Accounting Principles & Procedures

Question 1

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

Answer 1

profit and loss account
balance sheet
cash flow statement

Question 2

What is the difference between management and financial accounts?

Answer 2

Management accounts are for the internal use of the management team. Financial accounts are the company accounts required by law.

Question 3

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

Answer 3

A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss. The balance sheet shows what a company owns (assets) and what it owes (liabilities) at a given point in time.

Question 4

What is a cashflow statement?

Answer 4

It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period. It is broken down into operating, investing and financing activities. It measures the short term ability of a firm to pay off its bills.

Question 5

What is a sinking fund?

Answer 5

Set aside revenue for future expense or long-term debt

Question 6

What are capital allowances?

Answer 6

Tax relied on certain items bought for businesses

Question 7

What is insolvency?

Answer 7

Inability to pay debts. Liabilities exceed assets.

Question 8

What is Companies House?

Answer 8

Agency that incorporates and dissolves limited companies

Question 9

What does HMRC stand for?

Answer 9

Her Majesties Revenue and Customs

Question 10

What are the main types of ratio analysis used to assess a company’s financial strength?

Answer 10

Management Operating Ratios - these cover the liquidity and profitability aspects of the company

Question 11

What are liquidity ratios?

Answer 11

Measure the ability of the company to pay off its current liabilities by converting its current assets into cash. Calculated by current assets / current liabilities (ratio is usually around 1.5 but it depends on the sector of activity, a liquidity ratio of less than 0.75 can be an early indicator of insolvency)

Question 12

What are profitability ratios?

Answer 12

Measure the performance of the company to generate profits. Trading profit ratio calculated by turnover - (cost of sales / turnover).

Question 13

What are financial gearing ratios?

Answer 13

Measure the financial structure of the company which are crucial indicators for the external suppliers of debt and equity as well as for internal management. They help to measure solvency.

Question 14

What are investment ratios?

Answer 14

These relate to the financial returns that a company is achieving

Question 15

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

Answer 15

For own business accounts
For assessing the financial strength of contractors and those tendering for contracts
For assessing competition

Question 16

What is the purpose of a profit and loss (P and L)?

Answer 16

1. Monitor and measure profit or loss. Significant problems can arise if the information is inaccurate, either through incompetence or deliberate fraud.
2. Compared to its past performance, compared to the budget and compared to other businesses
3. Assist in forecasting future performance (next periods budget)
4. Calculate tax

Question 17

What is the difference between creditors and debtors?

Answer 17

Creditors are business entities that are owed money by another entity that they have extended credit to (i.e., your firm owes another firm money)
Debtors are business entities that owe money to another respective company (i.e., a firm who owes your firm money)

Question 18

What are management accounts?

Answer 18

Accounts prepared by a company for internal management use, or accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the funding. They will not be audited externally.

Question 19

What does the role of a Service Delivery Manager involve?

Answer 19

Review of project finances - report to team leader on gross profit margins. Review of resources booking to project. Compilation of monthly invoice/application for submission to finance/client. Interface with client to ensure payment rec in accordance with payment terms. Arrange CPF to review clients satisfaction with service received.

Question 20

What is the Late Payment of Commercial Debts (Interest) Act 1998 and Late Payment of Commercial Debts Regulations 2002?

Answer 20

Statute that allows the recovery of interest at the Bank of England Base rate plus 8% on debts which are not paid by the agreed payment date

Question 21

What are financial statements?

Answer 21

Forecasts of income and expenditure which can be used as an analytical tool to identify potential shortfalls and surpluses

Question 22

What is profit and loss?

Answer 22

Shows company sales, running costs and profit/loss over a financial period (usually 1 year). Used to show sales vs expenses (invoicing vs time and disbursements). Can be used to identify non-profitable work.

Question 23

What is a balance sheet?

Answer 23

Shows the value of everything the company owns and owes. Shows the value of the business at any given point.

Question 24

What is a cash flow?

Answer 24

Summarises amount of cash or cash equivalents entering and leaving a company.

Question 25

What is an escrow account?

Answer 25

A separate account owned by a third party, held on behalf of two other parties.

Question 26

What are solvency ratios?

Answer 26

Measures firms ability to meet long term obligations

Question 27

What is an LLP?

Answer 27

Limited Liability Partnership. Provides additional protection through limited liability i.e., only liable for your own negligence/default
Governed by Limited Liability Partnership Regulations 2001.

Question 28

When have you used company accounts in your work or when do you think you may in the future?

Question 29

How do you analyse company’s accounts?

Question 30

Why do you analyse companies’ accounts?

Answer 30

To assess a company’s financial performance over a period of time

Question 31

How do you carry out a credit check? Give an example.

Answer 31

Experian

Need to get an example

Question 32

What is the Company Act 2006?

Answer 32

It is a comprehensive piece of legislation that regulates all aspects of private and public companies. This includes general guidance on accountancy obligations and details of accounts that companies must return annually.

Question 33

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

Answer 33

A low credit rating
A liquidity ratio below 0.75
A low return on equity
A failing working capital ratio suggesting that the company has taken on more contracts than it can finance
A highly geared company that it heavily reliant on loans
A failing cashflow statement