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JT Revision > Mandatory - Accounting Principles and Procedures > Flashcards

Mandatory - Accounting Principles and Procedures Flashcards

1
Q

What is VAT?

A

Value Added Tax

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2
Q

What is an audit?

A

Checking that a company is compliant with government regulations. Check that the information provided is correct and valid.

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3
Q

What is turnover?

A

Income or revenue that a business generates, usually through the sale of products or services to customers.

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4
Q
  1. What are management accounts?
A

Accounts that are not audited externally. Usually for internal review or for a lender to evaluate if a business is able to repay borrowed funds.

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5
Q

What are financial accounts?

A

Accounts that are audited externally.

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6
Q

Why does a business keep accounts?

A

Required by law for tax purposes. Demonstrates the company’s financial position and ensures finances are being properly managed.

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7
Q

What is Gross and Net?

A

Gross = Total with no deductions.
Net = Total minus deductions such as VAT.

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8
Q

What is an escrow account?

A

An account owned by a third party where funds can be held on behalf of someone else.

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9
Q

What is a project bank account?

A

A ringfenced bank account where funds are held in escrow and money can be released for certain purposes. Such as paying contractors and the design team.

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10
Q

What are overheads?

A

Indirect costs of operating a business such as rent, utilities, salaries and insurance.

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11
Q

What is tax depreciation?

A

As the value of tangible assets (such as plant and equipment) decreases, the taxpayer can apply via tax return for these losses to be compensated by offsetting tax.

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12
Q

What is equity?

A

The value returned to the company’s shareholders if all the assets were liquidated and debts paid off.

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13
Q

What accounting ratios have I used?

A

I would not advice a client on the financial position of a company through the use of ratios. I would advise them to use a company like Dun & Bradstreet. However, for my own peace of mind I would do initial checks using:

  • Liquidity ratio to check a company’s ability to turn assets into cash
  • Profitability ratio to measure a company’s income relative to expenditure on assets, revenue and operating costs.
  • Gearing ratio to review a company’s financial stability. Measure the debt against the equity.
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14
Q

What is financial leverage?

A

An investment strategy using borrowed money to increase the return of an investment.

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15
Q

What are the key financial statements/ documents that companies produce?

A

Profit and loss account.
Balance sheet.
Cash flow forecast.

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16
Q

What is expenditure?

A

A payment to purchase goods or services.

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17
Q

What is capital expenditure (CAPEX)?

A

A payment to improve an asset such as equipment or buildings.

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18
Q

What is revenue expenditure (OPEX)?

A

Day to day running costs of the business, such as servicing equipment.

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19
Q

Why are CAPEX and OPEX split in business accounts?

A

They have different tax obligations.

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20
Q

What is a balance sheet?

A

A quick overview of a company’s financial position. Shows a company’s assets, liabilities and ownership equity.

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21
Q

What is an asset?

A

Something a business owns that delivers value

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22
Q

What is a liability?

A

Debts or obligations a company needs to fulfil in the future.

23
Q

What is a current asset?

A

Cash or other assets that will be converted into assets within 12 months.

24
Q

What is a fixed asset?

A

Assets purchased for long term use and can’t be quickly converted into cash – like land and property.

25
Q

What is a creditor?

A

An individual or business that has leant funds to a company and is owed money.

26
Q

What is a debtor?

A

An individual or business that has borrow funds from a company and owes it money.

27
Q

What is a cash flow forecast?

A

How much money a company or project expects to receive and pay out over a period of time. Helps to ensure that funds are in place throughout a project.

28
Q

What is a cashflow forecast used for?

A

Keep track of overdue payments.
Check whether a project is on track, delayed or ahead of programme.
Plan for funding gaps.
Manage surplus cash.

29
Q

Why is a cashflow forecast important for a construction project?

A

Helps the client understand their financial commitment throughout the project and to plan their spending accordingly.
Helps inform funders of when packages of money will need to be drawn down.
Acts as a check against progress and can be an early warning indicator that work is not progressing as per programme. Or if the contractor is ahead of programme or making inflated claims, which can be an early sign of potential contractor insolvency.

30
Q

How does a cash flow forecast help a company remain solvent?

A

If the forecast shows a period in the future when there is more money being paid out than coming in, it gives the company plenty or warning and helps them rearrange funds to cover debts and remain solvent.

31
Q

Tell me about a time you have used a cash flow forecast.

