Accounting principles and procedures

Question 1

What is the purpose of a balance sheet, profit and loss account and cash flow statement

Answer 1

Balance sheet - shows the value of everything that the company owns, owes or is owed on the last day of the financial year

Profit-and-loss account - shows the company sales, running costs, and the profit or loss that it has made over the financial year.

Cash flow statement - is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. The cash flow statement (CFS) measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.

Question 2

What is the GAAP?

Answer 2

Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements.

These 10 general principles can help you remember the main mission and direction of the GAAP system.

1. ) Principle of Regularity - The accountant has adhered to GAAP rules and regulations as a standard.
2. ) Principle of Consistency – Professionals commit to applying the same standards throughout the reporting process to prevent errors or discrepancies. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards.
3. ) Principle of Sincerity - The accountant strives to provide an accurate depiction of a company’s financial situation.
4. ) Principle of Permanence of Methods - The procedures used in financial reporting should be consistent.
5. ) Principle of Non-Compensation - Both negatives and positives should be fully reported with transparency and without the expectation of debt compensation.
6. ) Principle of Prudence - Emphasizing fact-based financial data representation that is not clouded by speculation.
7. ) Principle of Continuity - While valuing assets, it should be assumed the business will continue to operate.
8. ) Principle of Periodicity - Entries should be distributed across the appropriate periods of time. For example, revenue should be divided by its relevant periods.
9. ) Principle of Materiality / Good Faith - Accountants must strive for full disclosure in financial reports.
10. ) Principle of Utmost Good Faith - It presupposes that parties remain honest in transactions.

Question 3

What is the 1996 construction act?

Answer 3

The 1996 Construction Act
Otherwise known as ‘The Housing Grants, Construction and Regeneration Act 1996 HGRA) is intended to ensure that payments are made promptly throughout the supply chain and that disputes are resolved swiftly and:

• The right to interim, periodic or stage payments
• The right to be informed of the amount due, or any amounts to be withheld
• The right to suspend performance for non-payment
• The right to adjudication
• Disallowing pay when paid clauses

Note - The act was updated in 2011 to close loop holes, the act now applies to all construction contracts, in writing or not.

Question 4

What are the different types of valuation?

Answer 4

There are different types of valuations e.g. different methods of valuing the work. A valuation is a valuation of works done to date on site and is low predictability and high accuracy.

Valuation payments can be made in:
• Stage payments
• Milestone payments
• Payments against an activity

Question 5

Why is it important to control costs post contract?

Answer 5

• Keep the client informed.
• Crucial for decision making.
• Ensures costs don’t get out of control.
• Keeps track of project progress.

Question 6

What are the ways in which you can control costs?

Answer 6

• Cost reporting.
• Use of cashflows.
• Management of provisional sums – Defined e.g. kitchen and undefined e.g. ground obstructions and has to be instructed by the EA or CA
• Management of risk allowances. Also known as a contingency allowance, it is informed by a risk register and has 4 types of risk: Design development risk, construction risk, employer change risk and employer other risk.
• Change control procedures.

Question 7

How do you monitor the financial stability of the Contractor and their subcontractors?

Answer 7

Dunn & Bradstreet. Monitoring financial stability.
D&B provides Scores and Ratings to help you identify organisations that are likely to fail or pay late.
The D&B Rating provides a quick and clear indication of the credit-worthiness of an organisation, which helps you to identify profitable opportunities for growth and risks that could affect bad debt and cashflow.
The D&B Rating is made up of two parts and presented in the following format:
• Financial strength - Based on Tangible Net Worth from the latest financial accounts
• Risk Indicator - Derived from the D&B Failure Score but also takes into account expert rules and overrides