Accounting Principles

Question 1

What is included within a company’s financial accounts?

Answer 1

Balance Sheet
Profit and loss (income statement)
Directors Report
Cashflow Statement

Question 2

Who do you need to send your company accounts to?

Answer 2

HMRC
Companies House
Shareholders

Question 3

What is a balance sheet?

Answer 3

A balance sheet is a financial statement that shows a company’s current assets and current liabilities at a point in time.

Question 4

What is an income statement?

Answer 4

An income statement (profit and loss account) details a company’s income, expenditure and taxation over an accounting period - showing their NET profit or loss as a bottom line

Question 5

What is the difference between a balance sheet and an income statement?

Answer 5

Balance sheet shows current assets and liabilities, not profit and loss of a business > Snapshot in time
Income statement details revenue, profit, tax and losses.

Question 6

Why is it important to financially vet contractors?

Answer 6

To see if they’re struggling financially
Check the size of the contractor
Mitigate the risk of the contractor under performing due to not being able to pay subcontractors.

Question 7

How do you / have you financially vetted contractors?

Answer 7

Internal AtkinsRéalis credit check system
Dunn & Bradstreet report
PQQ’s & Financial Accounts

Question 8

What accounting ratios are you aware of?

Answer 8

Liquidity Ratio
Profitability
Gearing

Question 9

What does profitability tell you about a contractor?

Answer 9

Profitability outlines a contractor’s revenue less costs / profit, essentially showing if they are making a profit before tax.

Question 10

What does liquidity tell you?

Answer 10

A companies abilities to pay its short-term debts and their position in terms of assets and debts / liabilities

Question 11

What does gearing tell you?

Answer 11

Measures a company’s overall debt against equity (its value)

Question 12

What is a cashflow statement?

Answer 12

A cash flow statement is a financial document that provides a detailed overview of the cash inflows and outflows of a business over a specific period.

Question 13

What accounting principles are you aware of?

Answer 13

GAAP (General Accepted Accounting Principles) - A standard adopted in the UK for financial reporting
IFRS (International Financial Reporting Standards) - Set of international accounting standards stating how particular types and accounts should be reported.

Question 14

How is plant treated under IFRS?

Answer 14

Plant Property & Equipment – an asset which is expected to be used for more than one period.

Question 15

Why do chartered surveyors in your pathway need to understand financial accounts?

Answer 15

To assess if a contractor is in a healthy financial position
Limit risk of appointing a struggling contractor
Assessing competition

Question 16

What are some ways you have analysed a contractor’s financial accounts / position?

Answer 16

PQQ’s, requested that the contractors tendering provide 3 years of financial accounts
If the contractor had been profitable in the last few years
Dunn & Bradstreet Credit Report
AR credit checking system

Question 17

What is the limitation of a Dunn & Bradstreet Report?

Answer 17

Only takes into account last 3 years
Does not account for future performance or order books for example

Question 18

What type of information would you normally request in a PQQ?

Answer 18

Accounting Ratios
Financial information (last 3 years of financial documents)

Question 19

How would you calculate profitability?

Answer 19

Revenue - Costs / Revenue * 100 = Profitability

Question 20

What could be some signs of insolvency in a credit check / companies accounts?

Answer 20

Negative current ratio (liquidity)
Company making a loss over a period
Poor cashflow

Question 21

What are you likely to find on a balance sheet?

Answer 21

Non-current assets (property, plant and equipment)
Current Assets (cash)
Equity (share capital)
Non-current liabilities (bank loans)
Current Liabilities (wages)

Question 22

Are profit and loss accounts current?

Answer 22

No, they retrospective over a duration, usually the company’s accounting period

Question 23

What are the elements of an income statement?

Answer 23

Revenues – fees that were earned during the period shown in the heading (e.g. contract income of a construction company)
Gains – Net amount related to transactions that are not considered part of the company’s main operations (gains from investing)
Expenses – costs incurred by a company in performing its main operations
Losses – net amount related to transitions that are not considered part of a company’s main operating activities

Question 24

What are cashflow statements?

Answer 24

Explains how a company’s cash and cash equivalents have changed during a specified period

Question 25

What procedures can you implement to improve cashflow?

Answer 25

Study cashflow patterns Maintain a cashflow forecast Negotiate payment terms Cut unnecessary spending

Question 26

What is the difference between revenue expenditure and capital expenditure?

