CHOP 3.4 - Financial Management Flashcards
Definition
Accounts Payable
A record of accounts of money payable to consultants and other suppliers for expenses.
Definition
Accounts Receivable
A record of professional fees and disbursements which have been invoiced.
Definition
Aging Reports
A record of invoices due and past due. (For both receivable and payable)
Definition
Amortization
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.
Definition
Average Collection Period (ACP)
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.
Definition
Bad Debt
Recorded on the income statement, The amount of accounts receivable that will not be collected from clients.
Definition
Balance Sheet
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.
Definition
Cash Book
A record of the day to day cash position of the practice using the accounting method.
Definition
Cash Flow
Cash and other liquid assets to meet current payroll, consultants fees and other overhead expenses.
Definition
Current Assets
Cash + Cash equivalent +Items that can be converted into cash.
Definition
Current Liabilities
Usually includes liabilities that are due within the year (accounts payable, taxes, wages, insurance…).
Definition
Current Ratio
The difference between current assets and current liabilities. It is measured by calculating the Current assets / Current Liabilities.
Definition
Debt to Equity Ratio
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.
Definition
Depreciation / Amortization
The rate by which capital assets may be depreciated according to government tax regulations with time.
Definition
Direct Personal Expense (Direct labor cost)
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…).
Definition
Disbursement Record
A record of billable reimbursable expenses.
Definition
Fiscal Period
A 12-month period for which financial records start and end.
Definition
General ledger
A record of all accounts, including receivables, payables, income and expenses, payroll, tax payments, disbursements…
Definition
Labor Multiplier (Net Multiplier)
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.
Definition
Multiplier
A % or figure by which direct personnel expense is multiplied to cover overhead expenses and profit (billing rate).
Definition
Office Overhead
Includes expenses for rent and utilities, office supplies, automobile expenses, promotion and advertising, books and subscriptions.
Definition
Overhead Rate
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.
Definition
Payroll Burden
Includes required contributions by the employer (statutory benefits), including employment insurance, Canada pension plan / Quebec pension plan, health taxes, workers compensation.
Definition
Payroll Records
A record of salaries, taxes due and paid, and payroll burden for each employee.
Definition
Profit
An excess of revenue over expenses.
Definition
Profit Margin
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.
Definition
Project Cost Control Chart
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.
Definition
Staff Utilization Records
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.
DefinitionDefinition
Statement of Income and Expenses
A report, often prepared monthly, documenting all income, all expenses and the resulting profit or loss.
Definition
Tax Records
Includes personal income taxs, corporate taxes, and GST or HST.
Definition
Work-in-progress (WIP)
Work underway or complete but not yet invoiced.
Accounting - # Definition
Audit
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).
Accounting - # Definition
Review
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.
Accounting - # Definition
Compilation
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.
What are the 2 systems of accounting to record transactions? Which is applicable for Architecture firms?
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.
What is the Accrual system?
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.
What are the 2 types of financial reports prepared in an accural system?
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)
Balance Sheet Formula + Meaning
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?
Income Statement Formula + Meaning
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.
Cashflow Forecast
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.
Fee Calculation
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.
Billing Rates
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.
Utilization Factors
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.
Tax Planning
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
