Accounting, Principles & Procedures Level 1 Flashcards

1
Q

What is VAT?

A
  • Value Added Tax
  • A consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is corporation tax?

A
  • Corporation tax is paid by businesses in the UK
  • Calculated on their annual profit in a similar way to income tax for individuals
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is an audit?

A
  • Process used to check a person or companies’ compliance with policy, procedures & regulation
  • Audits are performed to ascertain the validity & reliability of information; also, to provide an assessment of a system’s internal control
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is turnover?

A
  • Income or revenue that a company receives from its normal business activities
  • Usually from the sale of goods & services to customers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are management accounts?

A
  • Accounts prepared by a company for internal management use, or accounts prepared for a lender, such as a bank to evaluate how the business will repay funding.
  • Management accounts will not be audited externally
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the difference between management and financial accounts?

A
  • Financial accounting is meant for external stakeholders
  • Management accounting is presented internally
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Why does a business keep company accounts?

A
  • Tax purposes, as required by law
  • Demonstrates the company’s financial standing (supports loan or borrowing applications)
  • To ensure cash flow and profitability in a company is being correctly managed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is an escrow account?

A
  • A separate account owned by a 3rd party, held on behalf of 2 parties
  • can be used as a project bank account
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a project bank account?

A
  • Ringfenced bank account (the money is held in escrow)
  • Ensures contractors, key subcontractors & key members of the supply chain are paid on the contractually agreed dates
  • Usually, mechanisms are in place for the release of funds (such as payment certificates)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are overheads?

A

The indirect costs or fixed expenses of operating a business:
- Rent / leasing costs
- Utility bills
- Staff salaries
- Insurance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Explain the principle of tax depreciation?

A

Tax depreciation is the depreciation expense claimed by a taxpayer on a tax return to compensate for the loss in value of the tangible assets. Examples include property, plant and equipment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Name 3 types of accountancy ratios

A
  • Liquidity ratios - the organisations ability to turn assets into cash in order to pay debts
  • Profitability ratios - used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders’ equity over time, using data from a specific point in time
  • Gearing ratio - Measures the proportion of a company’s borrowed funds to its equity. The ratio indicates the financial risk to which a business is subjected, since excessive debt can lead to financial difficulties
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is financial leverage?

A
  • Financial leverage is an investment strategy of using borrowed money
  • Specifically, the use of various financial instruments or borrowed capital to increase the potential return of an investment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are capital allowances?

A

the practice of allowing taxpayers to get tax relief on their tangible capital expenditure by allowing it to be deducted against their annual taxable income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the key financial statements / documents that companies produce?

A
  • Profit & loss account
  • Balance sheet
  • Cash flow forecast
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Can you explain the difference between ‘gross’ and ‘net’ in accounting terms?

A

Gross refers to the total amount of income before deductions, while net is the total after deductions or adjustments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is expenditure?

A

Expenditure represents a payment with either cash or credit to purchase goods or services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is capital expenditure?

A
  • CAPEX (capital expenditure) is spent to acquire or improve an asset such as equipment or buildings
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is revenue expenditure?

A

-OPEX (revenue expenditure) are costs in the day to day running of the business. For example, servicing a machine, spare parts etc

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Why are CAPEX and OPEX budgets split out in business accounts?

A
  • They have different tax obligation, for example CAPEX can benefit from capital allowances
21
Q

What is a balance sheet?

A
  • A balance sheet is a ‘snapshot’ of a company’s financial position at a given point in time
  • It reports on a company’s assets, liabilities & ownership equity
22
Q

What is meant by assets and the liabilities?

A
  • Asset = a van or land which is owned
  • Liability = a loan or a debt
23
Q

What is a current asset?

A

Cash or other assets that are expected to be converted to cash within a year

24
Q

What is a fixed asset?

A

Assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings & equipment.

25
Q

What is the difference between debtors & creditors?

A
  • Creditors - is an individual or business that has lent funds to a business & is owed money
  • Debtor - is an individual or business who has borrowed funds from business & so it owes money
26
Q

What is a cash flow forecast?

A
  • A cashflow forecast is a plan that shows how much money you expect your business or project to receive & pay out over a set period.
  • It can also help you understand when money will enter & leave your bank account
27
Q

What is a cash flow forecast used for?

A
  • Understand the impact on future plans & possible outcomes
  • Keep track of overdue payments
  • Plan for upcoming cash gaps
  • Manage surplus cash
  • Track whether spending is on target
28
Q

What is cashflow important for a construction project?

A
  • Allows the client to gain an understanding of their financial commitment over the duration of the project & when they are likely to spent the money
  • Can be used to estimate when external funding will be required
  • Acts as a check against valuations & can give early indication of financial difficulties
29
Q

How does a cashflow forecast help a company remain solvent?

