Accounting principles L1 Flashcards

1
Q

What are the key financial statements that companies need to provide?

A

-Profit and loss accounts
-Balance sheets
-Cash flow statements

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2
Q

What is the difference between management accounts and financial accounts?

A

-Management accounts are for the intenal use of the management team
-Financial accounts are the company accounts 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 and loss
    -The balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time
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4
Q

What is a cashflow statement?

A

Summary of the actual or anticipate d ingoing and outgoing of cash in a firm over the accounting period- measures the short-term ability of a firm to pay off its bills

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5
Q

What are capital allowances?

A

Tax relief on certain items purchased for the business e.g. tools & equipment

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6
Q

What are sinking funds?

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 companies house?

A

An agency that incorporates and dissolves limited companies within the UK

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9
Q

What is the HMRC?

A

Her majesties revenue and customs

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10
Q

What are liquidity ratios?

A

Measure the ability of a company to pay off its current liabilites by converting assets in to cash.
Current assets/current liabilites
usually around 1.5

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11
Q

What are profitability ratios ?

A

Measure the perforamnce of a company in generating its profits
Trading profit margin ration=turnover-cost of sales
Low margins may be due to growth strategy, not always bad management

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12
Q

What are financieal gearing ratios?

A

Measure the financial structure of the company including solvency

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13
Q

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

A

-Aid in preparing own buisness accounts
-Assesing financial strenght of contractors and tendering for contracts
- Assesing competition

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14
Q

Whats is the purpose of profit and loss accounts?

A

-Monitor and measure profit based performance
-Compare against past perfromance and budgets
-For valuation purposes
-Assist in forecasting future performance

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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 they have extended credit to
Debtors are business entities that owe money to another respective company

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16
Q

What are management accounts?

A

Accounts prepared by a company for internal management use
Accounts prepared for a lender to evaluate if you will be able to repay any funding
Not audited

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17
Q

What is a financial statement?

A

Forecasts of income and expenditure that can be used to identify shortfalls

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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 a year)
They are used to show sales vs expense
They can be used to show sales vs expense
They can also b eused to identify non profitable work

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19
Q

What is a balance sheet?

A

Shows the value of the companies assests and liabilies and demonstrates the value of the business

20
Q

What is a cash flow forecast?

A

Summarises the amount of cash entering and leaving a company or project
Usually show an S curve on construction projects

21
Q

What is an S-Curve?

A

Refers to the shape of the expenditure profile when shown in graph form
Start of a project expenditure is low, middle of the project expenditure is high due to more expensive aspects e.g steelwork/M&E
S curve flattens as the project comes up to completion

22
Q

How can an S Curve be used by a surveyor?

A

Track and analyse a projects expenditure
Assess the financial strength of contractors

23
Q

What are escrow accounts?

A

A seperate account owned by a 3rd party held on behalf of two parties, has defined contractual conditions for the relwease of funds. Can be used as a project bank account.

24
Q

When have you used company accounts in your work?

A

To asses the financial strength of a potential purchaser

25
Q

How do you analyse a company’s accounts?

A

Calculating liquidity and profitability ratios

26
Q

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

A

Low credit rating
A liquidity ratio below 0.75
low return on equity
heavily reliant on loans
a falling cashflow statement

27
Q

Why would you not reccomend the apointment of a contractor with a low credit rating?

A

increased risk of the contractor not performing, contractor may not be able to deploy resources and materials, increased risk of contractors insolvency

28
Q

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

A

Explore the option of requesting a performance bond, review the tender submission to ensure it is not front loaded, when reviewing interim valuations, ensure they are not over claimes, project bank account

29
Q

What is taxation?

A

Money owed to the HMRC based on a companies profit

30
Q

What is revenue?

A

Income generated from sales of products or services

31
Q

What is capital expenditure?

A

Money spent on acquiring or maintaining fixed assets

32
Q

What is auditing?

A

Examining and verification of a companies financial records- ensure they are in line with accounting standards

33
Q

How do you ensure healthy cashflow?

A

Ensure cash coming in is greater than going out

34
Q

What is accounting?

A

Process of keeping financial accounts

35
Q

What is bankruptcy

A

Legal process where debts are unpaid and unable to be paid, a company may seek relief. Court ordered and remains on file for 10 years.

36
Q

What is VAT?

A

Value added tax

37
Q

What is the standard rate of VAT?

A

20%

38
Q

When should a company be registered for VAT?

A

Within 3 months

39
Q

Why should you keep company accounts?

A
  • To keep track of money coming in and out
  • To monitor profit and loss
  • Future business planning
  • Highlight any problem areas of the company so they can be reviewed and solved
  • To submit annual financial statements to Company House.

In accordance with the Company’s Act, 1985 limited companies must provide their year-end accounts in accordance with a legal format

40
Q

Mentioned in submission

What is a balance sheet?

A
  • A balance sheet is a statement showing a business’s financial position at a point in time.
  • It shows a business’s assets and liability at a given date
41
Q

Mentioned in submission

What is a profit and loss account?

A

P and L accounts demonstrate how the revenue is transformed into net profit

42
Q

What is the difference between a Sole Trader, Partnership, or Limited Company and an LLP?

A

Sole Trader
A person who is the excludive owner of a buisness, entitled to keep all profits after tax but liable for all losses. (Unlimited Liability).

Partnership
A business organisation in which two or more individuals manage and operate the business. Both owners are equally personally liable for the debts from the business.

Limited
In a limited company, the shareholder’s liability is limited to the capital they originally invested. If the company becomes insolvent, the shareholder’s personal assets remain protected.

Limited Liability Partnership (LLP)
An LLP is a partnership where some or all partners have limited liabilities. One partner is not responsible for another patner’s misconduct or negligence.

43
Q

What is the difference between a public limited company (PLC) and a private limited company (LTD)?

A

PLCs are owned by shareholders and managed by directors. Members of the public can buy shares.

LTDs do not publicly trade shares and is limited to a maximum of 50 shareholders.

44
Q

What is the threshold that requires a set of audited accounts?

A

PLCs: must always be audited

LTDs: either; turnover exceeds £10.2m; total assets in excess of £5.1m; employ over 50 people

45
Q

What is the role of the auditor?

A

To check that accounts are correct and comply with the law (IFRS standards)

46
Q

Who can be an auditor?

A

A Chartered or Certified Accountant