CHOP 3.4 - Financial Management

Question 1

Definition

Accounts Payable

Answer 1

A record of accounts of money payable to consultants and other suppliers for expenses.

Question 2

Definition

Accounts Receivable

Answer 2

A record of professional fees and disbursements which have been invoiced.

Question 3

Definition

Aging Reports

Answer 3

A record of invoices due and past due. (For both receivable and payable)

Question 4

Definition

Amortization

Answer 4

An accounting method for spreading out the costs for the use of a long-term asset over the expected period the long-term asset will provide value.

Question 5

Definition

Average Collection Period (ACP)

Answer 5

Average collection period is the number of days it takes to receive payment for goods or services. It is measured by calculating the (Accounts Receivable) / (Gross revenue) X 365.

Question 6

Definition

Bad Debt

Answer 6

Recorded on the income statement, The amount of accounts receivable that will not be collected from clients.

Question 7

Definition

Balance Sheet

Answer 7

A record of all assets (bank funds, receivables, furniture…) all liabilities (accounts payable, loans…) and retained earnings which state the financial position of the practice.

Question 7

Definition

Cash Book

Answer 7

A record of the day to day cash position of the practice using the accounting method.

Question 8

Definition

Cash Flow

Answer 8

Cash and other liquid assets to meet current payroll, consultants fees and other overhead expenses.

Question 9

Definition

Current Assets

Answer 9

Cash + Cash equivalent +Items that can be converted into cash.

Question 10

Definition

Current Liabilities

Answer 10

Usually includes liabilities that are due within the year (accounts payable, taxes, wages, insurance…).

Question 11

Definition

Current Ratio

Answer 11

The difference between current assets and current liabilities. It is measured by calculating the Current assets / Current Liabilities.

Question 12

Definition

Debt to Equity Ratio

Answer 12

The debt-to-equity ratio shows how much of a company is owned by creditors (people it has borrowed money from) compared with how much shareholder equity is held by the company. The formula is total liabilities / shareholder equity.

Question 13

Definition

Depreciation / Amortization

Answer 13

The rate by which capital assets may be depreciated according to government tax regulations with time.

Question 14

Definition

Direct Personal Expense (Direct labor cost)

Answer 14

The salary of staff + the cost of such mandatory and customary contributions and employee benefits (employment tax, statutory benefits, insurance, sick leave, holidays, vacations, pensions…).

Question 15

Definition

Disbursement Record

Answer 15

A record of billable reimbursable expenses.

Question 16

Definition

Fiscal Period

Answer 16

A 12-month period for which financial records start and end.

Question 17

Definition

General ledger

Answer 17

A record of all accounts, including receivables, payables, income and expenses, payroll, tax payments, disbursements…

Question 18

Definition

Labor Multiplier (Net Multiplier)

Answer 18

The formula is net revenue / direct labor costs. It represents the actual net revenue generated by the firm expressed as a multiple of total direct labor costs. It shows the return on investment made in direct labor costs.

Question 19

Definition

Multiplier

Answer 19

A % or figure by which direct personnel expense is multiplied to cover overhead expenses and profit (billing rate).

Question 20

Definition

Office Overhead

Answer 20

Includes expenses for rent and utilities, office supplies, automobile expenses, promotion and advertising, books and subscriptions.

Question 21

Definition

Overhead Rate

Answer 21

The formula is total overhead including indirect labor / direct labor costs. This is a key rate to measure efficiency. The lower the overhead rate, the higher the profit margin.

Question 22

Definition

Payroll Burden

Answer 22

Includes required contributions by the employer (statutory benefits), including employment insurance, Canada pension plan / Quebec pension plan, health taxes, workers compensation.

Question 23

Definition

Payroll Records

Answer 23

A record of salaries, taxes due and paid, and payroll burden for each employee.

Question 24

Definition

Profit

Answer 24

An excess of revenue over expenses.

Question 25

Definition

Profit Margin

Answer 25

The formula is net profit / net revenue X 100. This is one of the most important ratios to analyze the overall financial health of a firm.

