Accounting Principles and Procedures - Level 1

Question 1

What is the difference between a profit and loss account and a balance sheet?

Answer 1

1. A P&L accounts shows the incomes and expenditures of a company resulting in profit or loss.
2. A balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time.

Question 2

What are the key financial statements that all companies must provide? What are company accounts

Answer 2

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.

Question 3

What is a cashflow statement?

Answer 3

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.

Question 4

Why do Chartered Surveyors need to understand and be able to interpret company accounts?

Answer 4

1. For reviewing own firms accounts
2. Assessing the financial strength of a contractor and those tendering for a contract
3. For reviewing profitability and sustainability

Question 5

What is the purpose of a profit and loss account?

Answer 5

1. To monitor profit and loss. Significant problems can arise if information is inaccurate, either through incompetence or fraud.
2. Compare current to past performance, compare to the budget and other businesses
3. Assisting with budgeting and taxation

Question 6

What is the difference between creditors and debtors

Answer 6

1. Creditors - Firm owe them

2. Debtors - Owe the firm

Question 7

What are financial statements?

Answer 7

Analysis of income and expenditure which can be used as an analytical tool to identify shortfalls and surpluses

Question 8

What are profit and loss accounts?

Answer 8

Shows the company’s income and outgoings over a financial period.

Question 9

What is a balance sheet?

Answer 9

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.

Question 10

What are signs of insolvency in company accounts/credit checks?

Answer 10

• 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

Question 11

What looking for a contractor what should you look at in their accounts?

Answer 11

• Credit rating
• Working capital ratio = total assets/total liabilities
• Profitability

Question 12

What are statutory accounts?

Answer 12

1. 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.

Question 13

What are management accounts?

Answer 13

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.

Question 14

What is the difference between management accounts and statutory accounts?

Answer 14

Management - internal use to measure day to day performance

Statutory - professionally produced accounts which are filed at Companies House

Question 15

What are IFRS?

Answer 15

International Financial Reporting Standards - provide common accounting language to increase transparency in the representation of financial information

Question 16

Why are the IFRS relevant for company accounts?

Answer 16

they specify how companies must maintain and report their accounts.

Question 17

How can you use company accounts to assess covenant strength?

Answer 17

You can look at the profitability and net assets in the accounts to determine the company’s ability to pay of debts.

Question 18

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Answer 18

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Question 19

What is an audit?

Answer 19

Process to check a person or companies compliance with policy/procedure or regulation.

Question 20

What is turnover?

Answer 20

Income that a company receives from normal business activities

Question 21

Why does a business keep company accounts?

Answer 21

• Tax purposes
• Demonstrate company’s financial standing
• Cash flow and profits

Question 22

What is an escrow account?

Answer 22

Separate bank account owned by a third party

Can be used as a project bank account

Question 23

What are overheads?

Answer 23

Indirect costs or fixed expenses

E.g. rent, utility bills, insurance

Question 24

Three types of accountancy ratio?

Answer 24

1. Liquidity (assets to cash)
2. Profitability Ratio (earning relative to it’s revenue)
3. Gearing Ratio (borrowed fund to it’s equity)

Question 25

What are capital allowances?

Answer 25

Tax relief on capital expenditure on improving an asset

Question 26

What is a current asset?

Answer 26

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

Question 27

What are fixed assets?

Answer 27

Assets which are not likely to be converted into cash quickly

Question 28

Why is a cash flow forecast used?

Answer 28

• Understand future financial commitments
• keep track of overdue payments
• plan for gash gaps
• manage surplus cash

Question 29

What is insolvency?

Answer 29

Inability to pay off debts or creditors

Question 30

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

Answer 30

Dun and Bradstreet Report

Financial Reports

Credit Checks

Question 31

Under what circumstances might a QS encounter insolvency?

Answer 31

• 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

Question 32

What is liquidation?

Answer 32

Formal process which brings about the closure of a limited company.

Question 33

What is the difference between administration and liquidation?

Answer 33

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