Financial & Risk Management Flashcards
1
Q
What are the two broad categories of accounting?
A
- Basic accounting (general ledger accounting)
2. Project Cost Accounting
2
Q
General ledger accounting
A
Keeping track of money flowing into and out of the business is needed for day-to-day operations, banking, taxes, and auditing.
This provides firm-wide statements about the overall financial status of the business so that firm owners can make decisions crucial to the firm’s profitability and survival.
3
Q
Project Cost Accounting
A
Tracks revenue, expenses, and profit by individual projects.
It is vital for professional service businesses, especially in architecture. Firms depend on knowing how the amount of time spent on specific projects affects the financial health of the firm.
Firm principals need to be able to differentiate between projects that are making money and those that are losing money, and that goes beyond the scope of general ledger accounting.
Information from project cost accounting reports can help managers decide how to allocate resources, manage projects, and develop accurate proposals for new work.
4
Q
Accounts payable
A
Amounts owed to the suppliers of goods or services (such as consultants, reproduction companies, or the utility company) that have not yet been paid.
5
Q
Accounts receivable
A
Money that others owe to the business through invoices for services
6
Q
Assets
A
Any type of tangible or intangible resource that can be measured in monetary terms, including current assets, fixed assets, and other assets.
7
Q
Chart of accounts
A
A list of the various accounts a business uses to keep track of money, along with corresponding account numbers used for data processing
8
Q
Current assets
A
Resources of a business that are converted into cash within one year
9
Q
Direct labor
A
All labor of technical staff, principals, and support staff that is directly chargeable to projects.
10
Q
Direct personnel expense
A
The expense of employee salaries plus the cost of mandatory and discretionary expenses and benefits such as payroll taxes and health insurance.
11
Q
Discretionary distribution
A
Voluntary distribution of profits to owners and nonowners, such as performance bonuses, profit sharing, and incentive compensation
12
Q
Fixed assets
A
resources that the firm uses and retains for a long period of time, such as equipment and property.
13
Q
Gross revenue
A
All the revenue generated by a business during a stated period of time
14
Q
Indirect labor
A
all labor not charged to a specific project or revenue-producing account, such as administration, general office time, and marketing
15
Q
Liabilities
A
claims by people outside the business and claims by the owners of the business against the total assets of the business
16
Q
Net operating revenue (or net revenue)
A
The money that remains from billing after deducting fees and expenses, reimbursable expenses, and non-reimbursable project-related expenses.
17
Q
Other assets
A
Miscellaneous resources such as securities and copyrights
18
Q
Overhead
A
Expenses incurred to keep a business operating whether or not any revenue is being generated, such as rent, software leases, and fees for power and telephone service.
19
Q
What are the two basic accounting methods?
A
Cash accounting and accrual accounting
20
Q
Cash accounting
A
revenue and expenses are recognized at the time the business receives the cash or pays a bill
21
Q
Accrual accounting
A
revenue and expenses are recognized at the time they are earned or incurred, whether or not cash changes hands
22
Q
What are the benefits of cash accounting?
A
Tracking actual cash flow.
It is often simple and used by single-person businesses and small businesses.
23
Q
Accrual accounting has what advantages?
A
Gives a better picture of a business’s long-term financial status and provides information that is important for active financial management.
Typically for business above a certain size or that maintain inventory are required by the IRS to use this accounting method.
24
Q
Modifies accrual basis method
A
a slight variation of the accrual method - records fee revenue, expenses billed to the client, and invoices to the firm by outside consultants
However, it does NOT include the amounts of fees that have been earned but not yet billed to the client
25
How are revenues and expenses organized in cash and accrual accounting?
Revenue and expenses are grouped into individual accounts for the purposes of auditing, review, tax preparation, management, and analysis.
26
What type of bookkeeping does the accrual accounting method use?
Double-entry bookkeeping - all transactions are listed chronologically in a journal.
They are then posted to a ledger where transactions are grouped into individual accounts.
Modern society uses accounting with computer programs, some designed specifically for architecture firms.
27
What are the more common accounting reports?
1. Balance sheet
2. Profit and loss statement (Income statement)
3. Cash flow statement
28
What is a balance sheet?
Summarizes all assets and liabilities and shows the financial position of a business.
All assets listed must exactly equal all the liabilities listed.
29
What is net worth and why is it important?
The net worth, otherwise known as owner's equity, is the money invested in a business by the owners or stockholders
Total assets must equal the total liabilities plus the net worth or owner's equity. (on a balance sheet)
30
What is a profit and loss statement (or income statement)?