A

The Edge, a refurbishment project in Digbeth, Birmingham. We had to review the contractors cash flow forecast each month to plan the monthly drawdown for the client.

32
Q

What is a profit and loss account?

A

Shows a company’s revenue and expenses, typically over a 12-month period. Shows whether a company has made a profit or a loss during that time.

33
Q

What is a balance sheet?

A

A broader outlook at the company’s financial position as a whole during the 12-month period.

34
Q

What is insolvency?

A

Inability to pay people or companies you owe money to. A generic term to describe bankruptcy, liquidation and administration.

35
Q

Why would I not recommend appointing a contractor with a low credit rating?

A

Risk of the company becoming insolvent during the project. Possibility that they will have supply chain issues with materials and labour due to poor credit score. Expensive for the client to find a replacement if they go bust, plus will cause delays.

36
Q

How would I determine the financial standing of a company prior to appointment?

A

Get a credit report through Dun & Bradstreet. But this is only based on the last submitted accounts. Ask for references from projects completed within the last 6 to 12 months. Check the workload of the company by asking them to list other projects they are currently working on, their value and labour requirements. Find out how much in house labour they use compared to sub-contractors.

37
Q

What are the signs of contractor insolvency on a construction project?

A

Slowing down of works.
Lack of materials on site.
Poor quality work.
Staff turnover.
Inflated valuations.
Complaints from subbies.

38
Q

When might I encounter insolvency as a QS?

A

A project I’m working on may have a contractor become insolvent.
A new client may approach me because their contractor has become insolvent and they need help or advice.
I may be appointed by a third party to evaluate the commercial viability of a project and produce an independent report on a situation.

39
Q

What would I do in the event of a contractor insolvency on one of my projects?

A

Inform all parties involved.
If there’s a bond in place, inform the bank/ insurance company.
Stop any pending payments from the client to the contractor.
Secure the site and materials on site.
Contact any companies where materials are being held off site via vesting certificate.
Value completed works and deduct any defects.
Calculate the loss and expense incurred by my client.
Terminate the existing contract and find a replacement contractor to complete the works.

40
Q

What is liquidation?

A

The formal process to close a limited company. Sell the assets to pay off any remaining debts and then close the company with Companies House.

41
Q

What is the difference between administration and liquidation?

A

Administration is when a third-party acts on behalf of creditors to recover monies owed.
Liquidation is managed by the company themselves. Selling off assets and paying off creditors before dissolving the company.

42
Q

What is bankruptcy?

A

Only applicable to individuals, not companies. Used when someone cannot pay their debts.

43
Q

What is the CIS scheme?

A

The Construction Industry Scheme. Method of collecting tax from main contractors and sub-contractors to help reduce tax evasion.

44
Q

What does GAAP stand for?

A

Generally Accepted Accounting Principles. Commonly used accounting rules and standards for financial reporting.

45
Q

What is the FRS 100?

A

It is the Application of Financial Reporting Requirements – a financial reporting framework applicable to all UK companies required to complete financial accounts.

46
Q

What is the acid test ratio?

A

Measures short term liquidity of a firm = (current assets – inventories) / current liabilities

47
Q

What is the ROCE ratio?

A

Return on capital employed measures profitability and efficiency of capital used = Earnings before interest and tax / capital employed* *capital employed = total assets – current liabilities

48
Q

What is the working capital ratio?

A

Measures liquidity and ability to pay off current liabilities with current assets = current assets / current liabilities

49
Q

What is the Companies Act 2006?

A

Governs company law in the UK.
Sets out duties for Directors.
Must audit accounts 9 months after financial year end.

50
Q

What are statutory accounts?

A

A report that is prepared annually by limited companies with one simple goal: to break down and showcase financial actions taken by the company in that year.

51
Q

Explain how I handle client’s money properly.

A

Never had to do it, but I know to comply with anti-money laundering legislation.
Get receipts for any client funds I receive.
Put any client money in an escrow account, not my own account or my company’s account.
Comply with the mandatory requirements set out in RICS professional statement “Countering bribery and corruption, money laundering and terrorist financing”.

52
Q

What RICS guidance is there for protecting client money?

A

RICS Client Money Handling guidance note 2019
RICS Client Money Protection Scheme Rules

53
Q

What are the main documents submitted to Companies House?

A

Form IN01 (incorporation information)
Annual accounts
Conformation statement

JT Revision (16 decks)

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