Accounting Principles and Procedures Flashcards
What are the key financial statements that companies provide?
- Profit and loss accounts.
- Balance sheets.
- Cash flow statements.
What is the difference between management and financial accounts?
Management - For internal use of the management team.
Financial - The company accounts that are required by UK law.
What is a profit and loss account?
- Shows the incomes and expenditures of a company and the resulting profit or loss over a financial period (usually 1 year).
- They are used to show sales vs expenses (invoicing vs time and disbursements).
- They can also be used to identify non-profitable work.
What is a balance sheet?
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.
What is a cashflow statement?
- A summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
- It measures the short-term ability of a firm to pay off its bills.
What are capital allowances?
Tax relief on certain items purchased for example tools and equipment.
What are sinking funds?
Funds that are set aside for future expenses or long-term debt.
What is insolvency?
An inability to pay debts where liabilities exceed assets.
What is companies house?
An agency that incorporates and dissolves limited companies within the UK.
What is HMRC?
His Majesties Revenue and Customs.
What are liquidity ratios?
- Measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
- Liquidity ratio calculation = current assets/ current liabilities.
- The ratio is usually around 1.5.
- A liquidity ratio of less than 0.75 can be an early indicator of insolvency.
What are 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 bad management.
Why do QS’s need to understand and be able to interpret company accounts?
- To aid in preparing their own business accounts.
- For assessing the financial strength of contractors and those tendering.
- For assessing competition.
What is the purpose of Profit and Loss?
- 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.
What’s the difference between creditors and debtors?
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.
What are management accounts?
- Accounts prepared by a company for internal management use.
- Accounts prepared for a lender e.g. a bank.
- The accounts are not audited externally.
What is a financial statement?
Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses.
What is a cashflow statement?
- 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 a small financial outlay at the start, a steep increase during the midway point and a taper towards the end.
Why are cash flow forecasts used by QS’s?
- 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.
What are Escrow accounts?
- A separate account owned by a 3rd party, held on behalf of 2 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.
What are the signs of insolvency in company accounts or credit checks?
- A low credit rating.
- A liquidity ratio below 0.75.
- A falling working capital ratio suggesting that the company has taken on more contracts than it can finance.
- A low return on equity.
- A highly geared company that is heavily reliant on loans.
- A falling cashflow statement.
What is the importance of a cashflow to a business?
Would you recommend the appointment of a contractor with poor financial standing? Why?
What measures could you put in place to protect your client if they insisted on appointing a contractor with a poor financial rating?
Why might you ask for a company’s turnover when carrying out a PQQ?
What information do Dun and Bradstreet reports give you?
As a chartered QS are you qualified to give financial advice to your client?
Why are accounting principles important for construction professionals?
Which documents make up companies accounts? In which act of parliament may you find further guidance?
Why are accounting principles important for construction professionals?
What is the importance of a cashflow to a business?
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
Can you name some of Rund’s assets and liabilities?