It lists all the income and expenses of a business for a certain period of time. The difference between all the income and all the expenses gives either the profit or the loss for that period
31
What is a cash flow statement?
Shows actual inflows and outflows of cash or cash equivalents.
Cash is defined as money, checks, or anything else accepted by banks.
32
What are cash equivalents?
Short-term invenstments that can be quickly converted into cash, such as short-term certificates of deposit.
They are important because a business's month-to-month financial health depends on being able to meet payroll and pay bills
33
What does financial management entail?
Active planning, monitoring,and controlling of financial information as well as acting on that information.
34
What is the most fundamental equation for financial planning in any profit-oriented business?
Profit + expenses = revenue
BUT
Equation is often shown in the form of
Revenue - expenses = profit
35
In equation Revenue - expenses = profit, why is it often shown like this?
It suggests that profit is whatever may be left over after expenses are subtracted from revenue.
The other equation suggests that the business will make its targeted profit, and that the business must then control expenses and generate appropriate revenue to make the equation to work.
36
What is the source of highest percentage of overhead?
Indirect labor, personnel who do not directly work on projects
37
What is a project progress report?
More detailed, computer-generated version of the manually produced charts.
It shows the hours and labor costs for each phase of a project, both for the current reporting period and the total to date, and compares these numbers with the estimated hours and costs.
It also shows direct costs, such as for consultants, overhead allocations, and reimbursable expenses.
These reports give the project manager and firm management an accurate look at the status of a project and can be used to take corrective action as necessary.
38
Office earnings report
Summarizes each of the firm's projects in terms of the amount of revenue it has generated, the expenses it has incurred, unbilled services, percentage of completion, and profit or loss to date.
It helps firm management find any projects that may be hurting overall profitability and need remedial action
39
Aged accounts receivable report
Shows the status of all invoices for all projects, whether or not they have been paid, and the "age" of each invoice, which is the time from the invoice date to the payment date, or the current date if still unpaid.
Generally any unpaid invoice more than 60 days old needs attention from the firm principal or whoever is responsible for collections.
40
What is the average collection period for architecture firms for invoices?
60-75 days
41
An invoice older than __ days means in effect that the firm is lending money to the client without charging interest.
90 days
42
Time analysis report
Lists each employee along with the number of hours he or she has spent on direct labor, indirect labor (including marketing and professional development), vacation time, sick leave, and holidays
43
Chargeable ratio
Or otherwise known as the utilization rate, is the percentage of time (sometimes calculated as percentage of dollars) spent on direct labor, divided by the total time (or dollars) spent on direct and indirect labor, vacation, holiday, and sick leave.
44
What is the chargeable ratio break-even point for the whole firm? (percentage)
65% (minimum that is allowed)
45
What is the chargeable break-even point for professional and technical staff?
75-85%
46
Current ratio
Total current assets/total current liabilities = current ratio
This is a measure of a firm's ability meet current obligations. Generally, the higher the ratio, the better, with 1.5 or more indicating a healthy business and 1.0 being about the minimum acceptable level.
47
Net profit before tax
Percentage of profit based on net revenue - the total annual revenue minus consultant's fees and reimbursable expenses
48
overhead rate
Total office overhead (or total indirect expenses) divided by total direct labor. This ratio should be in the range of 1.3 - 1.5.
When used to calculate fees, this ratio is multiplied by the estimated cost of direct labor, and the resulting product is added to the direct labor amount.
49
Quick Ratio
A refinement of the current ratio including only cash and cash equivalents, plus accounts receivable, plus revenue earned but not bills, divided by total current liabilities.
50
Revenue per technical staff
Amount of net revenue produced per technical staff member, or those staff members most directly involved with charging direct time and producing jobs.
51
Revenue per total staff
amount of net revenue produced per staff member per year, including principals and part-time employees.
This ratio is the annual net operating revenue divided by the total number of employees.
52
Billing rate
charge an hourly rate per staff member working on a project
53
How are billing rates determined?
Employee's salary, plus the costs for that employee's fringe benefits, plus the cost of office overhead, plus an allowance for profit.
54
Net multiplier
it is found by dividing the net revenue of the firm (excluding consultants' fees and reimbursables) by the cost of direct labor.
It accounts for fringe benefits, indirect labor, overhead, and profit.
The value is typically between 2.7 - 3.0.
55
Break even rate
similar to the net multiplier and is the total cost of operations/total money spent on direct labor.
