Accounting Principles and Procedures (Level 1) Flashcards

1
Q

What are the three key financial statements that companies provide?

A
  • Profit and loss accounts.
  • Balance sheets.
  • Cash flow statements.
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2
Q

What is the difference between management and financial accounts?

A
  • Management accounts are for the internal use of the management team.
  • Financial accounts are the company accounts that are required by UK law.
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3
Q

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

A
  • 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.
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4
Q

What is a cashflow statement?

A
  • 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.
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5
Q

What are Capital Allowances?

A

a tax relief on certain items purchased for the business for example tools and equipment.

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6
Q

What are Sinking Finds?

A

Funds that are set aside for future expense or long-term debt.

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7
Q

What is Insolvency?

A

An inability to pay debts where liabilities exceed assets.

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8
Q

What is the Companies House?

A

An agency that incorporates and dissolves limited companies within the United Kingdom.

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9
Q

What is HMRC?

A

His Majesties Revenue and Customs.

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10
Q

What are Liquidity ratios?

A
  • 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.
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11
Q

What are Profitability ratios?

A
  • 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.
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12
Q

What are Financial Gearing Ratios?

A
  • 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

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13
Q

Why do chartered quantity surveyors need to understand and be able to interpret company accounts?

A
  • To aid in preparing their own business accounts.
  • For assessing the financial strength of contractors and those tendering for contracts.
  • For assessing competition.
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14
Q

What is the purpose of a P & L?

A
  • 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.
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15
Q

What is the difference between debtors and creditors?

A
  • 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.
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16
Q

What are Management Accounts?

A
  • The accounts prepared by a company for internal management use.
  • Accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the funding.
  • These accounts are not be audited externally.
17
Q

What is a Financial Statement?

A
  • Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses.
18
Q

What is a Profit and Loss account?

A
  • They demonstrate a companies sales, running costs and profit or loss over a financial period (usually 1 year).
  • They are used to show sales vs expense (invoicing vs time and disbursements).
  • They can also be used to identify non-profitable work.
19
Q

What is a Balance Sheet?

A
  • They shows the value of everything the company owns made up of its assets and liabilities.
  • The balance sheet demonstrates the value of the business at any given point in time.
20
Q

What is a Cash Flow forecast?

A
  • A cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity.
  • On construction projects they usually show as an ‘S’ curve.
  • There is typically a small financial outlay at the start, a steep increase during the midway point and a taper towards the end.
21
Q

What are Escrow Accounts?

A
  • A sperate account owned by a third party, held on behalf of two other parties.
  • A bank account with defined contractual conditions for the release of funds.
  • They can be used as a project bank account.
  • Mechanisms must be in place for the release of funds such as payment certificates.
22
Q

When have you used company accounts in your work?

A
  • To assess the financial strength of contractors at Pre-Qualification Stage and tender stages.
23
Q

How do you analyse a company’s accounts?

A
  • The client’s accountants will carry out the detailed analysis but I can look at the warning signs by calculating ratios such as liquidity ratios, profitability ratios and gearing ratios.
  • I should always calculate the ratios myself as those included in the company accounts may have been manipulated.
  • I should always use the group or consolidated accounts rather than the company accounts unless it is a limited company.
24
Q

How do you carry out a credit check? Give an example.

A
  • I use the Credit Safe website to which my company subscribes to access a company’s accounts.
  • I considered both the group accounts and the company accounts.
  • If the credit rating is low, I calculate some key ratios and pass on all the information to my client’s accountants for them to analyse further.
25
Q

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

A
  • A low credit rating.
  • A liquidity ratio below 0.75.
  • A falling working capital ratio suggesting that the company has taken on more contracts than it can finance.
  • A low return on equity.
  • A highly geared company that is heavily reliant on loans.
  • A falling cashflow statement.
26
Q

Why would you not recommend the appointment of a contractor with a low credit rating?

A
  • There may be an increased risk of the contractor not performing satisfactorily.
  • It could present increased risk of the contractor failing to deploy sufficient resources and materials to the project.
  • It could increase the risk of the contractor’s insolvency.
27
Q

What measures would you recommend if your client wanted to
appoint a contractor with a low credit rating?

A
  • I would explore the option of requesting a performance bond that my client could call on if they Main Contractor failed to perform.
  • I would also review the tender submission to ensure this is not excessively front loaded.
  • When reviewing interim valuations, I would ensure that these are accurate and not over claimed.
  • A project bank account may also provide an additional level of assurance and should be considered.
28
Q

What is the Acid test?

A

(Current Assets - Inventory) / Liabilities

29
Q

What is the RICS’ buisness plan?

A

Increasing engagement with public sector employers and SMEs, recruiting assessors, and developing a new commercial strategy.