Question 26

Definition

Project Cost Control Chart

Answer 26

A financial record of each project, which includes professional fees, consultants’ fees, staff time expended, budgeted time, expended payroll, and profit and loss for each phase of the work.

Question 27

Definition

Staff Utilization Records

Answer 27

Identifies monthly and year to date hours spent by each staff person on direct labor for projects, as well as hours for vacation, holiday time, sick leave, and miscellaneous overhead duties.

Question 28

DefinitionDefinition

Statement of Income and Expenses

Answer 28

A report, often prepared monthly, documenting all income, all expenses and the resulting profit or loss.

Question 29

Definition

Tax Records

Answer 29

Includes personal income taxs, corporate taxes, and GST or HST.

Question 30

Definition

Work-in-progress (WIP)

Answer 30

Work underway or complete but not yet invoiced.

Question 31

Accounting - # Definition

Audit

Answer 31

An independent and objective examination of accounting records and other necessary documentation in order to express an opinion on the fairness of a balance sheet and other financial statements. An audit provides a “reasonable assurance” that the financial statements of the business are free of material misstatements and are in accordance with Canadian generally accepted accounting principles (GAAP).

Question 32

Accounting - # Definition

Review

Answer 32

A review is less extensive (and less expensive) compared to an audit. It provides a lower level of assurance that the financial statements are free of material misstatements.

Question 33

Accounting - # Definition

Compilation

Answer 33

A compilation is the lowest level, where the external accountant compiles the financial data from the company’s system and puts together the financial statements. In compilation, the financial data is not examined in detail.

Question 34

What are the 2 systems of accounting to record transactions? Which is applicable for Architecture firms?

Answer 34

1) Cash basis system (non applicable for Architecture firms)

2) Accural basis system (Always applies for arcchitecture firms)

*Accural: The accumulation or increase of something over time, especially payments or benefits.

Question 35

What is the Accrual system?

Answer 35

The accrual system records all income — including work-in-progress — and expenses as they occur in the general ledger. It shows the current financial position of the architectural practice, usually on a monthly basis.

Question 36

What are the 2 types of financial reports prepared in an accural system?

Answer 36

1) statement of income and expenses (also known as Income Statement or Profit and Loss Statement)

2) balance sheet (also known as Statement of Position)

Question 37

Balance Sheet Formula + Meaning

Answer 37

Assets = Liabilities + Owner’s Equity

Balance sheets are important for the monitoring of assets (what the business owns) and loan commitments (what the business owes)

Note: The balance sheet shows the financial position of a company at a given period and answer three questions: Who owns the business? How liquid is the business? And how lean or fat is the business?

Question 38

Income Statement Formula + Meaning

Answer 38

Income – Expenses = Profit or Loss

Income is also called revenue or architectural fees. The total income of a business is the sum of all sources of revenue in each period.

Note: The income statement is the primary measure of a firm’s performance, while the balance sheet shows a firm’s overall health.

Question 39

Cashflow Forecast

Answer 39

A cashflow forecast is helpful in projecting the practice’s cash position over a 12-month period. Such a forecast is needed to determine how much cash will be required to meet expenses in the short term and any additional requirements for working capital from a line of credit.

Question 40

Fee Calculation

Answer 40

When determining fees for services, the architect should identify and determine the following:

1) Each component of the services to be provided

2) The cost of production for each component (including direct and indirect costs)

3) The profit margin to be achieved.

Question 41

Billing Rates

Answer 41

A rule of thumb for calculating billing rates is to add 25% to the hourly rate for payroll burden, double the total to include overhead, and add 50% of the overhead for profit. This is the equivalent of a multiplier of 3.125 applied to the direct personnel expense.

Question 42

Utilization Factors

Answer 42

The percentage of billable hours as compared to the total hours of work in a year is called the “utilization factor.”

Utilization factor is a percentage determined by dividing the actual billable hours by the total billable hours possible.

Question 43

Tax Planning

Answer 43

Accounting advice should be sought for proper tax planning. The financial management of an architectural practice must consider the following taxes:

1) Goods and Services Tax (GST), or Harmonized Sales Tax (HST)

2) Employees’ income tax