Accounting Principles and Procedures (L1)

Question 1

What is VAT?

Answer 1

Value Added Tax - A tax added to most products and services sold by VAT-registered businesses.

Question 2

What is Corporation Tax?

Answer 2

Corporation Tax is paid by UK limited companies and some other organisations. It is based on the annual profits that a company makes.

Question 3

What is a financial audit?

Answer 3

An audit is an important term used in accounting that describes the examination and verification of a company’s financial records. They ensure financial information is represented fairly and accurately.

Question 4

What is turnover?

Answer 4

Income or revenue that a company receives from its normal business activities, usually from the sale of goods and services to customers.

Question 5

What are business overheads?

Answer 5

The indirect costs of operating a business, such as: Central staff salaries, insurance, rent costs.

Question 6

Why do businesses keep company accounts?

Answer 6

Tax purposes (required by law. Demonstrates financial standing (to shareholders and lenders). To ensure cash flow and profitability are correctly managed.

Question 7

What are management accounts?

Answer 7

Financial reports produced for business owners and managers. They are not required by law, but are desirable to inform strategic decisions.

Question 8

What are financial accounts?

Answer 8

They describe the performance of a business and must be filed with Companies House. They give precise data to external stakeholders such as investors, tax officials etc.

Question 9

What is an escrow account?

Answer 9

A type of legal holding bank account for monies, which can’t be released until predetermined conditions are met. They are often used to provide payment security to main contractors, as employers must put funds aside in a designated account prior to works being complete.

Question 10

What is a project bank account?

Answer 10

Ring fenced bank accounts that allow for payments to be made directly and simultaneously to a main contractor and members of the supply chain. A cash flow disbursement model designed to protect the project from supply chain insolvency / late payment.

Question 11

What is tax depreciation?

Answer 11

The depreciation expense claimed by a taxpayer to compensate for the loss in value of tangible assets.

Question 12

Name three types of accounting ratios?

Answer 12

Liquidity ratio - Ability to turn assets into cash to pay debts.

Profitability ratio - Ability to generate profit relative to revenue.

Gearing ratio - Proportion of a company’s debt to equity.

Question 13

What is financial leverage?

Answer 13

An investment strategy of using borrowed money to increase returns.

Question 14

What are capital allowances?

Answer 14

Practice of allowing taxpayers to get tax relief on their tangible capital expenditure by deducting it from their annual taxable income.

Question 15

Name the key financial statements that companies produce.

Answer 15

Profit and loss account, balance sheet, cash flow forecast.

Question 16

Explain the difference between gross and net.

Answer 16

Gross is the total amount of income before deductions, while net is the total amount after deductions (such as tax).

Question 17

Can you explain what equity is?

Answer 17

The value that an owner has in the business. Total assets minus total liabilities on the balance sheet.

Question 18

What is UK GAAP?

Answer 18

Generally Accepted Accounting Practice - a regulatory body that establishes how accounts and financial reports should be prepared in the United Kingdom.

Question 19

Why is it beneficial for surveyors to understand company accounts?

Answer 19

1) for assessing the financial health of competing surveying practices
2) for assessing the financial stability of tendering contractors.
3) to aid in preparing company accounts within their own surveying practice.

Question 20

What is expenditure?

Answer 20

A payment with either cash or credit to purchase goods or services.

Question 21

What is CAPEX?

Answer 21

Capital expenditure - spent to acquire or improve an asset such as equipment or buildings.

Question 22

What is OPEX?

Answer 22

Operational or revenue expenditure - costs incurred in the day-to-day running of the business.

Question 23

Why are CAPEX and OPEX split out in business accounts?

Answer 23

They have differing tax obligations, CAPEX can benefit from capital allowances.

Question 24

What is a balance sheet?

Answer 24

A snapshot of a company’s financial position at a given point in time. It reports on a company’s assets, liabilities and ownership equity.

Question 25

What is meant by assets and liabilities?

Answer 25

Asset - Something which is owned.

Liability - Something which is owed.

Question 26

What is a current asset?

Answer 26

Cash and other assets which are expected to be converted to cash within a year.

Question 27

What is a fixed asset?

Answer 27

Assets that are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings and equipment.

Question 28

What is the difference between debtors and creditors?

Answer 28

Creditors - individual or business which has lent funds and is owed money.

Debtor - individual or business which has borrowed funds and owes money.

Question 29

What is a cash flow forecast?

Answer 29

A document which shows how much money you expect your business or project to receive and pay out over a set period, often a year.

Question 30

What are cash flow forecasts used for?

Answer 30

1) Keeping track of overdue payments
2) Plan for periods with cash gaps
3) Manage periods with cash surplus

Question 31

Why is cash flow forecasting important in construction?

Answer 31

1) Allows clients to understand their financial commitment over the duration of a project and when they are likely to spend money.
2) Can be used to estimate whether external funding is required.
3) Acts as a check against valuations to give an early indication of financial difficulties.

Question 32

What is a profit and loss account?

Answer 32

A financial document which shows a company’s revenue and expenses over a particular period. These figures show whether the business has made a profit or loss over that period.

Question 33

Difference between a balance sheet and profit and loss account?

Answer 33

A balance sheet is a financial snapshot at one given time, whereas the profit and loss is over a longer determined period.

Question 34

What is insolvency?

Answer 34

The inability to pay off debts or creditors - a generic term used to describe bankruptcy, liquidation and administration.

Question 35

How would you determine the financial standing of a company prior to working with them?

Answer 35

A Dun & Bradstreet report creates a business credit report which can be reviewed and analysed.

Question 36

What are the main signs of contractor insolvency?

Answer 36

1) Slowing down works
2) Supply of materials drying up
3) Increase in defective work
4) Changes in management
5) Additional or inflated payment requests

Question 37

What steps would you take in the event of contractor insolvency?

Answer 37

• Inform all parties involved and secure the site
• Consider stopping payments to the contractor and seek legal advice
• Take ownership of materials off site
• Schedule all plant and materials
• Value completed works and value any defects
• Monitor all loss and expense incurred
• Terminate the building contract and appoint a new contractor

Question 38

What is liquidation?

Answer 38

A formal process which brings about the closure of a limited company. All company assets will be sold, for the benefit of outstanding creditors or shareholders before the company is struck off - or dissolved from the register held at companies house.

Question 39

What is administration?

Answer 39

Where someone (an administrator) is appointed to manage the company’s affairs on behalf of the creditors.

Question 40

What is bankruptcy?

Answer 40

One way for individuals to deal with debts they cannot pay, it does not apply to companies or partnerships. Assets are shared among those you owe money to (creditors). Allowing the individual to make a fresh start free from debt.