A
  • Cash flow forecasts can predict when a business or project has money to pay out & when money is coming in
  • This can highlight if the business or project will have negative cash flow, meaning they can do something about it in good time
30
Q

What is a profit & loss account?

A
  • A profit & loss account shows a company’s revenue & expenses over a particular period of time, typically either one month or consolidated months over a year
  • These figures show whether the business has made a profit or a loss over that period of time
31
Q

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

A
  • Balance sheet is a financial ‘snapshot’ at one given time showing the financial position of the company
  • Profit & loss account is showing the profit or loss over a determined period
32
Q

What is insolvency?

A
  • Insolvency is effectively the inability to pay off debts or creditors (the people you owe money to)
  • The term ‘insolvency’ is often a generic term used to describe bankruptcy, liquidation, administration, etc
33
Q

Why would you not recommend the appointment of a contractor with a low credit rating?

A
  • Risk of contractor or supply chain insolvency
  • Possibility of the contractor not performing satisfactorily or has restricted resources on site
34
Q

How could you determine the financial standing of a company prior to doing business with them?

A

A Dun & Bradstreet report creates a business credit report that could be viewed like a personal credit report for businesses

35
Q

What are the signs of contractor insolvency on a construction project?

A
  • Slowing down works
  • Supply of materials drying up
  • Increase in defective work
  • Changes in management
  • Additional or inflated payment requests
  • Complaints from subcontractors
36
Q

Under what circumstances might a QS encounter insolvency?

A
  • A project that you are working on may have a contractor or a subcontractor who is having serious financial difficulties which mean they cannot pay their debts
  • You may be approached by a client who has a project where the contractor has ceased trading and needs advice
  • You could be appointed by an external body (generally a liquidator or administrator) to prepare a report on a commercial aspect of a project
37
Q

What steps would you take in the event of insolvency?

A
  • inform all parties involved and secure the site
  • inform the bondsman (bank / insurance company)
  • stop any pending payment (can defend on the ground of counter claims for costs)
  • take ownership of materials off-site (if paid for in valuations)
  • schedule all plant & materials
  • value completed works and value any defects
  • monitor loss & expense incurred by the employer
  • terminate the building contract & employ others to complete
38
Q

What is liquidation?

A
  • in it’s simplest form liquidation is a formal process which brings about the closure of a limited company
  • as part of the process all company assets will be sold - or liquidated - for the benefit of outstanding creditors and/or shareholders before the company is struck off - or dissolved - from the register held at Companies House
39
Q

What is the difference between administration & liquidation?

A
  • Administration is where someone (the administrator) is appointed to manage the company’s affairs on behalf of the creditors
  • Liquidation involves the shutting down of a company & selling off the assets to pay off the creditors
40
Q

What is bankruptcy?

A
  • Bankruptcy is one way for the individuals to deal with debts they cannot pay. It does not apply to company’s or partnerships
  • Assets are shared among those you owe money to (creditors)
  • Allows the individual to make a fresh start free from debt (with some restrictions)
41
Q

What are the 5 basic accounting concepts?

A
  1. Business identity
  2. Going concern
  3. Monetary period
  4. Accounting period
  5. Accrual
42
Q

What is meant by the accounting concept ‘business identity’?

A
  • A business is treated separately from the owners as far as their financial transactions are concerns
  • Personal transactions should not be recorded UNLESS it involves adding or withdrawing resources (such as loans to / from the owner)
43
Q

What is the meant by the business concept ‘going concern’?

A
  • assumes an entity will continue to operate indefinitely, so doesn’t record them based on liquidation value
44
Q

What is meant by the business concept ‘monetary period’?

A
  • only business transactions that can be expressed as money are recorded
45
Q

What is meant by the business concept ‘accounting period’?

A
  • each business choses their accounting period
  • monthly, quarterly or annually based on either fiscal or calendar year
46
Q

What is meant be the business concept ‘accrual’?

A
  • income is recorded when earned
  • expenses are recorded as incurred
  • regardless of the time when cash is received or withdrawn
47
Q

What are the key Accounting Frameworks?

A
  • Generally Accepted Accounting Principles (GAAP)
  • International Financial Reporting Standards (IFRS)
48
Q

What is the key difference between GAAP and IFRS in relation to the treatment of property?

A

GAAP:
- no specific definition of property, therefore property is held as PPE
- PPE are recognised at cost & depreciated over time with no revaluations to fair value

IFRS:
- draws a distinction between PPE and investment properties
- PPE is recognised at cost and depreciated over time with optional revaluation
- investment properties can be carried out at cost and if depreciated, fair value disclosure is required