Accounting principles and procedures

Question 1

What should a PLC company accounts include?

Answer 1

1. chairmans statement
2. auditors report
3. income statement (profit and loss account)
4. Statement of financla position (balance sheet)
5. Corporate governance report
6. Renumeration report
7. Other statutory info

Question 2

What are the three kinds of financial statement for a company?

Answer 2

1. balance sheets
2. Profit and loss or income statements
3. cash flow statements;

Question 3

What is the diffenrece between a balance sheet and a profit and loss account and a cash flow statement?

Answer 3

Balance sheet

The Balance Sheet shows what the business owns (Assets), what it owes (Liabilities) and how much has been invested into it (Equity).

1. Use the Balance Sheet you can track how big your liabilities are, and hopefully identify ways to reduce them over time.
2. A business with a large ratio of liabilities to assets may be seen as risky as it funds its assets with debt rather than Equity.
3. Conversely a high ratio of equity to liabilities could be an indicator of a strong business, as it is not so reliant on debt to fund itself.

Profit and loss account/income statement

The Profit & Loss account records the business’ incoming revenue and outgoing expenditure, usually on a monthly or annual basis.

1. Why - tells you performance
2. e.g Can the business take on new projects?

Cash Flow statement

• The Cash Flow is based on when payments are actually made and received.
• A profitable business may still fall over if it cannot pay its costs on time.
• Shows receipts expenditure to ibclude VAT

Key information:

• Actual cash available to the business
• When payments happen
• Can the business fulfil its financial obligations?

Question 4

Can you tell me how you would go about producing a fee proposal for your client

Answer 4

I regularly produce fee proposals for clients, adhering to company policy, including fee structuring and conflict of interest checks.

1. I would look at the amount of time needed to carry out the instruction to a high standard.
2. I would consider any existing framework agreements with the client.
3. Make sure it was clearly stated how it had been caluclated e.g. hourly rate, percentage of contract value.
4. Make sure it was transparent any mark up fees for consultant work included

Question 5

How do you chase debts?

Answer 5

I start off with a polite email to ask in writing explaining when the payment was due and what this was for copying in relevant parties such as the client and their accounts department.

After two emails and a phone call, without good reason for non payment I would excalate this to my department credit controller and provide them with all the details to chase the payment.

raise invoices, chase debts and produce 12-month cash-flow forecasts to help my department maintain a healthy balance sheet.

Question 6

How do you carry out a 12 month cash flow report?

Answer 6

I have a tracker spreadsheet where I input the expected income per job reference across the 12 months and include for any third party fees such as for consultants in the gross figure, I then subtract these to provide a gross figure and update every month to give my department an accurate view of cash flow forecast so that the executive staff can understand how well the company is doing and provide information to company shareholders and adjust business strategy accordingly.

raise invoices, chase debts and produce 12-month cash-flow forecasts to help my department maintain a healthy balance sheet.

Question 7

What is an asset and a liability and give me an exampke of each

Answer 7

• An asset is anything of monetary value owned by a person or busines

1. Surplus cash
2. Investment e.g. built asset
3. Liabilities plus equity

• A Liability is something a person or company owes/ e.g.

1. Business loan
2. wages payable
3. tax payable

Question 8

What is equity?

Answer 8

• Equity, is simply the money that has been invested into the business.
• This could be money that the owner has invested into the business, the cash from shares sold in the business, or investments from outside investors.

Question 9

What is the difference between finance or audited and management accounts?

Answer 9

Management accounts

1. are prepared for internal use and not audited
2. frequently looks ahead

finance accounts

1. are prepared by a chartered or certified accountant usually for audit
2. Can be shared outside the company
3. financial accounting offers analysis of historical data.

Question 10

What are the Generally Accepted Accounting Practice (UK GAAP?

Answer 10

• Generally Accepted Accounting Practice in the UK (UK GAAP) is the body of accounting standards published by the UK’s Financial Reporting Council (FRC)
• The FRC has updated old UK GAAP by Replacing the existing mix of guidance (FRSs, SSAPs, UITFs) with a single Financial Repporting Standard (FRS 102).

Question 11

Which financial framework must a PLC use?

