M5. ACCOUNTING PRINCIPLES Flashcards
What are the key financial statements that companies provide?
- The key financial statements are:-
o Profit and loss accounts.
o Balance sheets.
o Cash flow statements.
What is the difference between management and financial accounts?
- Management accounts are for the internal use of the management team.
- Financial accounts are the company accounts that are required by UK law.
What is the difference between a profit and loss account and a balance sheet?
- A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss.
- The balance sheet shows what a company owns (it’s assets) and what it owes (it’s liabilities) at a given point in time.
What is a cashflow statement?
- A summary of actual or anticipated ingoing and outgoing of cash in a firm over a period.
- It measures the short-term ability of a firm to pay off its bills.
Explain your understanding of the insolvency ?
- Insolvency – An inability to pay debts where liabilities exceed assets.
Why do chartered quantity surveyors need to understand and be able to interpret company accounts?
- To aid in preparing their own business accounts.
- For assessing the financial strength of contractors and those tendering for contracts.
- For assessing competition.
What is the purpose of a profit and loss account?
- To monitor and measure profit (or loss).
- To compare against past performance and against company budgets.
- For valuation purposes and to compare against competitors.
- To assist in forecasting with future performance.
- To calculate taxation.
What is the difference between debtors and creditors?
- Creditors are business entities that are owed money by another entity that they have extended credit to.
- Debtors are business entities that owe money to another respective company.
What are Management Accounts?
- The accounts prepared by a company for internal management use.
- Accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the funding.
- These accounts are not be audited externally.
What is a Profit and Loss account?
- They demonstrate a companies sales, running costs and profit or loss over a financial period (usually 1 year).
- They are used to show sales vs expense (invoicing vs time and disbursements).
- They can also be used to identify non-profitable work.
What is a Balance Sheet?
- They shows the value of everything the company owns made up of its assets and liabilities.
- The balance sheet demonstrates the value of the business at any given point in time.
What is a Cash Flow forecast?
- A cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity.
- On construction projects they usually show as an ‘S’ curve.
- There is typically a small financial outlay at the start, a steep increase during the midway point and a taper towards the end.
What is an S-Curve?
- S-Curve means ‘standard’ and refers to the shape of the expenditure profile when shown in graphical form.
- During the start of a project, the rate of expenditure is typically lower due to site setup and lower value enabling works.
- As the scheme progresses to the middle of the programme, the rate of expenditure will typically increase as more expensive building components such as M&E and Structural Steel Work are installed.
- Towards the back end of the programme, the rate of expenditure will slow down which is shown by the flattening of the S-Curve.
How are S-Curve’s used by Surveyors?
- To track, analyse and assess business accounts and performance.
- For assessing the financial strength of contractors.
- To compare actual progress of the work against pre-contract predictions.
What are Escrow Accounts?
- A separate account owned by a third party, held on behalf of two other parties.
- A bank account with defined contractual conditions for the release of funds.
- They can be used as a project bank account.
- Mechanisms must be in place for the release of funds such as payment certificates.
When have you used company accounts in your work?
- To assess the financial strength of contractors at Pre-Qualification Stage and tender stages.
How do you analyse a company’s accounts?
- The client’s accountants will carry out the detailed analysis but I can look at the warning signs by calculating ratios such as liquidity ratios, profitability ratios and gearing ratios.
How do you carry out a credit check? Give an example.
Through Dun and Bradstreet or Experian.
What are signs of insolvency in company accounts or credit checks?
- A low credit rating.
- A liquidity ratio below 0.75.
- A falling working capital ratio suggesting that the company has taken on more contracts than it can finance.
- A low return on equity.
- A highly geared company that is heavily reliant on loans.
- A falling cashflow statement.
Why would you not recommend the appointment of a contractor with a low credit rating?
- There may be an increased risk of the contractor not performing satisfactorily.
- It could present increased risk of the contractor failing to deploy sufficient resources and materials to the project.
- It could increase the risk of the contractor’s insolvency.
What measures would you recommend if your client wanted to appoint a contractor with a low credit rating?
- I would explore the option of requesting a performance bond that my client could call on if they Main Contractor failed to perform.
- I would also review the tender submission to ensure this is not excessively front loaded.
- When reviewing interim valuations, I would ensure that these are accurate and not over claimed.
- A project bank account may also provide an additional level of assurance and should be considered.
What are the financial reporting standards applicable to the UK?
- International Financial Reporting Standards (IFRS Accounting Standards)
- UK GAAP (Generally Accepted Accounting Practice)
What is the Companies Act (2006)?
- Primary legislation for UK company regulation.
- Governs company formation, management, and dissolution.
- Sets rules for directors’ duties and shareholder rights.
- Requires financial reporting and transparency.
- Establishes corporate governance standards.
What is a liquidity ratio?
Determines a company’s ability to pay its short-term debt obligations.
What is a gearing ratio?
Compares a company’s debt to its equity
What is a profitability ratio?
Measures the ability of a company to generate income relative to revenue
What is the importance of accounting principles and procedures for a chartered surveyor?
Once chartered, I will be able to set up as a regulated firm and therefore it is important that I am competent in with accounting procedures and principles in order operate a compliant organisation.
What are the penalties for non-compliance with the Companies Act 2006 in relation to financial reporting?
Depending on severity, this can include:
Civil penalties: The company may be liable to a civil penalty of up to £1,000 per month for each month the accounts are late.
Criminal prosecution: The company directors may be prosecuted for failing to file the accounts. If convicted, they could face a fine of up to £5,000 or imprisonment for up to two years.
Dissolution of the company: If the company fails to file its accounts for two consecutive years, it may be struck off the Companies House register. This means that the company will cease to exist.
