Accounting principles & procedures (Level 1)

Question 1

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

Answer 1

Balance sheet is a ‘snapshot’ of a companies financial position at any given time. It reports on assets, liabilities and ownership equity.
Profit and loss shows companies revenue over a determines period

Question 2

When would you use balance sheet/profit and loss statement?

Answer 2

Balance sheet would be used at the end of a reporting month period to present a summary of the companies overall financial stability
P&L would be used to calculate how the business has operated over a given time, to determine areas where it could improve profitability

Question 3

How do you prepare a cashflow?

Answer 3

Track incoming and outgoing cash over a specific period and categorise them. This will determine net cashflow

Question 4

If actual was at variance to forecast what does this say? What action would you take?

Answer 4

Forecast was incorrect and/or unknown activities occurred within the period

Analyse the data to identify the variance
Assess if changes are to be made to the forecast
Implement a plan to do so

Question 5

How would you assess the financial standing of a contractor?

Answer 5

Dun & Bradstreet report which provides a credit report

Question 6

Other sources of information?

Answer 6

Companies House which details annual company accounts

Question 7

What do you understand by the acronym GAAP?

Answer 7

Generally Accepted Accounting Principles - establishes how accounts and financial reports should be created in the UK

Question 8

Would you understand by the term ratio analysis?

Answer 8

Procedure of obtaining a look into a firm’s functional efficiency, liquidity, revenues, and profitability by analysing its financial records and statements

Question 9

Can you give me some typical ratio analysis examples?

Answer 9

Profitability ratio - analyse a company’s ability to make money
Liquidity ratio - analyse a company’s ability to pay it’s debts
Gearing ratios - compares a company’s capital to its debt

Question 10

What are statutory accounts?

Answer 10

Set of annual financial statements that companies prepare at the end of each year to file with companies house

Question 11

What are management accounts?

Answer 11

Financial reports produced for business owners and managers

Question 12

What are the key differences between management and statutory accounts?

Answer 12

Statutory accounts break down the financial actions taken by the company during the year, management accounts are prepared for internal decision making

Question 13

Key financial statements a company provides?

Answer 13

Annual Statement - issued to Companies House
Profit & loss accounts
Balance sheets
Cash flow statements

Question 14

Role of an Auditor?

Answer 14

Ensure financial statements follow International Financial Reporting Standards (IFRS) and are true accurate and non-fraudulent

Question 15

CAPEX v OPEX?

Answer 15

CAPEX - Capital Expenditure - Expenditure to improve a building/equipment/plant
OPEX - Revenue Expenditure - Costs of running the business day to day

Question 16

Current v Fixed asset?

Answer 16

Current asset - Cash or other assets that can be converted into cash within a year
Fixed asset - Purchased for a long term use, such as land, buildings, equipment

Question 17

Difference between Administration and Liquidation?

Answer 17

Administration is where someone is appointed to manage the companies affairs on behalf of the creditors
Liquidation is where a company shuts down and sells off its assets to pay its debts

Question 18

Why would you run a credit report on a company?

Answer 18

To understand the financial stability of the firm to ensure there isn’t a risk they terminate whilst under contract

Question 19

What is an S Curve?

Answer 19

‘Standard’ Curve and refers to the expenditure profile of a project when shown on a graph:
Start on site - low expenditure
Middle of project - high expenditure
End of project - Slower rate of expenditure

Question 20

Understanding of Domestic Reverse Charge?

Answer 20

• Introduced in 2020 as a new way of charging VAT on Suppliers and Subcontractors in the Construction Industry
• MC’s don’t pay VAT to their supply chain, instead pay direct to HMRC

Question 21

Impact of Domestic Reverse Charge?

Answer 21

• Short term effect - less cashflow for supply chain
• Long term effect - increase costs for suppliers to recover shortfall, have to arrange interest loans