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Accounting Principles & Procedures Flashcards

1
Q

What are current assets?

A

Cash
Accounts recoverable
Inventory
Supplies
Prepaid insurance

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2
Q

What are current liabilities?

A

Notes payable
Accounts payable
Wages payable
Interest payable
Unearned revenues

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3
Q

What is a cash flow statement?

A

It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
It measures the short-term ability of a firm to pay off its bills.
On construction projects they usually show as an ‘S’ curve.

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4
Q

What is a balance sheet?

A

Shows company’s assets, equities and liabilities at one point in time.

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5
Q

What is a profit and loss account?

A

Shows the income and expenditure, and the resulting profit or loss over a period.

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6
Q

What is capital expenditure?

A

CAPEX - Is spent to acquire or improve an asset i.e. equipment or buildings.

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7
Q

What is revenue expenditure?

A

OPEX - Costs in the day to day running of a business.
Utility bills
Staff wages
Temporary office space

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8
Q

What are capital allowances?

A

A deduction from taxable profits for certain types of capital expenditure.
Sums of money a UK business can deduct from the overall income tax on its profits.
These sums derive from certain purchases or investments.
E.g. Plant & machinery, computer equipment.

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9
Q

How is VAT dealt with in a company account?

A

A separate VAT account is kept & needs to be up-to-date.

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10
Q

What is VAT reverse charge ?

A

Where payments are made net of VAT & Contractor or client pays VAT direct to HMRC instead of supplier.

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11
Q

What are the types of insolvency?

A

Administration
Administrative receivership
Company compulsory liquidation
Voluntary liquidation

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12
Q

What is included in your company quarterly update?

A

Management update on turnover, cost of sales, overheads, profit & cashflow. And VAT return.

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13
Q

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

A

Profit & loss account
Balance sheet
Cash flow

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14
Q

What is the difference between management and financial accounts?

A

Management are for business planning / internal use and can include a forecast.
Financial are the company accounts that are required by law.

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15
Q

What are the main types of ratio analysis used to asses financial strength?

A

Liquidity - Acid test ratio
Gearing; exposure to loans
Profitability - Balance Sheets

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16
Q

What legislation is there regarding accounting principles?

A

Companies Act 2006
Accounts Act 2008
Housing Grants, Construction and Regeneration Act 1996
Local Democracy, Economic Development and Construction Act 2009

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17
Q

How can you assess the financial health of a business?

A

Dun & Bradstreet credit report - this checks the risk of insolvency and recommended credit limit.
It uses a traffic light system to score companies.
Also informs on payments to supply chain and if any convictions against a business.

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18
Q

What is working in ‘goodwill’?

A

It is the basis that consultants work on as they provide a service rather than a product.

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19
Q

What is bankruptcy?

A

The insolvency of an individual. It does not apply to companies.
Assets are shared between those that you owe money to.

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20
Q

What are sinking funds?

A

Funds that are set aside for future expense or long-term debt.

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21
Q

What is insolvency?

A

An inability to pay debts where liabilities exceed assets.

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22
Q

Who are Companies House?

A

An agency that incorporates and dissolves limited companies within the United
Kingdom.

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23
Q

Who are HMRC?

A

His Majesties Revenue and Customs.

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24
Q

What are Liquidity ratios?

A

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

Liquidity ratio calculation = current assets / current liabilities.

