Accounting Principles and Procedures (L1) Flashcards
What is VAT?
Value Added Tax - A tax added to most products and services sold by VAT-registered businesses.
What is Corporation Tax?
Corporation Tax is paid by UK limited companies and some other organisations. It is based on the annual profits that a company makes.
What is a financial audit?
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.
What is turnover?
Income or revenue that a company receives from its normal business activities, usually from the sale of goods and services to customers.
What are business overheads?
The indirect costs of operating a business, such as: Central staff salaries, insurance, rent costs.
Why do businesses keep company accounts?
Tax purposes (required by law. Demonstrates financial standing (to shareholders and lenders). To ensure cash flow and profitability are correctly managed.
What are management accounts?
Financial reports produced for business owners and managers. They are not required by law, but are desirable to inform strategic decisions.
What are financial accounts?
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.
What is an escrow account?
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.
What is a project bank account?
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.
What is tax depreciation?
The depreciation expense claimed by a taxpayer to compensate for the loss in value of tangible assets.
Name three types of accounting ratios?
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.
What is financial leverage?
An investment strategy of using borrowed money to increase returns.
What are capital allowances?
Practice of allowing taxpayers to get tax relief on their tangible capital expenditure by deducting it from their annual taxable income.
Name the key financial statements that companies produce.
Profit and loss account, balance sheet, cash flow forecast.
Explain the difference between gross and net.
Gross is the total amount of income before deductions, while net is the total amount after deductions (such as tax).
Can you explain what equity is?
The value that an owner has in the business. Total assets minus total liabilities on the balance sheet.
What is UK GAAP?
Generally Accepted Accounting Practice - a regulatory body that establishes how accounts and financial reports should be prepared in the United Kingdom.
Why is it beneficial for surveyors to understand company accounts?
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.
What is expenditure?
A payment with either cash or credit to purchase goods or services.
What is CAPEX?
Capital expenditure - spent to acquire or improve an asset such as equipment or buildings.
What is OPEX?
Operational or revenue expenditure - costs incurred in the day-to-day running of the business.
Why are CAPEX and OPEX split out in business accounts?
They have differing tax obligations, CAPEX can benefit from capital allowances.
What is a balance sheet?
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.
What is meant by assets and liabilities?
Asset - Something which is owned.
Liability - Something which is owed.
What is a current asset?
Cash and other assets which are expected to be converted to cash within a year.
What is a fixed asset?
Assets that are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings and equipment.
What is the difference between debtors and creditors?
Creditors - individual or business which has lent funds and is owed money.
Debtor - individual or business which has borrowed funds and owes money.
What is a cash flow forecast?
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.
What are cash flow forecasts used for?
1) Keeping track of overdue payments
2) Plan for periods with cash gaps
3) Manage periods with cash surplus
Why is cash flow forecasting important in construction?
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.
What is a profit and loss account?
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.
Difference between a balance sheet and profit and loss account?
A balance sheet is a financial snapshot at one given time, whereas the profit and loss is over a longer determined period.
What is insolvency?
The inability to pay off debts or creditors - a generic term used to describe bankruptcy, liquidation and administration.
How would you determine the financial standing of a company prior to working with them?
A Dun & Bradstreet report creates a business credit report which can be reviewed and analysed.
What are the main signs of contractor insolvency?
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
What steps would you take in the event of contractor insolvency?
- 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
What is liquidation?
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.
What is administration?
Where someone (an administrator) is appointed to manage the company’s affairs on behalf of the creditors.
What is bankruptcy?
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.
