JS Accounting Principles and Procedures Flashcards
Are you aware of any financial ratios which can be used to determine the financial status of a contractor?
Gearing Ratios, Liquidity Ratio, Probability Ratio
What is a gearing ratio?
Stakeholder equity : company debts. Shows long term financial ability of the business
What is profitability ratio?
Shows ability of a company to generate profits; turnover - (sales / turnover)
What is liquidity ratio?
Ability to pay off current liabilities by converting assets into cash; assets / liabilities
What report can you obtain to determine financial suitability of a contractor?
Dun and Bradsheet report or Experian
Can you name 3 different types of financial statement?
Balance sheet, profit loss, cashflow statement
What is a profit and loss statement?
Shows the revenue and expenditure over a set period to equate to a net profit of loss figure
Why is cashflow forecasting important?
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.
Why is it important to understand contractors financial stability
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
What is difference between a fixed asset and current asset?
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
What is net working capital
Total assets - total liabilities
What are company accounts and what’s included
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
What happens when a company doesn’t submit a company account?
It is assumed the company are no longer trading and assets become property of the crown
What’s the different between a partnership and limited liability partnership
The difference is in terms of liability of the partners and tax; a partnership has unlimited liability and any profit is taxed as income
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?
There difference is the limit of liability under a limited company, whereas under a sole trader the liability is unlimited
If you were setting up your own practice, what would you need capital for and how would you go about raising it?
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
What is the different between management account and financial account
A management account is used internally and a financial account is required by UK law
What is the difference between balance sheet and profit loss
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.
What is your understanding of the term capital allowances?
Tax relief on certain items purchased on items such as tools and equipment
What are sinking funds
Funds that are set aside for future expense or long term debt
What is Insolvency
The state of a company who are unable to pay off debts where liabilities exceed assets
What is an escrow account?
An account held by a third party on behalf of two other parties
What would you advise your client if they wanted to hire a contractor with a low credit score?
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
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?
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.
What would you expect to see on a contractor’s profit loss account?
- 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
What is company voluntary agreement?
A company comes to an agreement with it’s creditors to pay off all the debt or part over a period of time
What is compulsory liquidation?
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?
What is administration?
Applies to limited companies with the aim to help them get out of financial troubles. It is protection against liquidation under the insolvency act.
What is the difference between liquidation and insolvency?
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
What is auditing?
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.
What are assets
Everything a company owns of value; cash in the bank, equipment and property. They can be split into current and non current.
What are some examples of current assets?
Money a company is owed
Items or goods you can see as profit
Investments that can be easily sold or traded
What are some examples of non current assets
Buildings, machinery or equipment
What are liabilities?
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.
What is cash flow insolvency?
Where a company has the funds to pay off the debt but it is not yet available
What is balance sheet insolvency?
Where a company does not have the assets to pay off it’s debts / liabilities
Under JCT, what are the different types of insolvency?
- Liquidation
- Administrative receivership – not used much any more
- Administrative order – debenture holders can use
- Voluntary agreement
If a contractor was to go insolvent, what would you to?
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
