Accounting principles & procedures Flashcards
What are the three types of financial statement you may come across relating to a company?
Balance Sheet (Statement of Financial Position) – Shows a company’s financial position at a specific date.
Profit and Loss Account (Income Statement) – Reports revenue, expenses, and profit over a period.
Cash Flow Statement – Tracks cash inflows and outflows, showing liquidity.
What is an asset?
Asset: A resource owned by a company that provides future economic benefits.
What is a liability?
Liability: A financial obligation a company owes.
Can you give me an example of an asset?
Asset: Property, cash, equipment.
Can you give me an example of a liability?
Liability: Loans, trade payables, mortgages.
What is the difference between financial and management accounts?
Financial accounts: Required by law, prepared annually for external stakeholders.
Management accounts: Internal reports for decision-making, produced more frequently.
What do you understand by the term Generally Accepted Accounting Principles (GAAP)?
A set of accounting standards and principles ensuring financial statements are prepared consistently.
How do companies know which reporting framework to comply with?
Determined by company size, legal structure, and regulatory requirements.
Which reporting framework do public limited companies have to comply with?
International Financial Reporting Standards (IFRS).
How would you assess the financial strength of an entity, e.g. for a valuation?
Reviewing key financial ratios, profit trends, cash flow stability, and debt levels.
Can you tell me about a common financial measure?
Gross Profit Margin = (Gross Profit / Revenue) × 100 – Indicates profitability.
What is the acid test ratio?
(Current Assets – Inventory) / Current Liabilities – Measures liquidity.
What is ROCE (Return on Capital Employed)?
Operating Profit / Capital Employed × 100 – Measures financial efficiency.
What is the working capital ratio?
Current Assets / Current Liabilities – Assesses short-term financial health.
What is the gearing ratio?
Debt / (Debt + Equity) × 100 – Measures financial leverage.
What are net assets per share?
(Total Assets – Liabilities) / Number of Shares – Indicates shareholder value.
Can you tell me what the role of an auditor is?
Independent review of financial statements to ensure accuracy and compliance.
When are audited accounts needed and why?
Annual turnover exceeds £10.2 million.
Balance sheet total exceeds £5.1 million.
More than 50 employees.
Required for large companies and public limited companies to ensure transparency.
How do public limited company accounts differ?
Must comply with IFRS, include detailed disclosures, and be externally audited.
Tell me something you understand from the Companies Act 2006.
It governs company formation, directors’ duties, financial reporting, and audits.
Tell me what it means to prepare accounts in accordance with IFRS.
IFRS ensures global consistency and focuses on fair value reporting.
What is the difference between UK GAAP and IFRS?
UK GAAP is domestic-focused, while IFRS is internationally recognised.
What is the basis of valuation under IFRS 13?
Fair Value, defined as the price received to sell an asset in an orderly transaction.
What is fair value?
The market-based measurement of an asset or liability.
What has changed in relation to lease accounting / IFRS 16?
Introduced in January 2019, requiring companies to recognise most leases on the balance sheet.
When did the change come into effect?
January 2019.
What is FRS 102?
The UK financial reporting standard for medium-sized businesses.
What changes have been made to FRS 102?
Stronger disclosure requirements for investment property and lease liabilities.
How has this impacted upon investment property?
Investment property must be measured at fair value, with changes recognised in profit & loss.
What are statutory accounts?
Legally required financial statements prepared for regulatory compliance.
Why is good financial record keeping important to you?
Ensures compliance, transparency, and accurate financial reporting.
Tell me three ways you ensure that clients’ money is handled properly.
- Keeping it in a designated client account.
- Regular reconciliation and record-keeping.
- Following RICS Client Money Protection Scheme rules.
What RICS guidance or Schemes do you adhere to in doing so?
RICS Professional Statement on Client Money Handling (2019).
Explain your understanding of the VAT domestic reverse charge for building and construction services.
A mechanism where VAT liability shifts from supplier to recipient to reduce fraud.
When do changes to the reverse charge apply from?
March 2021.
What is the impact of the reverse charge on VAT accounting?
VAT is not paid to suppliers, instead, it is accounted for by the buyer.