This rate accounts for the salary of the employee plus the amount of overhead attributed to the employee.
Break even rate should be from 2.3 - 2.5.
56
What is the recommended overhead rate?
1.3 to 1.5
57
What is the break-even rate?
2.3 to 2.5
The employee's base salary is multiplied by the break-even rate to determine the minimum hourly fee that must be charged to the client in order for the firm to break even on the employee's salary. This number can then be increased by whatever percentage of profit is wanted to arrive at an hourly fee.
58
Direct personnel expense (DPE)
Related to the net multiplier,
the costs of providing taxes, benefits, and the like are included with the employee's base salary. The multiplier is then calculated to account for indirect labor and profit.
59
Why is the Direct personnel expense multiplier lower than the net multiplier?
benefits are included, this way is not used as much as net multipliers.
60
What are billing rates based on?
Employee's salary + employee's benefits + office overhead + allowance for profit
61
Why do firms use information about past projects to develop benchmark fees?
Past projects have evidence based on area, construction costs, project type and other measures that serve as an additional check for fees.
62
What are the four basic steps to collecting accounts receivable?
1. Contract terms
2. Timely billing
3. Complete invoices
4. Regular procedures for tracking accounts
63
What are ways to avoid misunderstandings about fee collection?
Contract should include:
1. basis for the fee
2. when invoices will be sent and in what form
3. when payment is due, and any penalties for late payment
4. Interest charges after 45 days
5. contain provisions for nonpayment
64
When should invoices be sent?
As soon after the payroll period as possible. Every day of delay is one more day until payment is made
65
Should a firm agree to a lump sum payment at the end of phase completion?
No, because on a large project, this can sometimes delay cash inflow for months. Faster billing also helps the client associate the invoice with the work performed during the billing cycle and may forestall questions.
66
What should the invoice information include?
Depending on the firm, it can be itemized information of how many hours was spent on the project per team member, the amount due, reimbursable expenses, project name and number, reference to a contract
67
What is the single largest overhead expense?
Non-billable labor
68
What are some non-labor direct expenses?
1. progress prints made during the course of the job
2. all copy machine reproduction
3. computer expenses charged by an outside company
4. model supplies for a specific project
5. postage and delivery
6. all local travel expenses
7. presentation supplies used for a project
69
For architects, what are three ways duties are established?
1. Terms of contract
2. Legislative enactment - means of building codes and architectural licensing laws
3. Architect's conduct. (Implied duties)
70
What are implied duties?
They depend on how the parties have conducted themselves in the course of performing their work.
71
What are some examples of implied duties?
1. cooperating with contractors - while some actions related to this duty are clearly stated in contracts, others are not.
2. not interfering with the contractor's work. - Such interference includes actions that might cause delay or additional costs, or that cause the contractor to modify standard methods and procedures of construction
3. giving relevant information to contractors - this includes anything that may affect the progress of the job, including any problems or errors the architect has observed.
4. assisting the owner in coordinating work. - this includes helping owners coordinate the schedules and requirements of other contractors and vendors who are not under the control of the general contractor.
72
What is liability?
Legal responsibility for injury to another person or damage to property.
73
Negligence
failure to use due care to avoid harming another person or damaging property
74
What three conditions must be met for an architect to be found negligent?
1. there must be a legal duty established between the parties
2. must be shown that the architect breached that duty
3. must be shown that the breach of duty was the cause of the damage or injury suffered by the other party.
75
What is the concept of betterment?
It is applied to claims of omission by the architect.
For example, if the client asked for wood paneling in the room and the architect showed a painted finish in the drawing, the client may want to ask for architect to pay for a full change order for the room.
Instead of paying in full, the architect can claim that the owner would have to pay for the wood paneling anyway and the architect will agree to pay for the changes needed, IE. bring back the workers who did the room, add wood blocking, etc.
76
Statute of limitations
sets a time limit within which a claim can be made. it is generally between 3 to 10 years. In some states, the statute of limitations begins with the date of substantial completion.
77
Statute of repose
similar to a statute of limitations, except the time limit is usually much shorter and does not begin until the problem is first discovered.
There is a second time limit within which any claim can be made.
78
What is the second time limit that is made inside a statute of repose?
The statue of repose for a claim against an architect may be three years from discovery, with the absolute cutoff date six years from substantial completion. In this case, if a client discovered a problem five years after substantial completion, he or she would have only one year in which to file a claim.
79
What is privity?
Architects are in theory protected from claims by parties with whom they have no direct contractual relationship.
80
Which contract clearly states the concept of privity?