Answer 11

1. IFRS • EU-adopted IFRS (IFRS). Companies Act*
2. IFRS recognition and measurement with reduced disclosures (FRS 101, the ‘reduced disclosure framework’ or RDF).
3. FRS 102, the FRS for UK GAAP reporters (‘new UK GAAP’), which is based on the IFRS for SMEs.
4. FRS 102 (new UK GAAP) with reduced disclosures available in that standard. The Financial Reporting Standard for Smaller Entities (FRSSE). This will still be an option for eligible companies.
5. All except IFRS (first bullet point) are within the Companies Act accounts framework. So a group can use a mixture of the last four options above and still meet the company law requirement to use a consistent

Question 12

What is IFRS 16

Answer 12

• IFRS 16 is the new lease accounting standard.
• All companies must comply from 2019 if using the IFRS (international financikla reporting standards)
• Full cost of lease must be accounted for on the balance sheet
• Occupiers obligation to pay rent is seen as a liability
• Leases of 12 months or les can be exmpt.

Question 13

What are three common financial measures?

Answer 13

1. cash flow management - does it stretch istself too far
2. profit generation
3. revenue growth (see on P and L statement) Revenue is the total amount of money that you have earned, coming into your business over a defined period of time. Can have high revenue and zero profit.

Question 14

What is meant by the terms Gross and Net?

Answer 14

In salary terms, Gross is the total salary and net is salary minus tax and all other deductions (the net cannot get any lower).

Question 15

What is a balance sheet?

Answer 15

• A balance sheet is a statement showing a business’s financial position at a point in time. • It shows a business’s assets and liabilities at a given date, usually at the end of a financial year. Assets = things the business owns that you get a future benefit from e.g. physical assets like property and non-physical assets like brand and goodwill. Current assets = assets to be used within 1 year Non-current (fixed) assets = plant, machinery and equipment etc. Liabilities = amounts a business owes due to past transactions e.g. wages and loans

Question 16

What is a profit and loss account?

Answer 16

• A summary of a business’s income and expenditure transactions usually prepared on an annual basis. • PandL Accounts demonstrate how the revenue is transformed into the net income - how the actual income the business receives transfers into profit for the year. Revenue = income the business receives from its business activities e.g. money from things it sells Expenses = outgoings that arise as the entity performs its business activities e.g. costs incurred in order to provide their service.

Question 17

What is a cashflow statement?

Answer 17

• Cash flow shows the actual receipts and expenditure and includes VAT. • Reviewing cash flow can identify potential shortfalls in cash balance i.e. where you may not have enough cash in the business to pay suppliers etc. • Review cash flow helps ensure businesses can afford to pay suppliers and employees i.e. the cash coming in is enough to cover the cash going out. • Struggling companies should review cash flow daily. • Healthier companies should review cash flow weekly or monthly.

Question 18

What is meant by depreciation in relation to an asset?

Answer 18

Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are furniture and IT equipment.

Question 19

What is the difference between Management and Company accounts?

Answer 19

Management accounts are used internally by the managers of the business Financial accounts are company accounts required by law and audited by a Chartered Accountant.

Question 20

What is the difference between a Sole Trader, Partnership, Limited, and a LLP?

Answer 20

• Sole Trader A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses (unlimited liability). - Partnership A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business. - Limited In a limited company, the shareholders’ liability is limited to the capital they originally invested. If such company becomes insolvent, the shareholders personal assets remain protected. Shares in a private limited company are not offered to the general public (distinguishing it from a public limited company - plc.) - Limited Liability Partnership (LLP) A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.

Question 21

How would you assess a contractor’s financial accounts?

Answer 21

Request a copy of the contractor’s company accounts for the last 3 years which would include the Profit and Loss Statement, Balance Sheet and Cash Flow Statement. I would then be able to assess: • If the contractor had been profitable in the last few years. • Calculate their liquidity ratio by looking at their assets vs their liabilities to see if they would be able to cover losses under a contract and stay solvent. I would always caveat any advice given to a client on a contractor’s financial position and recommend that further advice is sought through financial reports and a qualified accountant.

Question 22

What are ‘Mint’ and ‘Dun and Bradstreet’ reports?

