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Omar Assoc RICS prep > 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 - overheads/operating costs). 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 16?

A
  • International financial reporting standards
  • Standards issued to provide common global language for business affairs so 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
  • 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 45% 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
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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

54
Q

What changes were made to the International Accounting Standards in Jan 2019?

A

Assets and liabilities of leases now have to be shown on balance sheets.

55
Q

What is the difference between a balance sheet and a P+L account?

A

A balance sheet shows a company’s net position, a profit and loss account shows money coming in and out over a set period.

Omar Assoc RICS prep (11 decks)

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