Is VAT included in a balance sheet or a profit & loss account?
VAT payable/receivable appears in the balance sheet.
VAT on sales/purchases affects the profit & loss account.
How do you account for the impact of inflation when reporting to clients?
Adjusting valuations using indexed data, discount rates, or CPI/RPI measures.
What are the key financial statements that companies provide?
Profit and loss accounts
Balance sheet
Cash flow statements.
What is the difference between management and financial accounts?
Management accounts are for internal use of the management team.
Financial accounts are the company accounts that are required by UK Law.
What is the difference between a profit and loss account and a balance sheet?
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 (its assets) and what it owes (its liabilities) at a given point in time.
What is a cashflow statement?
It is a summary of the actual or anticipated ingoings and outgoings of cash in a firm over the accounting period.
It measures the short-term ability of a firm to pay off its bills.
Explain your understanding of the following terminology: Capital Allowances.
Tax relief on certain items purchased for the business for example tools and equipment.
Explain your understanding of the following terminology: Sinking funds.
Funds that are set aside for future expense or long term debt.
Explain your understanding of the following terminology: Insolvency.
An inability to pay debts where liabilities exceed assets.
Explain your understanding of the following terminology: Companies house.
An agency that incorporates and dissolves limited companies within the UK.
Explain your understanding of the following terminology: HMRC.
Her Majesty’s Revenue and Customs.
What are liquidity ratios?
Liquidity ratios 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.
The ratio is usually around 1.5 but it depends on the sector of activity.
A ratio of less than 0.75 can be an early indicator of insolvency.
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).
Low margins may be due to a growth strategy from the company and do not always result from bad management.
What are financial gearing ratios?
These 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.
Highly geared companies rely mainly on borrowing.
The payment of interests reduces the profit.
Why do chartered 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.
For assessing competition.
What is the purpose of a P&L?
To monitor and measure profit (or loss).
To compare against past performance and against company budgets.
For valuation purposes and to compare against competitors.
To assist in forecasting with future performances.
To calculate taxation.
What is the difference between debtors and creditors?
Debtors are business entities that owe money to another respective company.
Creditors are business entities that are owed money by another entity that they have extended credit to.
What are management accounts?
The accounts prepared by a company for internal management use.
Accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the funding.
These accounts are not audited externally.
What is a financial statement?
Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses.
What is a profit and loss account?
They demonstrate a company’s sales, running costs and profit or loss over a financial period.
They are used to show sales vs expense.
They can also be used to identify non-profitable work.
What is a balance sheet?
They show the value of everything the company owns made up of its assets and liabilities.
The balance sheet demonstrates the value of the business at any given point in time.
What is a cash flow forecast?
A cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity.
What is an S Curve?
S-curve means ‘standard’ and refers to the shape of the expenditure profile when shown in a graphical form.
During the start of a project, the rate of expenditure is typically lower due to site setup and lower value enabling works.
Middle of the graph has the highest level of expenditure from M&E and Structural cost.
End of graph flattens as spend reduces.
How are S curves used by surveyors?
To track, analyse and assess business accounts and performance.
What are escrow accounts?
A separate account owned by a third party, held on behalf of two other parties.
A bank account defined contractual conditions for the release of funds.
They can be used as a project bank account.
Mechanisms must be in place for the release of funds such as payment certificates.
When have you used company accounts in your work?
To assess the financial strength of a proposed tenant.
How do you analyse a company’s accounts?
The clients accountants will carry out the detailed analysis but I can look at the warning signs by calculating ratios such as liquidity ratios, profitability ratios and gearing ratios.
I should always calculate the ratios myself rather than rely on other people.
How do you carry out credit checks?
Credit safe website.
Look at both group accounts and company accounts.
Calculate key business ratios if credit score is low.
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.
Why would you not recommend the appointment of a contractor with a low credit score?
Increased risk of the contractor not performing satisfactorily.
Risk of contractor’s insolvency.
What measures would you recommend if your client wanted to appoint a contractor with a low credit rating?
Request a performance bond.
Ensure payment terms aren’t front loaded.
