Accounting Principals and Procedures Flashcards
What is your understanding of term tax depreciation?
- It is where the declining value of an asset is offset against a companies taxable profit.
- The depreciation in value can be recorded as an expense in order to reduce the amount of taxable income.
- This can be applied on things such as plant, tools, vehicles computers, furniture and buildings.
What are overheads?
- The operating costs of a business that are incurred on an ongoing basis.
- Overheads can be fixed or variable.
- Fixed overheads can include rent for office space or building insurance costs that do not change month to month.
- Variable overheads fluctuate depending on the activity of the business and include things such as utility charges.
What is an escrow account?
- Escrow accounts are contractual agreements that are used as financial instruments within a transaction.
- The asset or currency being transferred between two primary parties is held by an intermediary third party.
- The currency being exchanged is held securely by the third party until each of the two parties have met their contractual obligations allowing the money to then be transferred - often used for mortgage lenders or selling of real estate.
What are the three different types of accounting ratios?
- Liquidity ratios - consider an organisations ability to pay their debt obligations and assess its margin of safety by looking at a number of metrics including their operating cash against short term debts.
- Profitability ratios - assess an organisations ability to generate profits from its sales operations and shareholding equity. The ratio indicates how efficiently a company is in generating profit.
- Gearing ratios - compare capital within the company against its debts. The gearing is a measure of company’s financial leverage and sets out what proportion of the firms activities are funded by shareholders vs its creditor funds.
Why does a business keep company accounts?
- Record and measure a the company’s profitability.
- For tax calculation including tax calculating taxable deductions.
- Legislation requires companies to keep accurate records -
- Business growth is encouraged by identifying profitable operations and those that are loss making.
What is financial leverage?
- It is the concept of using borrowed funds in the form of debt to enhance business operations and increase the companies profitability and rates of return.
- In the event that the rate of return invested via borrowed funds is higher than that interest on those funds then more profit can be generated.
What are capital allowances?
- They allow tax payers to gain tax relief by using their expenditure to be deducted from their taxable income.
- There are only certain categories of expenditure that can benefit from tax relied and include: plant and machinery, integral parts of building structures (lifts etc) and R&D costs.
What is the difference between a current and fixed asset?
- Current asset - can normally be converted into cash within one financial year and are regarded as assets that allow day to day business operations e.g money owed to a company following sales of its products and inventory.
- Fixed asset - typically cannot be converted into cash within one financial year. These are assets are recorded on company balance sheets as fixed assets that the company owns e.g vehicles, machinery and buildings.
What is the difference between a profit and loss account and a balance sheet?
- Profit and loss account - shows the incomes and expenditures of a company and the resulting profit or loss.
- Balance sheet - shows what a company owns (assets) and what it owes (liabilities) at a give point in time.
What are the key financial statements that all companies must provide?
- Profit and loss account.
- Balance sheets.
- Cash flow statements.
What is a cashflow statement?
- It is the summary of the actual or anticipated ingoing and outgoing cash in a firm over the accounting period. It is broken down into operating, investing and financing activities.
- Measures the short term ability of a company to pay off its debts.
Why do chartered building surveyors need to understand and be able to interpret company accounts?
- For reviewing their own firms’ accounts.
- For assessing the financial strength of contractors and those tendering for contracts.
- For reviewing profitability and sustainability.
What is the purpose of a profit and loss account?
- Monitor and measure profit (or loss).
- Can be used to compare a firms past performance, compare performance to the budget and compared to other businesses.
- Assist in forecasting future performance (can be used to inform next period’s budget).
- For calculating tax.
What is the difference between debtors and creditors?
- Creditors - sub consultants that you owe money to.
- Debtors - a firm that owes your firm money - e.g a client.
What are the signs of insolvency in company accounts / credit checks?
- Low credit rating.
- A current ratio below 0.75. Current ratio = measures a company’s ability to pay short-term obligations or those due within one year.
- A falling working capital ratio suggesting that the company has taken on more contracts than it can finance. Working capital ratio = measurement of a company’s current assets compared to its current liabilities (ability to meet financial obligations).
What is auditing?
- Term used to describe the examination and verification of a company’s financial records.
- Auditing performed to ensure the financial statements are prepared in accordance with the relevant accounting standards.
- Financial records prepared internally must be in accordance with GAAP (Generally Accepted Accounting Principals).
What is GAAP?
- The Generally Accepted Accounting Principals - is the governing body of accounting standards published by the UK’s Financial Reporting Council (FRC) and detail the framework by which financial information should be presented.
- The accounting principals are enforced to encourage greater transparency and understanding, improve financial report and to ensure that businesses are being honest.
What are the main GAAP?
- ASK accounts team?
What is insolvency?
When a business can no longer meet your financial obligations, ie not enough money coming in to match money going out.
What does a balance sheet tell you?
t tells you how much the company owns (assets) and owes (liabilities).
What is the difference between a profit and loss statement and a balance sheet?
A profit and loss shows the income and expenditures of a company and resulting profit or loss.
The balance sheet shows what a company owns (assets) and what it owes ((liabilities) at any given point.
What are company accounts?
Company accounts are legally required from all incorporated companies under the Companies Act 1989. They are prepared for external parties (HMRC, banks etc) to show the performance over a period and help prevent fraud, ensure that cashflow is managed, provide evidence for borrowing purposes etc.
When should a company be registered for VAT ?
If the company a VAT taxable turnover to be greater than £85,000 in the last 12 months or in the proceeding 30 day period.
Give me some examples of how you forecast your individual fee income.
- Consideration of pipeline
- Framework contracts
- Upcoming projects
- Scheduled appointments
What does a Dun and Bradstreet report show?
It compiles business information to measure the creditworthiness of a company. They are the business equivalent of a credit report check. It will colour code the companies financial status from green, red or orange/yellow to show their risk.
What are the limitations of a Dun and Bradstreet Report?
It is limited only to the latest submitted documents on companies house.
Why do companies keep accounts?
For regulatory purposes, to keep track/record of outgoings and in goings and compare performances and to plan future growth.
How are fee proposals prepared?
A fee proposal is prepared using an estimate of the time required to carry out a job multiplied by the cost of your hire on an hourly rate. A percentage will then be added for company overheads.
What is bankruptcy?
The legal process where people or companies who cannot repay debts may seek relief from the government of their debt. It is court ordered. It stays on your financial record for up to 10 years
What is retention and why do we keep this?
Retention is the withholding of a percentage of a contract sum to ensure the contractor properly completes the activities required within the rectification period.
What is solvency?
The possession of assets in excess of liabilities; ability to pay one’s debts.
What is meant by the terms Gross and Net?
n salary terms, Gross is the total salary and net is salary minus tax and all other deductions.
