Accounting Principles & Procedures

Question 1

What is your understanding of term tax depreciation?

Answer 1

It is where the declining value of an asset is offset against a companies taxable profit.

The depreciation in value can be recorded as an expense in order to reduce the amount of taxable income.

This can be applied on things such as plant, tools, vehicles computers, furniture and buildings.

Question 2

What are overheads?

Answer 2

The operating costs of a business that are incurred on an ongoing basis.

Overheads can be fixed or variable.

Fixed overheads can include rent for office space or building insurance costs that do not change month to month.

Variable overheads fluctuate depending on the activity of the business and include things such as utility charges.

Question 3

What is a balance sheet?

Answer 3

• A statement of the assets, liabilities and capital of a business, detailing the balance of income and expenditure over the preceding period.

Question 4

What is a profit and loss account?

Answer 4

• A financial statement that summarises the revenues, costs and expenses incurred during a specified period.
• These records provide information about a company’s ability or inability to generate profit by increasing revenue.

Question 5

What is revenue?

Answer 5

• The amount of money brought into a company, typically by the sale of goods, products or services

Question 6

What is working capital?

Answer 6

• The capital of a business used in its day-to-day trading operations, calculated as current assets minus current liabilities

Question 7

What is EBITA?

Answer 7

• Earnings Before Interest Taxes & Amortisation
• Method of determining profitability, measures what an entity earned before the deduction of taxes, interest and paying debts.

Question 8

What is VAT?

Answer 8

• Value Added Tax – charged on most goods and services that VAT registered businesses provide in the UK.

Question 9

What is the VAT registration threshold?

Answer 9

• When your VAT taxable turnover exceeds the current threshold of £85,000. (i.e. all sales that aren’t exempt from VAT)

Question 10

What are the levels of VAT?

Answer 10

• Standard – 20%
• Reduced – 5%
• Zero - 0%

Question 11

What is money laundering?

Answer 11

• The practice of engaging in financial transactions to conceal the identity, source, and/or destination of illegally gained money.

Question 12

Why do we need financial reporting?

Answer 12

• To regulate and prevent fraud
• Provide information to investors
• Help manage the business

Question 13

What are the basic accounting formats?

Answer 13

• Balance sheet
• Profit and loss statement

Question 14

What is a cash flow and how is it prepared?

Answer 14

• Cash flow is the movement of money into or out of a project over the duration of the project
• A Construction S curve can be used to predict cash flow on most projects

Question 15

What is capital expenditure?

Answer 15

• Expenditure to create future benefits i.e. purchasing fixed assets or to add value to an existing asset.

Question 16

What is revenue expenditure?

Answer 16

• Day to day running costs of a business. i.e. wages, admin, rent

Question 17

What is corporation tax?

Answer 17

• Tax paid on company profits
• Increased from 19% to 25% from 1st April 2023

Question 18

What is a management account?

Answer 18

• Used within a company to help management record, plan and control activities internally, they can be prepared for any period.

Question 19

What is a company account?

Answer 19

• Registered companies in the UK are required to prepare annual accounts for HMRC and Companies House every year.

Question 20

What standards must your accounts be prepared to?

Answer 20

• The International Financial Reporting Standards
• The UK Generally Accepted Accounting Practice

Question 21

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

Answer 21

• For reviewing their own firms’ accounts.
• For assessing the financial strength of contractors and those tendering for contracts.
• For reviewing profitability and sustainability.

Question 22

Why does a business keep company accounts?

Answer 22

Record and measure a the company’s profitability.

For tax calculation including tax calculating taxable deductions.

Legislation requires companies to keep accurate records -

Business growth is encouraged by identifying profitable operations and those that are loss making

Question 23

What is financial leverage?

Answer 23

It is the concept of using borrowed funds in the form of debt to enhance business operations and increase the companies profitability and rates of return.

In the event that the rate of return invested via borrowed funds is higher than that interest on those funds then more profit can be generated.

Question 24

What is the difference between a current and fixed asset?

Answer 24

Current asset - can normally be converted into cash within one financial year and are regarded as assets that allow day to day business operations e.g money owed to a company following sales of its products and inventory.

Fixed asset - typically cannot be converted into cash within one financial year. These are assets are recorded on company balance sheets as fixed assets that the company owns e.g vehicles, machinery and buildings.

Question 25

What is the difference between a profit and loss account and a balance sheet?

Answer 25

Profit and loss account - shows the incomes and expenditures of a company and the resulting profit or loss.

Balance sheet - shows what a company owns (assets) and what it owes (liabilities) at a give point in time.

Question 26

What are the key financial statements that all companies must provide?

Answer 26

Profit and loss account.
Balance sheets.
Cash flow statements.

Question 27

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

Answer 27

For reviewing their own firms’ accounts.
For assessing the financial strength of contractors and those tendering for contracts.
For reviewing profitability and sustainability.

Question 28

What is the purpose of a profit and loss account?

Answer 28

Monitor and measure profit (or loss).

Can be used to compare a firms past performance, compare performance to the budget and compared to other businesses.

Assist in forecasting future performance (can be used to inform next period’s budget).

For calculating tax.

Question 29

What is the difference between debtors and creditors?

Answer 29

Creditors - sub consultants that you owe money to.

Debtors - a firm that owes your firm money - e.g a client.

Question 30

What is auditing?

Answer 30

Term used to describe the examination and verification of a company’s financial records.

Auditing performed to ensure the financial statements are prepared in accordance with the relevant accounting standards.

Financial records prepared internally must be in accordance with GAAP (Generally Accepted Accounting Principals).

Question 31

What is insolvency?

Answer 31

When a business can no longer meet your financial obligations, ie not enough money coming in to match money going out.

Question 32

Give me some examples of how you forecast your individual fee income.

Answer 32

Consideration of pipeline
Framework contracts
Upcoming projects
Scheduled appointments

Question 33

What does a Dun and Bradstreet report show?

Answer 33

It compiles business information to measure the creditworthiness of a company. They are the business equivalent of a credit report check. It will colour code the companies financial status from green, red or orange/yellow to show their risk.

Question 34

What are the limitations of a Dun and Bradstreet Report?

Answer 34

It is limited only to the latest submitted documents on companies house.

Question 35

Where can you find information on a company’s financial status?

Answer 35

Companies House for filed accounts
Credit checks.

Question 36

What are the signs of insolvency?

Answer 36

Overvaluing Interim Valuations
Front Loading
Dissatisfied workforce
Asking for upfront payment
Contractual Approach

Question 37

What is a purchase order?

Answer 37

A purchase order (PO) is a legal document that is created by a buyer and sent to a seller to confirm their intention to purchase products and/or services.`