Accounting Principles & Procedures Flashcards
Are you aware of the Generally Accepted Accounting Principles?
GAAP are standards for reporting business accounts set by the Financial Reporting Standards.
What are the two types of accounts?
Management accounts - internal accounts for internal use. May be required for a bank loan. (any format)
Financial/Statutory accounts - for external stakeholders, submitted to companies house.
Can you explain the difference between a balance sheet and a profit and loss statement?
A balance sheet is a document which shows the assets and liabilities of a company at a given point in time.
A profit & loss statement shows the income and expenditure of a company over a set period of time (typically financial year)
How would you assess the financial stability of a company?
I would advise the client to undertake their own financial checks on a contractor or supplier.
However at a high level I could review information from Companies House, a credit report or undertake a ratio analysis.
What is VAT?
Value Added Tax - a tax added to goods and services
What is an audit?
A check on people and businesses practices to ensure compliance with laws and legislation.
Can you give some examples of Financial/Statutory Accounts
- Directors reports
- Cashflow statement
- Balance Sheet
- Profit & Loss satement
What is an escrow account?
An account held by a separate third party
What is a project bank account?
A bank account specific to one project - typically to provide a verification of the availability of funds to a contractor
What are overheads?
Fixed costs of running a business:
- Rent
- Staff
- Utilities
- Insurances
Why would you ask a contractor to submit their Financial accounts?
To check they are financially stable.
How many financial accounts would you ask a contractor to submit when verifying their financial stability?
Typically 3 years
What would you check for when looking through a contractors financial accounts?
I would undertake a ratio analysis on:
- Profitability
- Liquidity
What is a balance sheet?
A snapshot of companies assets and liabilities at a given point in time.
What does a profit and loss statement show?
A companies income and expenditure over a financial year.
Why should assets and liabilities need to balance on a balance sheet or be positive?
So that the value of assets can offset any liabilities.
What is insolvency?
The inability of a business to pay off their liabilities.
What are the different types of insolvency?
- Administration, company still exists however an administrator is appointed to achieve best value for assets before the company ceases to exist
- Liquidation, company no longer exists
- Receivership, a breach of borrowing and the surety borrowed from appoints a receiver to recover the money
- Company Voluntary Agreement, someone appointed informally to resolve financial issues
What are signs of a contractor having financial difficulties?
- Subcontractors not getting paid
- Works on site slowing down
- Plant, materials and equipment removed from site
- Pushing for earlier payment
- Over claiming on payment applications
- Turnover of staff or lack of resource
What steps would you take if you found out a contractor is about to enter administration?
- Inform project team
- Stop any pending payments
- Secure the site
- Value works done, materials on and off site
- Schedule of defects and works to be done
- Produce a notional final account
What is CAPEX and OPEX?
CAPEX - Capital expenditure - improve assets i.e. buildings and equipment
OPEX - Operating expenditure - running costs
What are capital allowances?
Capital allowances is the practice of allowing tax payers to get tax relief on capital expenditure by allowing it to be deducted against their annual taxable income.
Whare the types of accountancy ratios?
- Liquidity - the ability to turn assets into cash
- Profitability - the ability to generate earnings
- Gearing - the amount borrowed from or owed to others
What are you required to provide every year to comply with the Companies Act?
- Annual statutory accounts
- Strategic report
- Directors report