Answer 26

Revenue = An amount expensed immediately Capital = Costs associated with a one-off acquisition

Question 27

What is an audit?

Answer 27

An audit is a review completed by an external auditor that reviews and qualifies a companies accounts and checks its accuracy

Question 28

Who is exempt from being audited?

Answer 28

Small Companies Less than £10.2m in turnover Total Assets less than £5m Less than 50 employees

Question 29

What is the basic accounting equation?

Answer 29

Assets = Liabilities + Equity

Question 30

What is the accruals concept?

Answer 30

Accrual accounting is when a company may record revenue before receiving the payment for goods or services.

Question 31

What is the “going-concern” concept?

Answer 31

oing concern is an accounting term for a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future

Question 32

Who needs to register with companies house?

Answer 32

All limited companies must register with companies house Sole traders and partnerships do not need to register with companies house

Question 33

What is taxation?

Answer 33

The obligation to pay compulsory levies by the government, to fund public spending

Question 34

If you were registering a company tomorrow, what taxes would you need to pay and be aware of?

Answer 34

VAT if applicable Corporation Tax National Insurance Income Tax

Question 35

What is the construction industry scheme?

Answer 35

The construction industry scheme is a scheme created by HMRC to collect tax from contractors or sub-contractors (over £3m on construction operations) Designed to minimise tax evasion in the construction industry

Question 36

How does this relate to your projects / contracts / clients?

Answer 36

For tax purposes, my clients are registered as contractors within each main contract. Contractors deduct tax from payments to sub-contractors and instead are paid directly to HMRC.

Question 37

What is corporation tax?

Answer 37

Tax owed by every company based on their profit

Question 38

What is the current rate of corporation tax?

Answer 38

19% for small businesses = less than £50k 25% for other business = Over £250k Marginal relief between the two

Question 39

What legislation do you need to follow if you were setting up your own company?

Answer 39

Companies Act 2006 H&S at work 1974 Bribery Act 2010 Equality Act 2010 GDPR 2018 UK Employment Law

Question 40

What must companies provide every year in accordance with the companies act 2006?

Answer 40

The Directors must prepare accounts for the company for its financial years Basically, company annual accounts submitted to Companies House and HMRC

Question 41

Why was the Companies Act 2006 introduced?

Answer 41

To modernise and simplify corporate law to codify common law To improve shareholder rights To simplify administration process

Question 42

What is the difference between management accounts & financial accounts?

Answer 42

Management Accounts - Used internally by the managers of the business, to obtain funding, loans or investment (not mandatory) Financial Accounts - Accounts required by law and audited by a Chartered Accountant (mandatory)

Question 43

Explain the principles behind capital allowances

Answer 43

Capital allowances = A tax incentive to invest in plant and machinery The government incentive reduced taxable profits by claiming tax relief on certain types of Capex (plant and machinery) to reduce taxable trading profits. The annual investment allowance (AIA) gives a deduction of 100% of the cost of “qualifying expenditure” from your business income up to an annual limit. The AIA is currently £1m per accounting period.

Question 44

What is meant by depreciation in relation to an asset?

Answer 44

The term depreciation refers to an accounting method used to allocate the cost of a tangible asset over its useful life E.g. if an excavator has a useful life of 10 years and it costs £100k, then a £10k expense will appear on the company’s income statement each year rather than the full £100k purchase.

Question 45

What is the current annual limit for Capital Allowances?

Answer 45

The annual investment allowance is currently £1m. Increased in a company’s first year of trading

Question 46

What is VAT?

Answer 46

Value added tax – applies to the sale of most goods and services

Question 47

Give me some examples of goods or services not applicable to VAT?

Answer 47

Public Education & Training Healthcare and medical treatments Charities

Question 48

What is the rate of VAT?

Answer 48

20%

Question 49

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

Answer 49

Not included within P&L – shown as a liability on the balance sheet

Question 50

When must a company register for VAT?

Answer 50

When they have a turnover of £90,000, increased from £85k in April 2024

Question 51

Where could you look to for information on a company’s accounts?

Answer 51

Companies House

Question 52

What is a sinking fund?

Answer 52

Money set aside to pay off a debt or bond

Question 53

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

Answer 53

Holding accounts for construction project funds Paid upfront and held in the account to be drawn down from