Accounting Principles

Question 1

What are the key financial statements that companies provide?

Answer 1

1. Profit and Loss accounts
2. Balance sheets
3. Cash flow statement

Question 2

What is the difference between management and financial accounting?

Answer 2

1. Management accounts are for the internal use of the management team
2. Financial accounts are the company accounts that are required by UK law

Question 3

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

Answer 3

1. A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss
2. The Balance sheet shows what a company owns (its assets) and what it owes (its liabilities) at a given point in time

Question 4

what is a cashflow statement?

Answer 4

1. It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period
2. It measures the short term ability of a firm to pay off its bills

Question 5

Explain your understanding of the following terms:

Answer 5

Capital allowance:
Tax relief on certain items purchased for the business for example
tools and equipment

Sinking Fund:
Funds that are set aside for future expense or long term debt

Insolvency
An inability to pay debts where liabilities exceed assets

Company House
An agency that incorporates and dissolves limited companies
within the United Kingdom

HMRC:
His Majesties Revenue and Customs

Question 6

What are liquidity ratios?

Answer 6

1.Liquidity ratios measure the ability of a company to pay off its current liabilities by converting its current assets into cash
2. Liquidity ratio calc= current assets/ current liabilities
3. The ratio is usually around 1.5 but it depends on the sector of activity
4. for example, house builders often operate on a liquidity ratio over three because they retain high value assets in the form of unsold houses
5. A liquidity ratio of less than 0.75 can be early indicators of insolvency

Question 7

What are Profitability ratios?

Answer 7

1. Profitability ratios measure the performance of a company in generating its profits
   2.The trading profit margin ratio= turnover- (cost of sales /turnover)
2. Low margins may be due to a growth strategy from the company and do not always result from bad management.

Question 8

What are financial gearing ratios?

Answer 8

1. 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
2. They help to measure solvency
3. Highly geared companies rely mainly on borrowing
4. The payment of interest reduces the profit

Question 9

Why do chartered surveyors need to understand and be able to interpret company accounts?

Answer 9

1. To aid in preparing their own business account
2. For assessing the financial strength of contractors and those tendering for contracts
3. For assessing competition

Question 10

What is the purpose of the P & L?

Answer 10

1. To monito and measure profit or loss
2. To compare against past performance and against company budgets
3. For valuation purposes and to compare against future competitors
4. To assist in forecasting with future performance
5. To calculate taxation

Question 11

What are financial statements?

Answer 11

Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses

Question 12

What is a profit and loss account?

Answer 12

1. They demonstrate a companies sales, running costs and profit or loss over a financial period, usually annually.
2. They are used to show sales vs expenses
3. They can also be used to identify non-profitable work.

Question 13

What is a balance sheet?

Answer 13

1.They show the value of everything the company owns made up of its assets and liabilities
2.The balance sheet demonstrates the value of the business at any given point in time

Question 14

What is a cashflow forecast?

Answer 14

1. A cashflow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity
2. On construction projects, they usually show an S curve
   3.There is typically a small financial outlay at the start, a steep increase during the midpoint and a taper down towards the end.

Question 15

What is an S-curve?

Answer 15

1. S-curve means standard and refers to the shape of the expenditure profile when shown in a graphical form
2. During the start of the project, the rate of expenditure is typically lower due to site site up and lower value enabling works
   3.As the scheme progresses to the middle of the programme, the rate of expenditure will typically increase as more expensive building components are installed
3. Towards the back end of the programme, the rate of expenditure will slow down which is shown by the flattening of the S-curve.

Question 16

How are s-curves used by surveyors?

Answer 16

1. To track, analyse and assess business accounts and performance
2. For assessing the financial strengths of a contractors
3. to compare actual progress of the works against pre-contract predictions.

Question 17

What are escrow accounts?

Answer 17

1. A separate account owned by a third party, held on behalf of two other parties
2. A bank account with defined contractual conditions for the release of funds
3. They can be used as a project bank account
4. Mechanisms must be in place for the release of funds, such as payment certificates.

Question 18

When have you used company accounts in your works?

Answer 18

To assess the financial strength of contractors as a pre-qualification stage and tender stage

Question 19

How do you analyse a company’s accounts?

Answer 19

1. The clients accountants will out the detailed analysis but i can look at the warning signs by calculating ratios such as liquidity ratios, profitability ratios and gearing ratios
2. I should always calculate the ratios myself as those included in the company accounts may have been manipulated
3. I should always use the group or consolidated accounts rather than the company accounts unless it is a limited company

Question 20

What is Dun and Bradstreet report?

Answer 20

A Dun & Bradstreet (D&B) report is a business credit report that provides detailed information about a company’s financial health, creditworthiness, and operational history. It is widely used by lenders, suppliers, investors, and business partners to assess risk before engaging in transactions.

Question 21

Why is D&B Report important?

Answer 21

Why Is It Important?
Suppliers use it to determine credit terms.

Lenders use it to assess loan risk.

Partners & clients use it to evaluate reliability.

Businesses use it to monitor their own creditworthiness.

Question 22

D&B

Answer 22

PAYDEX® Score: Ranges from 0–100; shows payment performance (80+ = timely payments).

Delinquency Predictor Score: Likelihood a company will miss payments.

Failure Score: Predicts risk of business closure or bankruptcy.