Accounting Principles Lvl 1 Flashcards
What are the key financial statements
- Profit and loss accounts
- Balance sheet
- Cash flow statement
What is the difference between management and financial accounts
- Management are for internal use by the mgmt team
- Financial accounts are the company accounts required by Companies Act 2014
What is the difference between a P&L and balance sheet
- P&L shows income and expenditures of a company and resulting profit or loss
- Balance sheet shows what the company owns and what it owes.
What is a cashflow statement
- Summary of actual and anticipated ingoing and outgoings of cash in a firm over the accounting period
- Measures short term ability of firm to pay bills
Explain your understanding of Capital allowances, sinking fund, insolvency
Capital allowances - Tax relief for certain purchases by businesses
Sinking fund - Funds set aside for future expenses
Insolvency - Liabilities exceed assets
What are liquidity ratios
- Measures companies ability to pay of liabilities by converting assets into cash
- Current assets / Current liabilities
- Ratio around 1.5
- Liquidity ratio of less than .75 can be early indications of insolvency
What is profitability ratio
- Measures performance of company in generating profits
- Net Profit / Total Revenue of Company
- Margins are industry dependent
What are financial gearing ratios
- Financial ratio that compares some form of capital or owner equity to funds borrowed by the company
- Helps measure solvency
- Highly geared rely on debt
- Interest reduces profit
Why do chartered surveyors need to understand and interpret accounts
- Aid in preparing own business accounts
- Assessing financial strength of contractors and tenants
- Assessing competition
What is the purpose of a P&L
- Monitor and measure profit (Loss)
- Benchmark
- Valuation purposes and competitor analysis
- Forecasting
- Calculate tax
What’s the difference between debt and creditors
Cred - Owed money (extended credit)
Debtors - Owes money
What is a financial statement
Financial statements are written records that convey the business activities and the financial performance of a company
What is a profit and loss account
Demonstrates companies sales, running costs and profit and loss
- Used to show sales v. expenses
- Also identify non- profitable work
What is a balance sheet
- Shows value of everything the company owns made up of assets and liabilities
What is a cash flow forecast
- Details out the cash entering and leaving the business in a financial year
What is an S-Curve
- S-Curve means ‘standard’ and refers to the shape of the expenditure profile when shown on a graph.
- Start of project rate of exp is lower
- As scheme progresses, the rate of expenditure will typically increase as more expensive components are installed M&E etc..
- Towards the end the rate of expenditure will slow
What are Escrow accounts
- Separate account owned by a 3rd party, held on behalf of two parties
- Defined contractual conditions for the release of funds
When have you used company accounts in your work
- Assess both contractors for works and tenants for letting and assignment
How do you analyse a companies accounts
- Clients accountant should do but I have carried out some simple ratios and overall commentary
How do you carry out a credit check
I personally use search4less to get an understanding of the companies financials and there board makeup
What are the signs of an insolvent company
- Low credit
- Liquidty ratio below .75
- Falling working capital ratio = company may be taking on too many projects
- Low return on equity
- Highly geared
- falling cashflow
Why would you not recommend the appointment of a contractor with low crediting rating
- Increased risk of poor performance
- Increased risk of under resourced project
- Poor materials used
- Contractor insolvency
What measures could you take if your client wants to go with a low credit rated contractor
- Request a performance bond
- Review tender submission to ensure it’s not excessively front loaded
- Project bank account
What is GAAP/IFRS
GAAP and IFRS are two important sets of accounting standards that companies use to prepare their financial statements. Here’s a breakdown of each:
GAAP (Generally Accepted Accounting Principles): This is the common standard for financial reporting in the United States. It’s a rule-based system, meaning companies must follow specific guidelines for accounting practices. The Financial Accounting Standards Board (FASB) sets these standards.
IFRS (International Financial Reporting Standards): This is a set of international accounting standards used by many countries outside the US. It’s a principles-based system, which means it provides more general guidelines rather than strict rules. The International Accounting Standards Board (IASB) develops these standards.
What is Gross Profit
Revenues less cost of goods
Profit before operating expenses/ interest / taxes
Net profit
Profit after operating expenses, tax, interest
What is Capital expenditure
Assets employed in a buisness
What is revenue expenditure
Repair and maintenance / wages / rent
What is liquidity
How much cash is available
Assets easily sold
Profit margins
GROSS PROFIT = NET SALES - COGS / NET SALES
Operating profit
= GROSS PROFIT - OPERATING EXPENSES - DEPRECIATION AND AMORTISATION
Gearing
Debt to equity = Total debt / Total Equity *100
ROE
NET INCOME / SHAREHOLDER EQUITY
HOW MUCH THE BUSINESS IS ACHIEVING OF NET PROFIT IF COMPARED TO NET WORTH OF BUSINESS