Answer 22

DandB reports provide scores and ratings to help identify organisations that are likely to fail or pay late. Financial Strength - derived from the net worth of the company by assessing the latest financial accounts. Risk Indicator – the likelihood of an organisation obtaining legal relief from its creditors or ceasing operations within the next 12 months including any detrimental litigation events, possible fraudulent activity etc. Delinquency Score - Predicts the likelihood that a business will pay its obligations late within the next 12 months. E.g. are they paying their suppliers in time, if so, this demonstrates good and well managed cash flow Limitations: They are historic and look at past performance, whereas future performance is the key thing. As it may look profitable, but it may have been reducing profit steadily over the last few years which suggests it’s not actually healthy. I.e. you want to forecast future performance for security of investment etc.

Question 23

What are the main types of ratio analysis used to assess a company’s financial strength?

Answer 23

• Liquidity – the ability of the company to pay its way (solvency). More companies fail due to cash flow than any other reason. Current Ratio = Liquid assets / Liabilities • Investment/shareholders – information to enable decisions to be made on the extent of the risk and the earning potential of a business investment. Return on Investment (ROI) = (Gain – Cost) / Cost • Gearing – information on the relationship between the exposure of the business to loans as opposed to share capital. Net Gearing = Net Debt / Equity • Profitability – how effective the company is at generating profits given sales and/or its capital assets. Gross Margin = Gross profit / Net Sales • Financial – the rate at which the company sells its stock and the efficiency with which it uses its assets. Asset Turnover = Net Sales / Total Assets

Question 24

Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?

Answer 24

• Companies business accounts. • For assessing the financial strength of contractors and those tendering for contracts. • For assessing competition.

Question 25

What is the Construction Industry Scheme (CIS)?

Answer 25

• The Construction Industry Scheme (CIS) is a scheme created by HMRC for tax from contractors and subcontractors. • The scheme is designed to minimize tax evasion within the construction industry. • Contractors deduct tax from payments to subcontractors. • All contractors and subcontractors must register with the scheme before work starts

Question 26

Why is having an understanding of accountancy required as a QS?

Answer 26

• To be able to understand the financial health of a project to protect the clients interests. • To understand your own financial health. • To be able to understand the financial health of a company.

Question 27

What are some examples of assets?

Answer 27

• Fee income from clients - Plant equipment owned -Rent income

Question 28

What are some examples of liabilities?

Answer 28

-Staff wages -Rent payments for office premises - Insurance

Question 29

How often do company accounts need to be logged and where?

Answer 29

• This is once a year and need to be published to the HMRC and companies house. - This can be at any time of the year.

Question 30

What is the liquidity ratio?

Answer 30

Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations. These ratios measure the ability of a company to pay off its short-term liabilities when they fall due.

Question 31

What is the gearing ratio?

Answer 31

A gearing ratio is a type of financial ratio that compares company debt relative to different financial metrics, such as total equity.

Question 32

What is the profitability ratio?

Answer 32

Profitability ratios are a class of financial metrics that are used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, and shareholders’ equity over time, using data from a specific point in time.

Question 33

What is insider trading?

Answer 33

the illegal practice of trading on the stock exchange to one’s own advantage through having access to confidential information.

Question 34

What is the difference between liquidity, administration and insolvency?

Answer 34

• Liquidity is the process of selling all assets before dissolving the company completely. - Insolvency means the company is unable to pay it’s debts. - Administration aims to help the company repay debts in order to escape insolvency (if possible)

Question 35

What is capital expenditure?

Answer 35

Money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

Question 36

What is operational/revenue expenditure?

Answer 36

Revenue expenditure are those which relate to the trade of the business. In our example of a mobile catering trailer business, the stocks, fuel costs,staff wages, repair of catering equipment are the revenue expenditure.

Question 37

Why do chartered surveyors in your pathway need to understand and be able to interpret company accounts?

Answer 37

-For your own business accounts. -For assessing the covenant strength of potential tenants and landlords. -For assessing the financial strength of contractors and those tendering for contracts. -For profits-method valuations (for leisure properties). -For assessing competition.

Question 38

What is the difference between a statement of comprehensive income and a statement of financial position?

Answer 38

A statement of comprehensive income shows the income, expenditure and profit or loss of the company and the statement of financial position shows what a company owns (assets) and what it owes (liabilities) at a given point in time.