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25
What are Profitability ratios?
Profitability ratios measure the performance of a company in generating its profits. The trading profit margin ratio = turnover – (cost of sales / turnover).
26
What are Financial Gearing Ratios?
These measure the financial structure of the company, measuring the proportion of a company's borrowed funds to its equity. Excessive debt can lead to financial difficulty and in turn they help to measure solvency.
27
Why do chartered quantity surveyors need to understand and be able to interpret company accounts?
To aid in preparing their own business accounts. For assessing the financial strength of contractors and those tendering for contracts.
28
What is Credit Control?
It's when one party puts an upper limit on the amount of credit they will provide another.
29
What is EPS?
Earnings Per Share.
30
What % of project costs are usually made up be consultant's fees?
Depends on the type and nature of the project - however a traditional new build project 10-15%.
31
What is the CIS?
Construction Industry Scheme.
32
What is liquidation?
A company's operations are brought to an end and it's assets are divvied up between it's creditors and shareholders according to the priority of their claims.
33
How do you produce a cashflow?
By plotting forecast expenditure at a point in time against time.
34
What would it show if actual and forecast differed?
A change in progress - quicker or slower than forecast. Potential issues causing a change to the progression of works - contractor insolvency Change in sequence of works. Front loading Over claiming
35
Why is it important for a client to understand the forecast cashflow?
So that they are aware of what and when payments will be due and understand they need to draw down funding / payments. This will allow them to secure funding at the correct time and avoid interest and accelerated funding charges
36
What is GAAP?
Generally Accepted Accounting Principles. To ensure financial reporting is transparent and consistent.
37
What current challenges are Covid and/or Brexit bringing to Accounting Principles?
Many more insolvencies/ companies folding under pressures of covid costs & rising prices. Companies taking loans / furlough grants which they can't repay.
38
Is VAT incl in a balance sheet or profit and loss?
In a balance sheet only.
39
When is the apprenticeship levy applicable?
When an employer's annual payroll is over £3m - 0.5% is paid monthly as an apprenticeship levy..
40
What is the purpose of a Profit & Loss?
To monitor and measure profit (or loss). To assist in forecasting with future performance. To calculate taxation.
41
What is the difference between debtors and creditors?
Creditors are business entities that are owed money by another entity that they have extended credit to. Debtors are business entities that owe money to another respective company.
42
What is a Financial Statement?
Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses.
43
What is an S-Curve?
S-Curve means ‘standard’ and refers to the shape of the expenditure profile when shown in graphical form. During the start of a project, the rate of expenditure is typically lower due to site setup and lower value enabling works. As the scheme progresses to the middle of the programme, the rate of expenditure will typically increase as more expensive building components such as M&E and Structural Steel Work are installed. Towards the back end of the programme, the rate of expenditure will slow down which is shown by the flattening of the S-Curve.
44
How are S Curves used by Surveyors?
For assessing the financial strength of contractors. To compare actual progress of the work against pre-contract predictions.
45
What are Escrow Accounts?
A sperate account owned by a third party, held on behalf of two other parties.
46
When have you used company accounts in your work?
To assess the financial strength of contractors at Pre-Qualification Stage and tender stages.
47
What are signs of insolvency in company accounts or credit checks?
A low credit rating. A liquidity ratio below 0.75. A falling cashflow statement. Supply of material drying up. Complaints from subcontractors. Slowing down of works.
48
Why would you not recommend the appointment of a contractor with a low credit rating?
There may be an increased risk of the contractor not performing satisfactorily. It could present increased risk of the contractor failing to deploy sufficient resources and materials to the project. It could increase the risk of the contractor’s insolvency.
49
What measures would you recommend if your client wanted to appoint a contractor with a low credit rating?
I would explore the option of requesting a performance bond that my client could call on if the Main Contractor failed to perform. I would also review the tender submission to ensure this is not excessively front loaded. When reviewing interim valuations, I would ensure that these are accurate and not over claimed.
50
What is VAT?
Value Added Tax
51
What is Corporation Tax?
It is paid by businesses in the UK.
52
What is an audit?
Process used to check a person or companies' compliance with policy, procedures and regulation.
53
What is turnover?
Income or revenue that a company receives from its normal business activities.
54
What are overheads?
The indirect costs or fixed expenses of operating a business. Rent Utility bills Staff salaries Insurance
55
What is a project bank account?
Ringfenced bank account (money held in escrow). Ensures contractors, key subcontractors and key members of the supply chain are paid on the contractual dates.
56
What is tax depreciation?
The depreciation expense claimed by a taxpayer on a tax return to compensate for the loss in the value of assets i.e. plant and equipment.
