Accounting Principles and Procedures

Question 1

What are the key financial statements that companies provide?

Answer 1

1. Profit and loss accounts.
2. Balance sheets.
3. Cash flow statements.

Question 2

What is the difference between management and financial accounts?

Answer 2

Management - For internal use of the management team.
Financial - The company accounts that are required by UK law.

Question 3

What is a profit and loss account?

Answer 3

1. Shows the incomes and expenditures of a company and the resulting profit or loss over a financial period (usually 1 year).
2. They are used to show sales vs expenses (invoicing vs time and disbursements).
3. They can also be used to identify non-profitable work.

Question 4

What is a balance sheet?

Answer 4

It shows what a company owns (its assets) and what it owes (its liabilities) at a given point in time and shows the value of a business.

Question 5

What is a cashflow statement?

Answer 5

1. A summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
2. It measures the short-term ability of a firm to pay off its bills.

Question 6

What are capital allowances?

Answer 6

Tax relief on certain items purchased for example tools and equipment.

Question 7

What are sinking funds?

Answer 7

Funds that are set aside for future expenses or long-term debt.

Question 8

What is insolvency?

Answer 8

An inability to pay debts where liabilities exceed assets.

Question 9

What is companies house?

Answer 9

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

Question 10

What is HMRC?

Answer 10

His Majesties Revenue and Customs.

Question 11

What are liquidity ratios?

Answer 11

1. Measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
2. Liquidity ratio calculation = current assets/ current liabilities.
3. The ratio is usually around 1.5.
4. A liquidity ratio of less than 0.75 can be an early indicator of insolvency.

Question 12

What are profitability ratios?

Answer 12

1. Measure the performance of a company in generating its profits.
2. The trading profit margin ratio = turnover - (cost of sales / turnover)
3. Low margins may be due to a growth strategy from the company and do not always result from bad management.

Question 13

Why do QS’s need to understand and be able to interpret company accounts?

Answer 13

1. To aid in preparing their own business accounts.
2. For assessing the financial strength of contractors and those tendering.
3. For assessing competition.

Question 14

What is the purpose of Profit and Loss?

Answer 14

1. To monitor and measure profit (or loss).
2. To compare against past performance and against company budgets.
3. For valuation purposes and to compare against competitors.
4. To assist in forecasting with future performance.
5. To calculate taxation.

Question 15

What’s the difference between creditors and debtors?

Answer 15

Creditors - Are business entities that are owed money by another entity that they have extended credit to.
Debtors - Business entities that owe money to another company.

Question 16

What are management accounts?

Answer 16

1. Accounts prepared by a company for internal management use.
2. Accounts prepared for a lender e.g. a bank.
3. The accounts are not audited externally.

Question 17

What is a financial statement?

Answer 17

Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses.

Question 18

What is a cashflow statement?

Answer 18

1. Summarises the amount of cash or cash equivalents entering and leaving a company or project entity.
2. On construction projects they usually show as an ‘S’ curve.
3. There is typically a small financial outlay at the start, a steep increase during the midway point and a taper towards the end.

Question 19

Why are cash flow forecasts used by QS’s?

Answer 19

1. To track, analyse and assess business accounts and performance.
2. For assessing the financial strength of contractors.
3. To compare actual progress of the work against pre-contract predictions.

Question 20

What are Escrow accounts?

Answer 20

1. A separate account owned by a 3rd party, held on behalf of 2 other parties.
2. A bank account with defined contractual conditions for the release of funds.
3. They can be used as a project bank account.
4. Mechanisms must be in place for the release of funds such as payment certificates.

Question 21

What are the signs of insolvency in company accounts or credit checks?

Answer 21

1. A low credit rating.
2. A liquidity ratio below 0.75.
3. A falling working capital ratio suggesting that the company has taken on more contracts than it can finance.
4. A low return on equity.
5. A highly geared company that is heavily reliant on loans.
6. A falling cashflow statement.