Accounting Principles & Procedures Flashcards
Why is it important to estimate cash flow on a project
To identify any shortfalls in cash balance where you may not be able to pay supplier and employees. Ensures that the cash coming in is more than the cash going out. This ensures that you he client can pay any outstanding invoice.
I monitor cash flow for client on projects by estimating upcoming invoices on projects and inputting these with actual invoices once received.
What is a balance sheet?
A statement showing a business financial position at a point in time. It shows the business’s assets and liabilities at a given date, usually the end of the financial year.
What is a profit and loss account
A summary of a business’s income and expenditure transactions usually prepared on an annual basis.
Accounts demonstrate how the revenue is transformed into net income
What types of company are there?
Sole patnership - single individuals runs business and has unlimited liability.
Partnership - involves two or more individuals forming a business. Can be general patnerships where all partners share the management and liability of the business or limited partnerships where there are both general partners and limited partners.
How would you assess the financial position of a company?
If they are a limited company their financial statements are found on companies house. These provide a snapshot of the financial performance.
Calculate liquidity ratios. Which calculate the ability of a company to meet its short term liabilities. Current ratio and acid test.
Calculate profitability ratios such as gross profit margin and return on investment.
Credit checks such as Dunn and Brad street reports
What are the main types of ratio used to assess a company’s financial strength?
Liquidity - the ability of a company to turn its assets into cash. Current ratio = liquid assets / liabilities.
return on investment = net profit / investment cost
Gearing - ratio of the companies debt to its equity. Net gearing = net debt / equity
Profit - how effective a company is at generating profit. Gross profit margin = gross profit / revenue
Financial - the rate at which a company sells its stock and the efficiency that it uses its assets. Asset turnover= revenue / total assets
Why is it important to be able to understand financial statements?
When appointing new contractors or consultants you can assess the financial position of these and ensure they are able to carry out the works.
What are the GAAP?
Generally accepted accounting principles are a set of standards and procedures that companies use to compare their financial statements these principles ensure that financial reporting is transparent and consistent across different organisations allowing investors creditors and other stakeholders to make informed decisions.
Regularity
Consistency
Sincerity
Performance of methods
Principal of non compensation
Periodicy
Materiality
Utmost good faith
Prudence
What is a limited company
Limited - liability of the owners is limited to the amount of money invested. Personal assets of the company are protected. Private limited companies can’t offer share to the public.
