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Test > Accounting Principles and Procedures > Flashcards

Accounting Principles and Procedures Flashcards

1
Q

What is the difference between financial accounting and management accounting?

A
  • Management accounting provides information to people within an organization and is not required by law. Can be relating to a single aspect of organisation.
  • Financial accounting is mainly for those outside it, such as shareholders, and is required by law. Covers the entire organisation.
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2
Q

What is the Sarbanes-Oxley Act?

A
  • Enron pulled up for having accounting irregularities. Bosses had altered financial statements to cover up losses

Sarbox Act stipulated that:

  • Officers of company required to sign financial statements, holding them personally accountable
  • Harsher punishments for tampering
  • Company must provide description of internal controls to public
  • Company is responsible for hiring independent accounting firms to audit accounts. Auditors opinion now forms a section of financial report
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3
Q

What is a balance sheet?

A

A snapshot of where a business is at. The companies financial position / net worth

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4
Q

What does a balance sheet consist of?

A

Assets (fixed, current)

  • ## Liabilities (long term, short term)+/- Net position (assets - liabilities

=

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5
Q

Why are balance sheets important?

A
  • P+L accounts can look great one year due to one off profits. Balance sheet gives a broader view of the companies health
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6
Q

What are contingent liabilities?

A
  • Balance sheets are supported by a note called contingent liabilities which shows potential liabilities not yet recorded on BS but may be present in future, e.g. law suit losses
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7
Q

What is a profit and loss account? (P+L)

A

A summary of a business’s income and expenditure transactions.

  • Usually prepared on an annual basis. Shows journey from one balance sheet to the next.
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8
Q

What is included in a P+L account?

A

Sales

  • Cost of sales

= Gross profit

  • Operating costs/overheads

= Operating profit or EBIT/PBIT (earnings/profit before interest and tax)

  • Interest

= PBT

  • Tax

= PAT/Net profit

  • Dividends

= Retained profits

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9
Q

What is EBITDA?

A

Earnings before interest, tax, depreciation and amortisation is the earnings before depreciation of fixed assets and amortisation (costs of things such as licences) are deducted from the gross profit. These items are otherwise deducted from the gross figure within the overheads/operating cost figure.

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10
Q

What is the IFRS?

A
  • International financial reporting standards
  • Standards issued to provide common global language for business affairs to company accounts are understandable/comparable worldwide
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11
Q

How would you acquire information about a company to review their financial position?

A
  • Dun & Bradstreet provide commercial data, analytics and insights for businesses
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12
Q

What is an annual report?

A
  • An annual report is a comprehensive report on a company’s activities throughout the preceding year
  • They give shareholders and other interested people information about the company’s activities and financial performance
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13
Q

Name different types of taxation in the UK.

A
  • VAT
  • Capital Gains Tax
  • Capital allowances
  • Stamp Duty Land Tax
  • Income tax
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14
Q

What is VAT?

A
  • A tax on goods and services
  • VAT registered companies charge VAT which they then pay to HMRC
  • VAT registered companies can reclaim VAT on purchases
  • Different VAT levels are 20%, 5% and 0%
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15
Q

What is capital gains tax?

A

A tax on the profit when you sell (dispose) of something (asset) that has increased in value

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16
Q

What is SDLT?

A
  • Stamp Duty Land Tax is a tax on the purchase of a property
  • Commercial rates are:

0% up to £125k
2% £125k - £250k
5% above £250k

  • Residential rates are:

0% up to £125k
2% £125k - £250k
5% £250k - £925k
10% £925k - £1.5m

First-time buyers pay no SDLT up to £300k (£500k in London).

People buying a second property pay an extra 3% SDLT for each band.

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17
Q

What is income tax?

A
  • The tax everybody pays on their income
  • EVeryone has a personal allowance of £11,850 tax free
  • Income tax is 20% on everything over persona allowance up to £46k
  • Income tax is 40% on earnings between £46k - £150k
  • Income tax is 50% on earnings over £150k
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18
Q

What is revenue expenditure?

A
  • Expenditures for costs related to specific revenue or operational periods
  • Examples include cost of goods sold or repair/maintenance expenses
  • Generally smaller expenditures, consumed within short period
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19
Q

What is capital expenditure?

A
  • Expenditure on fixed assets expected to be productive for a long period of time
  • Charges to expense gradually via depreciation
  • Generally involve larger monetary amounts
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20
Q

What is meant by cash flow?

A

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business for a set period of time

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21
Q

Give an example of poor cash flow in the construction industry

A
  • Carillion’s cash flow was very poor leading to their liquidation in January 2018
  • Many outgoing costs, not enough money coming in, leading to cash shortfall
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22
Q

How can contractors predict their cash flow before a project begins?

A
  • S-Curve shows a high level expected cash flow for a construction project.
  • More accurate cash flows can be created between Contractor and Subbies by analysing the programme and working out when costs are going to be incurred
23
Q

Why are cash flows useful for the client’s QS?

A
  • Actual costs incurred at interim valuations can be charted against forecasted cash flow
  • If actual cash flow is behind forecasted, project may be behind programme
  • If actual cash flow is ahead of forecasted, project may be ahead of programme
24
Q

Why are cash flows useful for the Contractor?

A
  • Incoming payments (from the client) and expenditure (to suppliers, subcontractors) can be forecasted.
  • Can be used to monitor progress/float in the programme
  • As costs are usually incurred before payment is received from client, there is often a cash shortfall to be covered by an overdraft. Forecasting incoming/outgoing cash can help identify when this will be/how much overdraft
25
Q

What are the benefits of a cash flow forecast for a company?