57
What is financial leverage?
An investment strategy of using borrowed money.
58
What is a current asset?
Something which is expected to be converted to cash within a year.
59
What is a fixed asset?
Assets which are purchased for long term and are not likely to be converted quickly into cash i.e.. buildings.
60
What is a cash flow forecast used for?
Understand income and expenditure over a period. Keep track of overdue payments. Track whether spending is on target.
61
What is cash flow important for a construction project?
Allows the client to gain an understanding of their financial commitment over the duration of the project. Acts as a check against valuations and can give early indication of financial difficulties.
62
How does a cash flow forecast help a company remain solvent?
They predict when a project has money to pay out and when money will be coming in.
63
Under what circumstances might a QS encounter insolvency?
A contractor may not be able to pay their debts which could lead to you being appointed by an external body to prepare a report on the commercial aspect of the project.
64
What steps would you take in the event of contractor insolvency?
Inform all parties. Inform the insurers. Stop any pending payments to the contractor and seek legal advice. Take ownership of materials. Schedule all plant and materials. Value completed works and any defects. Monitor loss and expense of the employer. Terminate the building contract and employ others to complete.
65
What is the difference between administration and liquidation?
Administration is where an administrator is appointed to manage the company's affairs on behalf of the creditors. Liquidation involves shutting down of the company and selling off the assets to pay the creditors.
66
L1 - What is the difference between a balance sheet and a profit and loss account?
A balance sheet shows a company's assets, equities and liabilities at any one time. A profit and loss sheet shows a company's income and expenditure and resultant profit and loss.
67
L1 - When would you use a balance sheet or a profit and loss account?
I would use it to identify a companies financial standing.
68
L1 - How do you prepare a cashflow?
By plotting forecast expenditure at a point in time against time.
69
L1 - If actual was at variance to forecast what does this say?
It says that the works are either ahead or behind programme. Behind - Financial difficulty of contractor, re sequencing of works Ahead - Accelerated programme, front loading, over claiming
70
L1 - What action would you take to combat a variance between actual and the forecasted cashflow?
I would aim to identify what the cause of the variance is and either adjust or accelerate the works to bring them back in line.
71
L1 - How would you assess the financial standing of a contractor?
Use the Dun & Bradsheet Credit Report.
72
L1 - What other sources of information could you use to assess the financial standing of a contractor?
You could use companies house to assess the financial standing of a contractor.
73
L1 - What do you understand by the acronym GAAP?
Generally Accepted Accounting Principles.
74
L1 - Would you understand by the term ratio analysis?
Compares a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency.
75
L1 - Can you give me some typical ratio analysis examples?
Liquidity Ratios Profitability Ratios Financial Gearing Ratios
76
L1 - What are statutory accounts?
They are company accounts to show a company's financial position that are required by law.
77
L1 - What are management accounts?
Management accounts are for internal use and used for forecasting purposes.
78
L1 - What are the key differences between management and statutory accounts?
Management accounts are for internal use, statutory accounts are required by law.
79
L1 - In the UK where are statutory accounts for limited companies required to be filed?
Companies House.
80
L1 - What current challenges is Covid and/or Brexit bringing to Accounting Principles?
Many more insolvencies/ companies folding under pressures of covid costs & rising prices. Companies taking loans / furlough grants which they can't repay.
81
Who are the IFRS?
International Financial Reporting Standards.
82
What do the IFRS do?
Set of accounting rules which bring consistency to accounting standards and practices. US does not use IFRS, they use GAAP.
83
What does the Construction Industry Scheme involve?
Contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC). The deductions count as advance payments towards the subcontractor’s tax and National Insurance. Contractors must register for the scheme. Subcontractors do not have to register, but deductions are taken from their payments at a higher rate if they’re not registered.
84
What impacts your company's fee proposal?
Expenses Site visits Time spent on job Seniority of staff members
85
What are your companies short and long term goals?
Short - Maintain your current clients and your relationships Long - Move into new markets and sectors, and open up new offices
86
How do you differentiate between short and long term goals?
Short term is within a year. Long term is more than a year.
87
What is WIP?
Work In Progress (WIP) is an accounting concept meaning the value of the work you have completed but have not yet invoiced. WIP can be important if you are trying to understand the current profitability of a job and WIP reports can also help you manage your cash flow.
88
What accounting reporting frameworks do companies need to comply with?
1. GAAP 2. IFRS
89
What is a project bank account?
Ringfenced bank account (money held in escrow). Ensures contractors, key subcontractors and key members of the supply chain are paid on the contractual dates.

Nadine APC (21 decks)

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