JS Accounting Principles and Procedures

Question 1

Are you aware of any financial ratios which can be used to determine the financial status of a contractor?

Answer 1

Gearing Ratios, Liquidity Ratio, Probability Ratio

Question 2

What is a gearing ratio?

Answer 2

Stakeholder equity : company debts. Shows long term financial ability of the business

Question 3

What is profitability ratio?

Answer 3

Shows ability of a company to generate profits; turnover - (sales / turnover)

Question 4

What is liquidity ratio?

Answer 4

Ability to pay off current liabilities by converting assets into cash; assets / liabilities

Question 5

What report can you obtain to determine financial suitability of a contractor?

Answer 5

Dun and Bradsheet report or Experian

Question 6

Can you name 3 different types of financial statement?

Answer 6

Balance sheet, profit loss, cashflow statement

Question 7

What is a profit and loss statement?

Answer 7

Shows the revenue and expenditure over a set period to equate to a net profit of loss figure

Question 8

Why is cashflow forecasting important?

Answer 8

Indicates the out goings of a business and the likely expenditure of a business so it’s important to be able to ensure funding and cash is available.

Question 9

Why is it important to understand contractors financial stability

Answer 9

If they are financially unstable, chances are they won’t be able to maintain their cashflow, front loading valuations and going insolvent whilst working on your projects

Question 10

What is difference between a fixed asset and current asset?

Answer 10

A current asset is an asset that can easily be converted into cash, within 12 months. Fixed asset won’t realise their value for 12 months

Question 11

What is net working capital

Answer 11

Total assets - total liabilities

Question 12

What are company accounts and what’s included

Answer 12

Companies accounts are required by law to be submitted to companies account and are financial accounts including balance sheets, profit loss statements and proof of auditing and signed by a director

Question 13

What happens when a company doesn’t submit a company account?

Answer 13

It is assumed the company are no longer trading and assets become property of the crown

Question 14

What’s the different between a partnership and limited liability partnership

Answer 14

The difference is in terms of liability of the partners and tax; a partnership has unlimited liability and any profit is taxed as income

Question 15

If you were considering setting up your own practice, what would be the differences between setting yourself up as a sole trader or as a limited company?

Answer 15

There difference is the limit of liability under a limited company, whereas under a sole trader the liability is unlimited

Question 16

If you were setting up your own practice, what would you need capital for and how would you go about raising it?

Answer 16

You would need capital for the day to day running of the business, employee expenses, rent etc. To raise it you could obtain bank loans, funding from stakeholders

Question 17

What is the different between management account and financial account

Answer 17

A management account is used internally and a financial account is required by UK law

Question 18

What is the difference between balance sheet and profit loss

Answer 18

A profit loss account shows the revenue and expenditure over a set period. A balance sheet shows what the company owes / owns at any given time.

Question 19

What is your understanding of the term capital allowances?

Answer 19

Tax relief on certain items purchased on items such as tools and equipment

Question 20

What are sinking funds

Answer 20

Funds that are set aside for future expense or long term debt

Question 21

What is Insolvency

Answer 21

The state of a company who are unable to pay off debts where liabilities exceed assets

Question 22

What is an escrow account?

Answer 22

An account held by a third party on behalf of two other parties

Question 23

What would you advise your client if they wanted to hire a contractor with a low credit score?

Answer 23

Ensure I review the contractor’s tender to see it is not front loaded
When undertaking valuations, I would ensure they are not claiming for anymore than they should
Also take out a performance bond

Question 24

If you and a contractor reached an impasse on agreeing an item in a valuation, how would you move this forward to a reasonable conclusion?

Answer 24

I would ask them to provide a breakdown of their valuation, and justify what works have been to date. I would be as fair and reasonable as possible but still only value the works done to date, in line with the valuation rules.

Question 25

What would you expect to see on a contractor’s profit loss account?

Answer 25

• Sales and Revenue
  MINUS cost of sales (sub-contractor costs)
• Gross Profit
  MINUS Overheads & Operating Expenses
• Operating Profit
  MINUS Interest Expense
• Net Profit Before Tax
  MINUS Tax
• Net Profit After Tax

Question 26

What is company voluntary agreement?

Answer 26

A company comes to an agreement with it’s creditors to pay off all the debt or part over a period of time

Question 27

What is compulsory liquidation?

Answer 27

Courts issue a winding up order to a company and a liquidator comes and sells the assets of the company to pay off the debts and fees associated with the liquidation?

Question 28

What is administration?

Answer 28

Applies to limited companies with the aim to help them get out of financial troubles. It is protection against liquidation under the insolvency act.

Question 29

What is the difference between liquidation and insolvency?

Answer 29

Liquidation is where a company is shut down and the assets are used to pay off debts and liabilities. Insolvency is where a companies debts outweigh the assets and the company is placed into administration

Question 30

What is auditing?

Answer 30

The process where a third party review a company’s accounts and records to ascertain how true the information provided within the company’s financial statement is.

Question 31

What are assets

Answer 31

Everything a company owns of value; cash in the bank, equipment and property. They can be split into current and non current.

Question 32

What are some examples of current assets?

Answer 32

Money a company is owed
Items or goods you can see as profit
Investments that can be easily sold or traded

Question 33

What are some examples of non current assets

Answer 33

Buildings, machinery or equipment

Question 34

What are liabilities?

Answer 34

Things you need to pay including wages, bills and taxes. Current are things you can pay within the year such as rent and wages, non current are liabilities you can not pay off within the year, such as long term debts or interests.

Question 35

What is cash flow insolvency?

Answer 35

Where a company has the funds to pay off the debt but it is not yet available

Question 36

What is balance sheet insolvency?

Answer 36

Where a company does not have the assets to pay off it’s debts / liabilities

Question 37

Under JCT, what are the different types of insolvency?

Answer 37

• Liquidation
• Administrative receivership – not used much any more
• Administrative order – debenture holders can use
• Voluntary agreement

Question 38

If a contractor was to go insolvent, what would you to?

Answer 38

I would refer to section 8 of the contract under JCT which deals with contractor insolvency. Their obligations under the contract become suspended.
I would inform the CA so a notice or termination can be issued.
Advise the client to take control of the site and make it secure.
Advise the client to call on any precautions which were taken, e.g. PGCs, PBs, collateral warranties