A
  • Good for business and resource planning
  • Shows when liabilities must be met eg wages
  • Good for analysing financial health of companies
  • Profitable business can go into administration if cashflow is poor due to not being able to meet their current liabilities
26
Q

Why might a company have poor cash flow?

A
  • Late payments from clients
  • Too much capital tied up in assets
  • Withdrawal of overdraft from funders
27
Q

What is the HGCRA?

A
  • The Housing Grant, Construction and Regeneration Act 1996 (HGRCA, or Construction Act)
  • Policies to improve cash flow and help resolve disputes quicker
  • HGCRA 2009 supersedes 1996
28
Q

What are some of the key points in the HGCRA 1996?

A
  • All contracts should provide a payment mechanism stipulating when/how/final date for payment
  • Payer must give early communication of amount to be paid
  • No withholding of sums without withholding notice, stipulating what is to be withheld and why
  • Payee may suspend performance where sum is due and not paid in full by final date of payment
  • Provides statutory right to refer disputes to adjudication
29
Q

What changes were brought in with the HGCRA 2009?

A
  • Includes all construction contracts, even if not in writing
  • Parties are free to agree amounts for payments and the intervals
  • No withholding of sums without pay less notice instead of withholding notice, stipulating the basis on which they have built up the sum to be paid
  • Prohibits payment clauses whereby payment is linked to payments under separate contract
30
Q

What is the S curve?

A
  • Shows cost of construction project over time. Cash flow forecast of payments from Client to Contractor
  • Shape of an S
31
Q

Why is it an S shape?

A
  • Slow at start due to reduced number of trades on site. Setting up site etc invite lower costs
  • Costs spike in the middle as big, expensive packages are constructed e.g. steelwork, facades, M&E. Concurrent working.
  • Costs slow down towards the end as works slow. Less trades on site.
32
Q

What is the difference between an internal audit and an external audit?

A

External auditing is an independent examination of financial statements prepared by an organisation. Required by law and carried out by a registered firm of accountants.

Internal auditing is an internal review of strengths, weaknesses and management of risk. Not required by law.

33
Q

What is an internal audit?

A
  • Should be an independent and objective evaluation of an organisation’s internal controls to effectively manage risk within its appetite.
  • should identify and address areas of weakness
  • often identifies fraud
  • auditors should be independent and objective, internally assigned but free to carry out role
34
Q

What is an external audit?

A
  • independent examination of financial statements prepared by an organisation
  • determines whether financial statements give true and fair reflection of state of affairs and operations for that period
  • Not to detect fraud but this may emerge
  • Required by law
35
Q

Who can conduct an external audit?

A

Registered firm of accountants

36
Q

Who can conduct an internal audit?

A

Anyone in the firm

37
Q

Who are exempt from external audits?

A
  • Companies with a turnover less than £6.5m

- Companies with less than 50 employees

38
Q

What are ratios for?

A

Interpret company accounts

39
Q

What are the three classifications of ratios?

A
  • Performance
  • Financial standing
  • Investment return
40
Q

List 3 performance ratios

A

Return on Capital Employed (ROCE) = PBIT / Capital Employed (20% UK avg.)

Return on Equity (ROE) = PAT / Shareholders Funds (20% or more = v strong)

Profit Margin = Profit / Turnover

41
Q

List 3 financial standing ratios

A

Current ratio = current assets / current liabilities (should be 2:1)

Acid test (quick ratio) = (Current assets - stock) / current liabilities (should be 1:1)

Gearing ratio = interest bearing debts / shareholders funds (1:1 excessive, risky)

42
Q

List 3 investment ratios

A

Dividend yield = dividend per share / market price per share

Dividend cover = earnings per share / dividend per share

Price to earnings ratio = market price per share / earnings per share (high = popular share as people are buying in spite of lower dividend yield)

43
Q

What are the limits of ratios?

A
  • They are looking backwards at historical performances

- Don’t account for non-monetary factors

44
Q

What are the profit margins in the construction industry like?

A

9.9% in 2009, 3% reported in 2015

45
Q

How might you improve profitability of your construction firm?

A
  • cost planning
  • improve productivity
  • understand risk and mitigation strategies
  • maintain tight control on variations/change orders
46
Q

What is insolvency?

A

Refers to the inability of a debtor to pay its debts

47
Q

What’s the difference between bankrupcy and liquidation/administration?

A

Only people can go bankrupt, companies go into administration/liquidation

48
Q

What is the difference between technical and legal insolvency?

A

Technical insolvency = doesn’t have time to realise assets in order to pay creditors

Legal insolvency = couldn’t pay creditors even if all assets realised

49
Q

What is a statutory demand?

A

Where a creditor demands payment of a debt. This must be satisfied within 21 days.

50
Q

What should you do if a Contractor goes insolvent?

A
  • Carry out valuation of works incl fixed and unfixed materials/plant on site to ensure they’re not taken. Materials paid for by Employer must not be removed
  • Secure the site
  • Contractors plant can be used freely until completion. Sub-contractor’s plant can only be used with permission
  • Retention held to cover any losses
51
Q

What is liquidation?

A
  • The process of bringing a business to an end and distributing its assets to claimants
  • Occurs when a company goes insolvent
52
Q

What is administration?

A
  • When a company becomes insolvent and is put under management of Licensed Insolvency Practitioners.
  • Administrator will try to stop you being wound up/going into liquidation
  • Being in administration protects you from legal action by people/organisations who are owed money in an 8 week moratorium.
  • Nobody can apply to wind up your company during administration
  • Directors/secured lenders may appoint administrators through a court process in order to protect the company and their position
  • Administration can mean your company doesn’t have to pay all it’s debts in full, but company can still be wound up
53
Q

What legislation do we have in the UK to prevent bribery and money laundering?

A
  • Bribery Act 2010

- Money Laundering Regulations 2017

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