Accounting Principles & Procedures

Question 1

What is an audit?

Answer 1

• Review of organisations financial performance and validity and reliability of information
• To check company’s compliance with policy, procedures and compliance with regs

Question 2

What is CAPEX?

Answer 2

• Capital expenditure
• Company’s long term expenses.
• E.g. buildings, equipment, machinery and vehicles.

Question 3

What is OPEX?

Answer 3

• Operating expenses.
• Company’s day-to-day expenses.
• E.g. salaries, rent, utilities, property, taxes and costs of goods sold.

Question 4

What is capital allowances?

Answer 4

Offsetting of tax for capital expenditure against annual pre-tax income. Capital allowances may be claimed on most assets purchased for use in the business. Examples include:
- Plant and machinery
- Thermal insulation for industrial buildings
- Compliance provisions with Part B (fire safety)
- Safety measures for sports grounds

Question 5

What is Turnover?

Answer 5

Turnover is the total amount of income generated by the sale of goods and services.

It’s sometimes referred to as ‘gross revenue’ or ‘income’. This is different to profit, which is a measure of earnings.

Question 6

What is profit?

Answer 6

Profit describes the financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity in question.

(Any profits earned funnel back to business owners, who choose to either pocket the cash or reinvest it back into the business. Profit is calculated as total revenue less total expenses).

Question 7

What is gross profit?

Answer 7

A company’s profits earned after subtracting the costs of producing and distributing its products.

Question 8

What is net profit?

Answer 8

Net income indicates a company’s profit after all of its expenses have been deducted from revenues.

Question 9

What is the difference between gross profit and net profit?

Answer 9

Gross profit is an intermediate earnings figure before all expenses are included and net profit is the final amount of profit or loss after all expenses are included

Question 10

What are overheads?

Answer 10

• Calculated costs of running the company contracted to carry out a project.
• Example: head office administrative costs.

Question 11

What is credit control?

Answer 11

Strategy employed by businesses to extend credit to those with “good” credit and limit credit to those with “weak” credit, or possibly deny it to delinquent borrowers. This will both increase sales and decrease bad debts, thus improving a company’s cash flow.

Question 12

What is a county court judgement (CCJ)?

Answer 12

Order from the County Court instructing you to repay a debt. A lender can apply to the County Court if you don’t repay a debt. So, if you receive a Summons, or County Court Claim Form, it means a lender has decided to take legal action against you to recover the money.

Question 13

What is ratio analysis?

Answer 13

Way of reviewing a company’s performance in terms of profitability, solvency and inventory.
- Gearing: ratio derived from a balance sheet showing a company is funded by debt.
- Liquidity: inability of a company to stay solvent.
- Investment/shareholders.

Question 14

Who are statutory accounts for?

Answer 14

Prepared from the company’s financial records at the end of the financial year. Must be sent to:
- Shareholders
- Companies House
- HMRC as part of the tax return

Question 15

What do financial (statutory) accounts include?

Answer 15

• Profit and Loss Statement
• Balance Sheet
• Notes about the Accounts
• Director’s Report (unless you’re a micro-entity)

Question 16

What is a profit and loss statement?

Answer 16

• Profit and loss account = shows the company’s sales, running costs and profit or loss it has made over the financial year.

Question 17

What is a balance sheet?

Answer 17

A balance sheet is a business statement that shows:
- what the business owns (assets)
- what it owes (liabilities), and
- the value of the owner’s investment (owner’s equity) in the business.

Question 18

What is companies house and what does it include?

Answer 18

Online portal which details information about Registered Companies. Includes:
- Profit and loss statements
- Company status
- Secretaries/directors of the company

Question 19

Who are management accounts for?

Answer 19

For a company’s own internal use by the management team.
- Set of summarised accounting data.
- Prepared and presented regularly (usually monthly) for a firm’s management to see key
financial and statistical information to make short-term decisions.
- Include:
o Balance sheet
o Cash flow
o Profit and loss statement
o Statement of stockholders’ equity

Question 20

What is a cash flow statement?

Answer 20

• Movement of cash in or out of a business
• Measured during a specific period of time
• Helps to understand firms short term ability to pay off bills.

Question 21

What is a credit rating?

Answer 21

• An estimate of the ability of a person or organization to fulfil their financial commitments, based on previous dealings.
• We would advise a Client against appointing a Contractor with a low credit rating.
• If a Contractor has a low credit rating then we would advise the Client to get a parent
  company guarantee and performance bond. We would have extra care to make sure the
  Contractor wasn’t front loading.
• Indicators:
  o Poor performance
  o Restricted on-site resources
  o Supply chain issues

Question 22

What is Value Added Tax?

Answer 22

Taxation applied to goods and services of a project i.e. certain elements of the project.

Question 23

What are the four rates of VAT?

Answer 23

• Standard Rate = 20% (most construction projects)
• Reduced Rate = 5% (Sustainable technology)
• Zero Rated = 0% (New-build residential developments)
• Exempt = Nil (Charities)

Question 24

What is insolvency?

Answer 24

Inability of an organisation to pay its debts.

Question 25

What are the contractor signs of insolvency?

Answer 25

• Low credit rating
• Highly geared and reliance on loans
• Slow progress on site
• Artificially high interim applications
• Falling cashflow statement
• Cash flow forecast differing from actual expenditure
• Liabilities exceeding assets on balance sheet

Question 26

What are the employer signs of insolvency?

Answer 26

• Failure to pay interim certificates
• Identifying spurious defects to reduce sums due

Question 27

What is a Dun and Bradstreet report?

Answer 27

A D&B report compiles available business data to measure the creditworthiness of a company.

Question 28

What is liquidation?

Answer 28

• When company wound up assets sold off to pay creditors
• Administration = company appointed to mange business affairs
• Liquidation = shutting down of company and selling of assets to pay creditors

Question 29

What is bankruptcy?

Answer 29

Legally declared inability to pay creditors

Question 30

What is WIP?

Answer 30

The total cost of unfinished instructions.

Question 31

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

Answer 31

• For reviewing their own accounts.
• For assessing the financial strength of contractors and those tendering for contacts.
• For reviewing profitability and sustainability of businesses they engage with.

Question 32

What is the difference between debtors and creditors?

Answer 32

Creditors - your firm owes another firm money.

Debtors - a firm who owes your firm money.

Question 33

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

Answer 33

• low credit rating
• A low return on equity
• Highly geared company (rely on loans)
• A falling cash flow statement
• A falling working capital ratio suggesting that the company has taken on more contracts then it can finance.

Question 34

What is GAAP

Answer 34

Generally Accepted Accounting Principles

This is the financial reporting framework adopted by some companies in the UK.

Question 35

What is CIS?

Answer 35

Construction Industry Scheme - aims to reduce tax evasion.

Contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC).

The deductions count as advance payments towards the subcontractor’s tax and National Insurance.