Accounting Principles And Procedures Flashcards
What are Accounts?
A record of the past, or forecasts for the future.
What are Company Accounts?
Summary of a company’s financial activity over a 12-month period, which:
•Tracks money coming in and out of
•Monitors profit and loss to show company performance
•Can be used for future business planning
•Should be submitted in annual financial statements to companies house
What is Companies House?
A UK register of companies which maintains corporate transparency.
What are the basic components in company accounts?
1) Profit and Loss
2) Balance Sheet
What is a P and L?
Summary of business’ transactions (both income and expenditure) for a given year.
Shows information on a company’s ability to generate profit through increasing revenue, reducing costs or both.
What is a Balance Sheet?
Summary of the financial balances at the end of the financial year.
What does a Balance Sheet include?
Assets
Fixed Assets - equipment and facilities which take over 1 year to convert into cash
Current Assets - Cash and other assets that can be converted into cash within one year
Liabilities
Long term liabilities - Amounts owned in more than 1 years time
Current Liabilities - Amounts owed (accrued but not yet invoiced)
Capital
Working Capital - Net current assets and liabilities in use in the business
Shared Capital - Long term investment by the shareholders
Reserves
Retained profit left in the business Shared Capital
What is an asset
Resource with economic value that an individual or company owns with the expectation that it will provide a future benefit
What is a liability
A debt or financial obligation that a person or company owes to another party
What is a cashflow?
Record of receipts and cash payments
Why are cash flows used
To show an increase or decrease in cash balances or borrowings
What is a profit and loss statement
A statement showing the revenues, costs, and expenses incurred during a specific period of time.
It shows information on a company’s ability to generate profit through increasing revenue, reducing costs, or both.
What is the role of an auditor?
To review the accounts of companies and organisations to ensure the validity and legality of their financial records.
In the UK, audits should be in line with the Generally Accepted Accounting Principles.
Why is it important to understand accounts as a PM?
•To understand the financial health of a project, consultant or contractor.
Can you give an example of how understanding accounts could help you as a PM?
1) Assessing the financial strength of contractors at tender stage
2) Assessing the covenant strength of potential tenants
A PM should caveat any financial client advise on a company’s financial position.
How do you manage and report project expenditure?
•CapEx - use a cashflow to record cash recipients and payments
• Monthly reporting and contingency soends
How would you analyse accounts?
Ratio Analysis - a method of examining a company’s balance sheet and income statement to learn about its liquidity, operational efficiency and profitability
What types of ratio analysis are you aware of?
1) Liquidity Ratios - A company’s ability to pay off short term sets (cash / liabilities)
2) Solvency Ratios - A company’s debt levels against its assets (Debt / Equity Ratios)
3) Profitability Ratios - How a company can generate profits (Return on Assets)
4) Efficiency Ratios - how efficient companies can uses it liabilities and assets to generate sales (Expenses on Revenue)
How are balance sheets and P&L statements used in your profession.
Contractors tendering- PM should review the last 3 years accounts to review financial stability
How / when would you use a cashflow statement as a PM?
On a project basis to track project costs / spends
Internally to assist with resourcing
What KPI’s do you use to monitor performance?
•Utilisation - to identify spare resource
•Recovery - monitors costs spent against what is being billed
How do you manage accounts?
•Keep records of all outgoings and incomings
•Record on balance sheets
•Keep profit and loss statements
What accounts have to be done and when?
•Companies accounts - end of the financial year in April
•Management accounts - at company’s discretion
What is a gearing ratio?
•Measure of financial leverage - assessing debt vs equity.
•Higher level of borrowing means higher risks
•calculated by dividing total debt by total equity
What is a liquidity ratio
•Companies ability to meet short term debt
•whether a business can pay off their debts within 1 years
Who might be interested in accounts?
Banks, investors, clients
How is property treated in an entity’s accounts under GAAP?
Purchase price plus the costs to bring the asset up to condition plus the costs to dismantle the property plus borrowing costs capitalised
What is the difference between management and company accounts?
•Management accounts provide information to people within an organisation
•Company accounts are statutory accounts for public use
