Profit and loss account, Insolvency and bankruptcy

Question 1

239. what is a Profit and Loss Account

Answer 1

A P & L account shows a companies revenue and expenses over a period of time either one month or over a year. This shows whether If business has made a profit or a loss over the period.

Question 2

240. What is the difference between a Profit and Loss Account and a balance sheet?

Answer 2

A balance sheet is a snapshot in time showing a companies a companies assets, labilities and capital a P & L account shows if a company has been profitable over a period of time, usually a year.

Question 3

241. What is insolvency?

Answer 3

Is the inability of a business or person to pay its creditors. This is often used as a generic term to describe bankruptcy, liquidation, administration etc.

Question 4

242. Why would you not recommend a contractor with a low credit rating?

Answer 4

• This is an indication of poor financial health
• As a result, they contractor has a higher risk of going bust (insolvency, bankruptcy etc)

Question 5

243. How could you determine the financial standing for a company prior to doing business with them?

Answer 5

A Dun and Bradstreet creates a business credit report what can be viewed like a personal credit report for businesses.

Question 6

244. What are the signs of a Contractor insolvency on a project?

Answer 6

• Low level of staff, plant or materials on site or works slowing down
• Overclaiming in valuations
• Reports from supply chain of late or no payments
• Changes in management or staff
• Increase defective works

Question 7

245. Under what circumstances might QS encounter insolvency?

Answer 7

• A project may have a contractor or subcontractor who is having serious financial difficulties which may mean they cant pay their debts.
• You might be approached by a client who has a project where the Contractor has ceased trading and needs advise
• You can be appointed by an external body (generally a liquidator or administrator to prepare a report on a commercial aspect of a project.

Question 8

246. What steps would you take in the event of a contractor insolvency?

Answer 8

• Inform all parties involved and secure the site
• Inform the bondsman (bank or insurance company) if relevant
• Consider stopping pending payments to the contractor and seek legal advice
• Take ownership of materials off site (if paid for in valuations)
• Schedule all plant and materials
• Value completed works and any defects
• Terminate the building contract as stated in the contract and employ others to complete

Question 9

247. What is liquidation?

Answer 9

Is a formal process which brings about the closure of a limited company. As part of this process all company assets will be sold or “liquidated” for the benefit of outstanding creditors and or shareholders before the company is struck off or dissolved from the register held and companies house.

Question 10

248. What is the difference between administration and liquidation?

Answer 10

• Administration – Where an administrator is appointed to manage the companies affairs on behalf of the creditors. They try to “rescue the company” to allow it to keep trading.
• Liquidation involves shutting down the company and selling off the assets to pay its creditors