Accounting principles & procedures

Question 1

Level 1 - Accounting principles

What are the three types of financial statement you may come across relating to a company and their purpose?

Answer 1

1. Balance sheets
   * reports on a company’s assets, liabilities and equity during a specific point in time.
   * Assesses financial health
   * Identify’s trends (when compared to previous)
2. Cash flow forecast
   * Shows money expected to move in and out during a specific period
   * Assesses liquidity
3. Profit & Loss accounts
   * Shows income and expenditure over specific period
   * Measures net profit or loss made
   * Calculates company ‘s profit margin

Question 2

Level 1 - Accounting principles

What is the difference between financial and management accounts?

Answer 2

• Financial - In line with the Companies ACT 2006 Company’s must file their annual accounts to Companies House
• Management - Management accounts are for internal purposes and not required by law

Question 3

Level 1 - Accounting principles

What is financial gearing ratios?

Answer 3

• Analyses a companies capital structure and financial leverage
• Measures the level od debt finance to equity held in a company
• Highly geared companies (>50%) rely mainly on borrowing

Question 4

Level 1 - Accounting principles

What is liquidity ratios?

Answer 4

• Measures the ability of a company to pay it’s debts by turning their assets into cash

Question 5

Level 1 - Accounting principles

What is Profitability ratio?

Answer 5

• Measures the performance of a company in generating its profits

Question 6

Level 1 - Accounting principles

How would you use this information in your role?

Answer 6

To assess the financial strength and performance of contractors at pre-qualification and tender stages.

Question 7

Level 1 - Accounting principles

What would you typically find in balance sheets?

Answer 7

• Assets
• Liability
• Equity

Question 8

Level 1 - Accounting principles

What would you typically find in P&L statements?

Answer 8

• Revenue
• Net Income
• Operating Expenses
• Gross profit
• Net profit
• Cost of goods

Question 9

Level 1 - Accounting principles

Why are cashflows important on construction projects?

Answer 9

• Gives the client understanding of their financial commitment
• Gives an indication on progress and;
• early indication of financial difficulty
• Acts as a check against valuations