Accounting, Principles & Procedures

Question 1

What governs how financial statements are produced in the UK?

Answer 1

The Companies Act 2006 legislation that enforces standards set out in;
Generally Accepted Accounting Practice UK (GAAP UK) published by the UK’s Financial Reporting Council (FRC).

Question 2

What is the purpose of GAAP?

Answer 2

To set standards and rules which dictate how businesses report and conduct their accounting to generate a degree of uniformity. This ensures accuracy between review of one company’s performance to another.

Question 3

What are some key financial statements companies must provide?

Answer 3

• Profit and loss accounts
• balance sheets
• cash flow statements

Question 4

Explain profit and loss account

Answer 4

A financial statement which outlines income and expenditure of a company to obtain the resulting profit or loss.

Question 5

Explain a balance sheet

Answer 5

A financial report that provides an overview of the business’s assets, liabilities and owners equity.

Shows what a company owns (its assets) and what a company owes (its liabilities)

Question 6

Explain cash flow statement

Answer 6

A summary of actual or anticipated incoming and outgoing cash. It measures short-term ability of a firm to pay off its debts and invest in assets with liquid cash.

Question 7

Explain liquidity ratios

Answer 7

Liquidity ratios measure the ability of a company to pay off its current liabilities by converting its current assets into cash.

A liquidity ratio of less than 0.75 is an early indicator of insolvency.

Question 8

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

Answer 8

• to aid in their own business accounts
• for assessing the financial strength of contractors tendering for contracts
• for assessing competition

Question 9

What is the purpose of profit and loss?

Answer 9

• to monitor and measure profit and loss over time
• to compare against past performance and company budgets
• to assist in future forecasting
• for valuation purposes and comparison against competitors

Question 10

What’s the difference between management accounts and financial accounts?

Answer 10

Management accounts are for internal use.

Financial accounts are the company accounts which are required by law.

Question 11

Explain creditors

Answer 11

Creditors are business entities that are owed money by another respective company. For example, if you have provided services to a client and they still owe payment of your fees, you become a creditor to the client.

Question 12

Explain debtors

Answer 12

Debtors are business entities that owe money to another respective company. For example, if you have used a sub-consultant and have yet to pay their fees, you become a debtor to the sun-consultant.

Question 13

What’s the difference between debtors and creditors?

Answer 13

If you are a debtor you owe money.

If you are a creditor you are owed money.

Question 14

What is an S-Curve?

Answer 14

An S-Curve is the standard expenditure profile for typical construction projects. Generally starting low, increasing in the middle and then flattening at the end.

Question 15

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

Answer 15

• low credit score
• a liquidity ratio below 0.75
• a falling cash flow statement

Question 16

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

Answer 16

• increase risk of contractor failing to perform satisfactorily
• increase risk of contractor failing to deploy sufficient resource and materials to the project
• increased risk of insolvency

Question 17

What can you do to reduce risk if the client insists on appointing a contractor with a low credit score?

Answer 17

• recommend the use of a performance bond
• take extra care to ensure tender submission is not front loaded
• take extra care to ensure interim valuations are accurate and not front over claimed

Question 18

Explain insolvency

Answer 18

The inability of a debtor to pay its debts and company is put into liquidation. The aim of liquidation is to recover all available assets so they can be disposed and all proceeds distributed to the creditors to satisfy debts.

Question 19

What is the role of the auditor?

Answer 19

An auditor is authorised to review financial records if a company to ensure their accuracy and compliance with local tax law. An auditor reviews; balance sheet, income statements and cash flow statements.

Question 20

What’s the difference between an accountant and auditor?

Answer 20

An accountant helps with a company’s day to day finances (financial reports, tax returns etc.)

An auditor checks this has all been done correctly and legally.