General conditions of the contract for contstruction, AIA document A201, as an indemnification clause
81
What is an indemnification clause?
Holds harmless both owners and architects for any damages, claims, or losses resulting from the performance of any work on the project, whether by contractors or others with whom the architects have no contractual relationship.
82
Why, in some cases, is the indemnification clause not supported?
The instructions the architects gave or failed to give were the primary cause of the damage or injury.
83
In addition to making sure an indemnification clause is in the contract and general conditions, what are other ways the architect can minimize third-party claims by these actions?
1. Don't include language in the contract that expressly states or implies responsibility to provide management, supervision, coordination, or planning of construction, unless those services are specifically being provided.
2. Do not give directions concerning methods of construction. Actions or directions to contractors during construction may imply that the architects' responsibility extends to portions of the work beyond what the contract requires.
3. Point out obvious construction safety problems to contractors. Follow up in writing with both the contractors and owners. If the problems are not corrected, suggest to the owners that construction be stopped until they are corrected.
84
What does the Architectural Works Copyright Protection Act state?
The rights retained by the copyright holder include the graphical representation of the building as well as the overall form, arrangement, and composition of spaces and elements in its design.
85
What does the AIA Document B101 state about copyright?
Standard form of agreement between owner and architect, states that the architect is the owner of the instruments of service and retains all common law, statutory, and other reserved rights, including copyrights.
In addition, the architect should specifically claim ownership rights of the building copyright. To do this, the owner-architect agreement should state that these rights belong to the architect, and the architect should register the work with the US copyright office.
86
What is the AIA Document B101?
Owner-architect agreement - requires architects to maintain professional liability, general liability, and workers' compensation insurance. If the owner requires the architect to carry insurance at limits greater than the architect normally does, the owner is responsible for paying the additional cost.
87
What are some types of insurances architects carry?
1. Professional liability insurance
2. General liability insurance
3. Property insurance
4. Personal injury protection
5. automobile insurance
6. workers' compensation
88
Professional liability insurance
sometimes called malpractice insurance or errors and omissions insurance.
Protects architects in case one of their actions causes bodily injury, property damage, or other damage.
This may include, incorrect specifications, mistakes on drawings, and negligence.
89
What does professional liability insurance not include?
1. Intentional wrongful acts
2. claims for cost estimates being exceeded
3. claims arising from express warranties
90
General liability insurance
includes a range of insurance that protects against claims of property damage, liability, and personal injury caused by architects or their employees, consultants, or other people hired by the architects.
91
Property insurance
protects the architects' building and the building's contents against disasters such as fire, theft, and flood.
92
Personal injury protection Insurance
Protects the architects against charges of slander, libel, defamation of character, misrepresentation, and other torts.
93
Tort
A civil wrong, as contrasted with a criminal act, which causes injury to another person.
94
Automobile Insurance
Automobile insurance covers liability and property damage to vehicles owned and used by the business. It can also include protection against claims made by employees who use their own cars while on company business
95
Workers' compensation
This insurance is mandatory in all states and protects employees in the event of injuries caused by work-related activities
96
AIA Document A201 (About insurance)
General conditions of the contract for construction, the owner is required to carry liability insurance as well as property insurance for the full insurable value of the work.
This insures
97
AIA Document A201 (About insurance)
General conditions of the contract for construction, the owner is required to carry liability insurance as well as property insurance for the full insurable value of the work.
This insures against physical loss or damage caused by fire, theft, vandalism, collapse, earthquake, flood, windstorm, and malicious mischief. It also provides for reasonable compensation for architect and contractor services and expenses that may be needed as a result of insured losses.
98
All risk insurance
Broader in coverage and includes all hazards except those that are specifically excluded by the policy. If the property insurance requires deductibles, any costs that are not covered because of the deductibles are paid by the owner. All-risk insurance also covers work stored off site and portions of the work in transit.
99
What are the general conditions of the contract for construction?
Requires that contractors carry insurance that will protect from an amount of claims.
100
What claims are contractors protected from under the general conditions of the contract for construction?
1. workers' compensation
2. damages because of bodily injury, occupational sickness, or death of employees
3. damages of bodily injury or death to people other than employees
4. personal injury, which includes slander, libel, false arrest, and similar actions
5. damages other than to the work because of destruction of tangible property, including loss of use resulting from such damages
6. Damages related to use of motor vehicles
7. Bodily injury or property damage arising when an injury occurs after the job is complete and the contractor has left the site
8. contractual liability insurance
