Accounting Principles And Procedures Flashcards
What is a Profit and Loss Statement?
A statement that shows income and expenditure for a project or company to show what profit or loss is being made
What is a Cash Flow Statement?
It is concerned with the flow of cash in and out of the business or project.
Useful in determining the short term viability of a company or project.
What is a Balance Sheet?
A statement of the assets, liabilities and capital of a business or other organisation at a particular time.
Details the balance of income and expenditure over the preceding period.
Gives an idea of what the company owns and owes
What is a Business Plan?
A formal statement of the business goals, reasons why they are attainable and the plan for reaching the goals
What is the role of an auditor?
Reviews accounts of companies and organisations to ensure the validity and legality of financial records
What are the key financial statements that all companies must
provide?
The key financial statements to be provided by companies are Profit and loss
account, balance sheet and cash flow statement.
What is the difference between management and financial accounts?
Management accounts are for the internal use of the management team. Financial
accounts are the company accounts required by law.
What is the difference between a profit and loss account and a
balance sheet?
A profit and loss account shows the incomes and expenditures of a company and the
resulting profit or loss.
The balance sheet shows what a company owns (assets) and what it owes
(liabilities) at a given point in time.
What are the main types of ratio analysis used to assess a company’s
financial strength?
Management Operating Ratios - these cover the liquidity and profitability aspects of
the company and, to many builders, liquidity ratios are the prime ratios.
What are Liquidity ratios
Measure the ability of the company to pay off his current liabilities by converting its
current assets into cash.
What is Working capital? (assets – liabilities / turnover)
Measures how much more capital may be needed to finance the operations. A falling
ratio may mean that the company has taken on more work than it can finance and
may be heading for cashflow difficulties.
What are Profitability ratios?
Measure the performance of the company to generate profits.
Return on equity (profit after tax / equity (capital in shares)) – BEST RATIO
Return on capital employed (operating (overheads deducted) profit / capital
employed) – BEST RATIO
A low return can be wiped out in recession; or loan interests may be higher than
profit; useful to decide to invest or not, or take-over a company.
Trading profit margin (turnover – cost of sale / turnover)
Low margins may be due to a growth strategy from the company, not always bad
management.
Operating profit margin (operating profit / turnover)
Capital employed = share capital + reserves + long term and short-term loans +
overdrafts + creditors etc.
Why do chartered quantity surveyors need to understand and be able
to interpret company accounts?
For own business accounts.
For assessing the financial strength of contractors and those tendering for contracts.
For assessing competition.
What is the difference between debtors and creditors?
Creditors - Your firm owes another firm money - e.g. If you owe a sub-consultant fees then they are a creditor.
Debtors - A firm who owes your firm money - e.g. a client who owes you fees is a debtor.
What are Management Accounts?
The accounts prepared by a company for internal management use, or accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the funding. They will not be audited externally.
What does the role of a Service Delivery Manager involve?
Review of project finances - report to team leader on gross profit margins. Review of resources booking to project. Compilation of monthly invoice/application for submission to finance/client. Interface with client to ensure payment rec in accordance with payment terms. Arrange CPF to review clients satisfaction with service received.
Purpose of Financial Statements?
Forecasts of income and expenditure can be used as an analytical tool to identify potential shortfalls and surpluses.
What is an Escrow Account?
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.
Can be used as a project account.
Mechanisms must be in place for the release of funds such as; payment certificates.
Ratio Analysis
Assesses financial strength.
Evaluates operating and financial performance over time or compared against
competitors.
What is an LLP?
In a Traditional Partnership - Joint liability - all Partners accountable for another’s
mistake.
LLP - technically they are ‘Members’ of the LLP and not ‘Partners’
Provides additional protection through limited liability. Only liable for your own
negligence/default etc.
Governed by the Limited Liability Partnership Regulations 2001
When have you used company accounts in your work or when do you
think you may in the future?
To assess the financial strength of contractors at PQQ and tender stages
How do you analyse company’s accounts?
The client’s accountants will carry out the detailed analysis but I can look at the
warning signs by calculating ratios such as liquidity ratios, profitability ratios and
gearing ratios.
I should always 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.
Why do you analyse companies’ accounts?
To assess a company’s financial performance over a period of time and against
similar companies.
To verify the solvency and financial suitability of potential tenderer s for a project
How do you carry out a credit check? Give an example.
I use the Credit Safe website to which my company subscribes to access company’s
accounts.
I considerer both the group accounts and the company accounts. If the credit rating
is a bit low, I calculate some key ratios and pass on all the information to my client’s
accountants for them to analyse further.
What are signs of insolvency in company accounts / credit checks?
Low credit rating. A current 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 Highly geared company (rely on loans) A falling cashflow statement
