Accounting Principles and Procedures (Level 1) Flashcards
What are the three key financial statements that companies provide?
- Profit and loss accounts.
- Balance sheets.
- Cash flow statements.
What is the difference between management and financial accounts?
- Management accounts are for the internal use of the management team.
- Financial accounts are the company accounts that are required by UK law.
What is the difference between a profit and loss account and a balance sheet?
- A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss.
- The balance sheet shows what a company owns (it’s assets) and what it owes (it’s liabilities) at a given point in time.
What is a cashflow statement?
- It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
- It measures the short-term ability of a firm to pay off its bills.
What are Capital Allowances?
a tax relief on certain items purchased for the business for example tools and equipment.
What are Sinking Finds?
Funds that are set aside for future expense or long-term debt.
What is Insolvency?
An inability to pay debts where liabilities exceed assets.
What is the Companies House?
An agency that incorporates and dissolves limited companies within the United Kingdom.
What is HMRC?
His Majesties Revenue and Customs.
What are Liquidity ratios?
- Liquidity rations measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
- Liquidity ratio calculation = current assets / current liabilities.
- The ratio is usually around 1.5 but it depends on the sector of activity.
- For example house builders often operate on a liquidity ratio over 3 because they retain high value assets in the form of unsold houses.
- A liquidity ratio of less than 0.75 can be an early indicator of insolvency.
What are Profitability ratios?
- Profitability ratios measure the performance of a company in generating its profits.
- The trading profit margin ratio = turnover – (cost of sales / turnover).
- Low margins may be due to a growth strategy from the company and do not always result from bad management.
What are Financial Gearing Ratios?
- These measure the financial structure of the company which are crucial indicators for the external suppliers of debt and equity as well as for internal management.
- They help to measure solvency.
- Highly geared companies rely mainly on borrowing.
- The payment of interests reduces the profit.
Debt / Equity
Why do chartered quantity surveyors need to understand and be able to interpret company accounts?
- To aid in preparing their own business accounts.
- For assessing the financial strength of contractors and those tendering for contracts.
- For assessing competition.
What is the purpose of a P & L?
- To monitor and measure profit (or loss).
- To compare against past performance and against company budgets.
- For valuation purposes and to compare against competitors.
- To assist in forecasting with future performance.
- To calculate taxation.
What is the difference between debtors and creditors?
- Creditors are business entities that are owed money by another entity that they have extended credit to.
- For example if you have provided services to a client and they owe payment of your fees, you become a creditor to that client.
- Debtors are business entities that owe money to another respective company.
- For example if you have used a sub-consultant and still owe them payment of their fees then you become a debtor of the sub-consultant.