Mandatory Competency - Flash Cards - Accounting

Question 1

What are the key financial statements that all companies must provide?

Answer 1

Profit and loss statement, Balance Sheet, Cash Flow statement

Question 2

What is the difference between a profit and loss account and a balance sheet?

Answer 2

Profit and loss account details the incomes and expenditures of A company over A specified period, and the resulting Profit or loss, usually over A financial year. The balance sheet shows the assets and liabilities at A given point in time.

Question 3

What is a cashflow statement?

Answer 3

A cashflow statement is the actual or anticipated ingoing and outgoing of cash over the accounting period.

Question 4

What is an S-Curve? How are these used by surveyors?

Answer 4

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. in the middle it will be more expensive as building components such as M&E and Structural Steelwork are installed.
- Used by surveyors to track, analyse and assess business accounts and performance. Also, to assess the financial strength of contractors and to compare actual progress of the work against pre-contract predictions.

Question 5

What are the main types of ratio analysis used to assess a company’s financial strength?

Answer 5

Profitability ratios - Measure the performance of the company to generate profits.
Financial gearing ratios - These measure the financial structure of the company which are crucial indicators for the external suppliers of debt and equity, as well as for internal management. They help to measure solvency. Highly geared companies rely mainly on borrowing. The payment of interests reduces the profit.
Investment ratios - These relate to the financial returns that a company is achieving and the resultant ratios will determine the demand for shares and the availability of new equity finance for the builder

Question 6

What is the difference between debtors and creditors?

Answer 6

Debtors - Firms which owe yours money
Creditors - Firms which you owe money

Question 7

What is the Late Payment of Commercial Debts (Interest Act) 1998 and how does it relate to the standard forms of contract?

Answer 7

Statute that allows the recovery of interest at the Bank of England Base Rate plus , 8% on debts which are not paid by the agreed payment date. JCT Contract supersedes this within Section 4 - 5% above the Bank of England dealing rate.

Question 8

What are Liquidity ratios?

Answer 8

Liquidity rations measure the ability of a company to pay off its current liabilities by converting its current assets into cash. The ratio is usually around 1.5 but it depends on the sector of activity. (Current assets / current liabilities)

Question 9

What is an escrow account?

Answer 9

A sperate account owned by a third party, held on behalf of two other parties. Can be used as a project bank account. Mechanisms must be in place for the release of funds such as payment certificates.

Question 10

What is an LLP?

Answer 10

Limited liability partnership.

Question 11

How does revenue expenditure differ from capital expenditure in business accounts?

Answer 11

Revenue expenditures are ongoing expenses whereas capital expenditures are for fixed assets.

Question 12

Explain the principles behind capital allowances?

Answer 12

A Capital Allowance is an expenditure your business may claim against its taxable profit. Capital Allowances may be ​claimed on most assets purchased for use within your business.

Question 13

How is VAT dealt with in a company’s accounts?

Answer 13

In the UK VAT, or Value Added Tax, is abusiness taxlevied by the government on sales of goods and services. All businesses which have an annual turnover of more than the current VAT threshold (£90,000 in 2024) must register for VAT and complete a VAT return

Question 14

Do all business accounts have to be audited?

Answer 14

Your company must have an audit if at any time in the financial year it’s been one of the following:
- a public company (unless it’s dormant)
- a subsidiary company (unless it qualifies for an exemption)
- an authorised insurance company, carrying out insurance market activity, or an issuer of electronic money (e-money)
- involved in banking
- a Markets in Financial Instruments Directive (MiFID) investment firm,
- an Undertakings for Collective Investment in Transferable Securities (UCITS) management company,
- a corporate body and its shares have been traded on a regulated market,
- a funder of a master trust pensions scheme,
- a special register body,
- a pensions or labour relations body

Question 15

Where could you obtain information on a company’s financial status?

Answer 15

Companies House

Question 16

What are management accounts?

Answer 16

Management accounts are used internally to monitor a firm’s performance against agreed metrics (Whereas financial accounts are those required by UK law)

Question 17

What is a sinking fund?

Answer 17

Set aside revenue for future expense or long-term debt

Question 18

What is an escrow account and when might it be used?

Answer 18

A sperate account owned by a third party, held on behalf of two other parties. Has defined contractual conditions for the release of funds and can be used as a project account. Mechanisms must be in place for the release of funds such as; payment certificates.

Question 19

How do you carry out a credit check? Give an example.

Answer 19

I use the Credit Safe website to which my company subscribes to access company’s accounts. I considerer both the group accounts and the company accounts. If the credit rating is a bit low, I calculate some key ratios and pass on all the information to my client’s accountants for them to analyse further.

Question 20

What are some signs of insolvency?

Answer 20

• Low credit rating.
• A current 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
• Highly geared company (rely on loans)
• A falling cashflow statement

Question 21

What measures would you recommend if your client wants to appoint , a contractor with low credit rating? / How do you deal with , contractor’s cash flow issues?

Answer 21

Request A bond, Check that the tender is not excessively front loaded, Make sure that work is accurately valued at interim valuations, Consider opening A project bank account

Question 22

How does a project bank account work?

Answer 22

PBAs are designed to make simultaneous payments to all levels of the supply chain through a specific ring-fenced bank account set up for a given scheme. This ensures security and certainty of payment, and helps drive efficiencies that can ultimately be passed to the client as a result of reduced financing requirements.

Question 23

What are the generally accepted accounting principals? (GAAP)

Answer 23

Set of accounting rules and procedures used in standardised financial reporting practices. UK Generally Accepted Accounting Practice (UK GAAP) is the body of accounting standards published by the UK’s Financial Reporting Council (FRC)

Question 24

What is insolvency?

Answer 24

An inability to pay debts where liabilities exceed assets.

Question 25

How do you manage invoicing?

Answer 25

Supply chain - review invoices against quotations, works completed, work with finance for payment.
Clients - Produce invoices for payment of fees monthly, work out percentage of work completed to produce invoice.

Question 26

How do you monitor project finances?

Answer 26

Review time and expense reports against job numbers, review fee allowances against time spend on the project, ensure efficiency to keep within fee allowances or discuss uplift in fees with client if additional works are required.

Question 27

What are the different types of tax?

Answer 27

Value added tax, income tax, nantional insurnace, corporation tax.

Question 28

What is the definition of insolvency?

Answer 28

When a perosn or a busness is unable to pay their dets or outgoings.

Question 29

What information needs to be submitted each year to HMRC?

Answer 29

Profit and loss statement, Balance Sheet, Cash Flow statement

Question 30

When is auditing required in a company?

Answer 30

Under Companies Act 2006 - those that are exempt are less than 50 employees, turnover of less than 10.2m and balance sheet less than 5.1m

Question 31

What is a financial gearing ratio?

Answer 31

Measure of financial leverage which indicates the degree of which a firms operations are funded by equity versus creditor financing.

Question 32

What is a profitability ratio?

Answer 32

Assess company’s ability to earn profits, from its sales or operations, balance sheet assets or shareholder equity.

Question 33

What is a liquidity ratio?

Answer 33

Measure of a businesses ability to pay off its short-term debt obligations.

Question 34

What are capital allowances?

Answer 34

Type of tax relief for businesses for long term assets. e.g. equipment, cars.