Accounting Principles

Question 1

What is VAT?

Answer 1

VAT is value added tax, which is tax added to goods and services

Question 2

What is corporation tax?

Answer 2

Corporation tax is paid by UK businesses, which is calculated on their annual profit

Question 3

What is the GAAP?

Answer 3

• Generally accepted accounting principles
• Set out the accounting standards for the sharing of accounting information within the UK

Question 4

What is the IAS?

Answer 4

A set of international accounting standards to promote transparency, accountability and efficiency in financial markets around the world 

Question 5

What is the role of an auditor?

Answer 5

An auditor insures a company is compliant with procedures and policies

Audits can be undertaken on company’s accounts and quality management systems

Question 6

What is an audit?

Answer 6

An audit is an inspection by an auditor to check accompanies compliance with policies and procedures

Different types of audits include quality system audit and financial account audit

Question 7

Why is it important to undertake audits?

Answer 7

• Improves efficiency of operations
• Evaluate risks
• Ensures legal compliance
• Can be a requirement to continue compliance with financial and quality management systems

Question 8

What would happen if an auditor found a problem with something in the company’s accounts?

Answer 8

• can stop company activities until the issue is resolved, especially if it was a legal requirement
• Can recommend ways in which the company can improve its methods to comply with policies and procedures

Question 9

What is turnover?

Answer 9

Turnover is how much income of business has made, usually from the sales of goods and services

Question 10

What is the difference between management and financial accounts?

Answer 10

• management accounts are presented internally
• Financial accounts are meant for external stakeholders

Question 11

Why do businesses keep accounts?

Answer 11

• Tax purposes
• Demonstrates a company’s financial standing, for things such as loans
• To show solvent, profitability and helps maintain an accurate cash flow
• A legal requirement for HMRC

Question 12

What is an escrow account?

Answer 12

An escrow account is a separate account owned by a third-party, held on behalf of two other parties

Question 13

What is a project bank account?

Answer 13

A project bank account is a Ring fenced account that is used to ensure contractors, subcontractors and members of the supply chain are paid on contractually agreed dates

Mechanisms, such as payments certificates, are used to release the funds

Question 14

What are overheads?

Answer 14

Overheads are the indirect costs of operating a building. Examples include:
- Rent
- Utilities
- Staff costs
- Insurances

Question 15

What is a ratio analysis and why is it useful?

Answer 15

Ratio analysis is a way to analyse a company’s accounts

A ratio analysis is used to evaluate various aspects of a business’ operating and financial performance, such as liquidity, profitability and solvency

Question 16

What are the three types of accountancy ratios?

Answer 16

Liquidity: to show the organisations ability to liquidate assets in order to pay debts

Profitability: to demonstrate the profitability of a business using balance sheets

Gearing: demonstrates how much debt accompany has against how much equity it has

Question 17

What is financial leverage?

Answer 17

The use of borrowed funds to invest, to increase the potential return on investment

Question 18

What is return on investment?

Answer 18

The amount of money that could or has been returned, after you’ve made an investment

Question 19

What are capital allowances?

Answer 19

Capital allowances are a type of tax relief. Businesses can claim when they invest in long-term assets.

Capital allowances allow you to deduct part, or all, of the assets value from profits, therefore paying less tax

Question 20

What is the difference between gross and net?

Answer 20

Gross: refers to the total amount of income before deductions

Net: the total after deductions

Question 21

Why is it beneficial for surveyors to understand company accounts?

Answer 21

• Helps with assessing the financial health of tendering contractors
• Can help in preparing company accounts within their own surveying practice
• Can assess the financial health of competing surveying practices

Question 22

Why are CAPEX and OPEX split out in business accounts?

Answer 22

They have different tax obligations, for example, CAPEX can benefit from capital allowances

Question 23

What is a balance sheet? What does it show?

Answer 23

A balance sheet is a snapshot of the companies financial position at anyone given time.

It reports the companies assets, liabilities, and ownership equity.

Balance sheet can demonstrate a company solvency at one point in time

Question 24

What is a current asset?

Answer 24

Current assets is cash, and anything that can be expected to be converted into cash within a year

Question 25

What is a fixed asset?

Answer 25

I fixed asset is something that is not likely to be converted into cash quickly, for example, buildings, land and equipment

Question 26

What is a cash flow?

Answer 26

Way of showing the expected income and expenditure of a business, over a given period of time

Question 27

Why are cash flows important for clients?

Answer 27

- it can give the client an indication of the expected expenditure at each month - It can enable a client to budget for their financial year

Question 28

Why are cash flows important for contractors?

Answer 28

- It can help them understand when money is due from the client and when they need to pay subcontractors in their supply chain - Can help them remain solvent by ensuring they are not paying all money out at once - Allows them to understand when they can procure materials and pay salaries

Question 29

How can a cash flow help accompany remain solvent?

Answer 29

- can forecast whether the business or project has money to pay out, and when money is expected to be paid in - Can highlight if a business or project will have a negative cash flow, so they can do something about this in good time

Question 30

How would you create a cash flow before contractor came on board?

Answer 30

I would use an indicative program and align the cost estimate to show the anticipated expenditure for each month, and when activities are anticipated to be completed

Question 31

What items would you expect to find in a profit and loss account?

Answer 31

- Incomings: sales and services - Expenditure: staff wages, rent and utilities This would then provide a bottom line figure, showing a positive or negative number, therefore demonstrating a profit or loss

Question 32

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

Answer 32

- Balance sheet is a financial snapshot to a companies financial position at any given time - Profit and loss account shows the profit or loss of business over a set period of time

Question 33

What is insolvency?

Answer 33

Insolvency is when a company can no longer meet their financial obligations and cannot pay their debtors

Question 34

What are the steps taken when a contractor becomes insolvent?

Answer 34

1. Stop all payments to the contractor. 2. Secure the site. 3. Take possession of any offsite materials. 4. Value the works completed. 5. Inform the bondsman, if required 6. Terminate the contract. 7. Begin the process of appointing another contractor to complete the works.

Question 35

How could you determine the financial standing of a business before doing business with them. For example appointing a contractor for works?

Answer 35

- I could undertake a Dunn & Bradsheet report - Undertake a credit check with an agency, such as Experian - Speak to colleagues & the supply chain

Question 36

What would you look for in a Dunn & Bradsheet report?

Answer 36

- Risk assessment to show the overall health of the business - Maximum recommended value for the scheme

Question 37

What signs might be present for a contractor going insolvent?

Answer 37

- Slowing down on site - Supply materials drying up - Increase in defective workmanship - Changes in management - Additional or inflated payment requests - Complaints from subcontractors

Question 38

Under what circumstances might a quantity surveyor encounter insolvency?

Answer 38

- you may be approached by a client where a contractor has cease trading and they need advice - A contractor could become insolvent on one of your projects - You could be appointed by an external body to prepare a report on the commercial aspect of a project

Question 39

What is the difference between administration and liquidation?

Answer 39

- Administration is where a body is appointed to manage companies affairs on behalf of the creditors - Liquidation involves the company shutting down and selling off its assets to pay its creditors

Question 40

What is bankruptcy?

Answer 40

Bankruptcy is a way for individuals to deal with debts. Their assets are shared amongst creditors, and it allows them to make a fresh start debt free (with some restrictions)