Accounting Principles and Procedures - Level 1 Flashcards
What is the difference between a profit and loss account and a balance sheet?
- A P&L accounts shows the incomes and expenditures of a company resulting in profit or loss.
- A balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time.
What are the key financial statements that all companies must provide? What are company accounts
The key financial statement are a profit and loss statement, balance sheet, and cash flow statement. These are the company accounts produced annually and filed at Companies House.
What is a cashflow statement?
It is a summary of actual or anticipated income or outgoings of a firm over the accounting period. It is broken down into operating, investing, financing activities.
It measures a firm’s short term ability to pay off its debts.
Why do Chartered Surveyors need to understand and be able to interpret company accounts?
- For reviewing own firms accounts
- Assessing the financial strength of a contractor and those tendering for a contract
- For reviewing profitability and sustainability
What is the purpose of a profit and loss account?
- To monitor profit and loss. Significant problems can arise if information is inaccurate, either through incompetence or fraud.
- Compare current to past performance, compare to the budget and other businesses
- Assisting with budgeting and taxation
What is the difference between creditors and debtors
- Creditors - Firm owe them
2. Debtors - Owe the firm
What are financial statements?
Analysis of income and expenditure which can be used as an analytical tool to identify shortfalls and surpluses
What are profit and loss accounts?
Shows the company’s income and outgoings over a financial period.
What is a balance sheet?
A balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time.
It values the business at a given time.
What are signs of insolvency in company accounts/credit checks?
- Low credit rating
- A current ratio below 0.75.
- A falling working capital ratio suggesting a company has taken on more than it can finance
What looking for a contractor what should you look at in their accounts?
- Credit rating
- Working capital ratio = total assets/total liabilities
- Profitability
What are statutory accounts?
- These accounts must be filed at Companies House.
2. They include a balance sheet, P&L account, cashflow statement and notes to the accounts and a directors report.
What are management accounts?
Management accounts are financial reports used by a business owner for day to date management and strategic decision making.
Produced monthly or quarterly, provide an insight in to the financial health of a company.
What is the difference between management accounts and statutory accounts?
Management - internal use to measure day to day performance
Statutory - professionally produced accounts which are filed at Companies House
What are IFRS?
International Financial Reporting Standards - provide common accounting language to increase transparency in the representation of financial information
Why are the IFRS relevant for company accounts?
they specify how companies must maintain and report their accounts.
How can you use company accounts to assess covenant strength?
You can look at the profitability and net assets in the accounts to determine the company’s ability to pay of debts.
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What is an audit?
Process to check a person or companies compliance with policy/procedure or regulation.
What is turnover?
Income that a company receives from normal business activities
Why does a business keep company accounts?
- Tax purposes
- Demonstrate company’s financial standing
- Cash flow and profits
What is an escrow account?
Separate bank account owned by a third party
Can be used as a project bank account
What are overheads?
Indirect costs or fixed expenses
E.g. rent, utility bills, insurance
Three types of accountancy ratio?
- Liquidity (assets to cash)
- Profitability Ratio (earning relative to it’s revenue)
- Gearing Ratio (borrowed fund to it’s equity)
What are capital allowances?
Tax relief on capital expenditure on improving an asset
What is a current asset?
Cash and other assets that are expected to be converted to cash within a year
What are fixed assets?
Assets which are not likely to be converted into cash quickly
Why is a cash flow forecast used?
- Understand future financial commitments
- keep track of overdue payments
- plan for gash gaps
- manage surplus cash
What is insolvency?
Inability to pay off debts or creditors
How would you determine the financial standing of a company prior to doing business with them?
Dun and Bradstreet Report
Financial Reports
Credit Checks
Under what circumstances might a QS encounter insolvency?
- Contractor having financial difficulty
- Approached by a client who has a contractor that has ceased trading
- appointed by an external body to prepare a commercial report
What is liquidation?
Formal process which brings about the closure of a limited company.
What is the difference between administration and liquidation?
Administration is where an administrator is appointed to manage the company’s affairs on behalf of the creditors
Liquidation involved the shutting down of the company selling off assets to pay creditors
