M01 - Accounting Principles and Procedures

Question 1

What is a balance sheet?

Answer 1

A statement of the financial standing of a business at a snapshot in time, showing what the business owns and owes.

Question 2

What is a profit and loss statement?

Answer 2

A statement that summarizes the revenues, costs and expenses incurred during a specific period of time, usually a fiscal quarter

Question 3

What is the difference between balance sheet and profit and loss statement?

Answer 3

The profit and loss statement shows changes in accounts over a set period of time, whereas the balance sheet is just a snapshot of a point in time

Question 4

What is the difference between management and financial accounts?

Answer 4

• Management accounting is presented internally

- Financial accounting is meant for external stakeholders

Question 5

How do you produce cashflows for your Client?

Answer 5

I calculate cash flows by inputting data such as the contract sum, contract period and the payment intervals

Question 6

Do you know of any types of ratio analysis and why they are needed?

Answer 6

Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm’s financial performance

• Profitability
• Liquidity
• Efficiency

Question 7

What is a PBA?

Answer 7

• Project bank account
• Ringfenced bank account
• Ensures contractors, key subcontractors and key members of the supply chain are paid on the contractually agreed dates

Question 8

Why is financial management in construction important?

Answer 8

• Investment goods industry, the products are wanted not for their own sake but on account of the goods and services, which they can create
• Amount to 7-8% of UK GDP and 3-10% of the world GDP.
• Dependence on government as a client, the government has the means to exercise very direct control over demand in the industry
• Problems in the construction industry can affect the economy therefore good financial management is vital.

Question 9

Why keep company accounts?

Answer 9

• To allow potential companies to see a companies financial standing
• Required by law for tax purposes
• For borrowing purposes
• To ensure the cash flow in a company is being managed correctly

Question 10

Why do we use cash flow?

Answer 10

• Ensures cash resources of the firm are fully utilized
• Ensures there is sufficient cash available to meet anticipated demand
• Provides a reliable guide to lending institutions when negotiating and repaying loans
• It provides an accurate tool for control

Question 11

What is included in a cashflow?

Answer 11

• Net cash flow from operating activities – sum of cash receipts less sums paid e.g. salaries, interest on loans. Depreciation (loss of tangible asset value over time), deferred tax and amortization (loss of intangible asset value over time) are added / subtracted from the net income figure from P&LA
• Returns on investments and servicing of finance – cash that the business receives as interest and dividends from investments e.g. repayment of debt
• Taxation – tax payment at the end of the accounting year – 50% from previous and 50% from current
• Capital Expenditure – cash payment used to acquire fixed assets (buildings, machinery) and receipts from disposal of others
• Equity Dividends Paid – payment to equity holders to period shown
• Management of Liquid Resources – cash payment / receipts from acquisition / disposal of readily disposable investments
• Financing – concerned with the long term financing from borrowings and shares.
• Increase / decrease in cash over a period – money in hand and bank deposits

Question 12

What types of profit are there?

Answer 12

• Gross profit = Net sales – Cost of goods sold
• Operating Profit = Gross Profit – Total operating expenses
• Net profit = Operating Profit – taxes & interest

Question 13

What are possible reasons for business failure in construction?

Answer 13

• Low working capital requirements
• Sensitive to economic cycles
• Characteristics of construction contracts
• Insolvency

Question 14

What is insolvency?

Answer 14

• Insolvency is having insufficient funds to meet debts and liabilities.
• Technical insolvency is when a company does not have enough time to realize all its assets to pay creditors
• Legal insolvency is when a company could not pay creditors even if assets were realised

Question 15

What is bankruptcy?

Answer 15

Bankruptcy is insolvency of an individual

Question 16

What is liquidation?

Answer 16

Liquidation is the process by which a company comes to an end

Question 17

What is receivership?

Answer 17

Receivership is insolvency of a company where a receiver is appointed to protect the assets on behalf of the creditors. The receiver continues to run the business for a while in order to sell or reorganize it so it can continue trading when receivership has concluded

Question 18

What is retention?

Answer 18

Retention is the withholding of a sum of money through each valuation. A sum is then released at completion followed by at the end of the defects liability period

Question 19

What does Completion trigger?

Answer 19

• Start of defects liability period
• Release of retention
• Final account agreement
• Risk of loss or damage to the works passes to client

Question 20

Why do we hold retention?

Answer 20

Retention is held to incentivize the contractor to complete works and to correct any defects occurring in the defects liability period

Question 21

What are overheads?

Answer 21

• The indirect costs or fixed expenses of operating a business
• What insurances should a Consultant firm have in place?
• Professional Indemnity Insurance

Question 22

What is Capex costing?

Answer 22

• Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.

Question 23

What is Opex costing?

Answer 23

• Operational expenditure might include expenditure such as; wages, utilities costs, maintenance and repairs, rent, sales, general and administrative expenses.

Question 24

What is a cash flow statement?

Answer 24

• Complements a balance sheet.

- It summarises the cash and cash equivalents entering and leaving the company during a period.

Question 25

What is a book to bill ratio?

Answer 25

• Book to bill: A ratio of orders taken to invoices sent over a set period of time. In other words, a book-to-bill ratio compares current customers (orders taken) to previous customers (invoices sent).

Question 26

Why is it important to compare a company’s cash flow statement to their profit and loss statement?

Answer 26

• It is important to understand the net incoming to understand the efficiencies of the company. Turnover may be high, but margins may be low.

Question 27

How did you produce the pre-construction cash flow report on Fleet Street?

Answer 27

• We used our cost estimates & split the costs across the programme
• We took into account the release of retention etc.