history, credit scores, legal events etc. D&B reports help with assessing risk, evaluating potential contractors, etc.

Question 6

What signs would show whether a contractor’s financials are healthy or not?

Answer 6

If a contractor is financially struggling, they may overclaim significantly on interim payments, there may be less labour on site and walk offs, and late payments to supply chain.

Question 7

What is the difference between assets, liabilities, and equities?

Answer 7

1. Assets = things your business owns.
2. Liabilities = things your business owes.
3. Equities = what’s left over after the above.

Question 8

Are you aware of any financial ratios?

Answer 8

1. Liquidity ratios
   a. Measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
   b. Current assets / current liabilities
   c. Usually around 1.5, depending on sector of activity.
   d. Ratio of 0.75 or less is usually an early sign of insolvency.
2. Profitability ratios
   a. Measure a performance of a company in generating its profits.
   b. Turnover – (cost of sales / turnover).
   c. Low margins could be a growth strategy and do not always result from bad company management.
3. Financial gearing ratios
   a. Measure the financial structure of a company, which are crucial indicators for the external suppliers of debt and equity, and for internal management.
   b. Companies’ debt / equity.
   c. Help to measure insolvency (high geared companies rely on borrowing).