Accounting Principles and Procedures

Question 1

What is VAT?

Answer 1

Value Added Tax

Question 2

What is an audit?

Answer 2

Process used to check a peron or companies’ compliance with policy, procedures and compliance with regulations. They are performed to essess how valid and reliable the information is and show the companies’ internal control

Question 3

What is turnover?

Answer 3

Income / revenue received from normal business activities. Usually from sale of goods / services

Question 4

What are management accounts?

Answer 4

Accounts prepared by a company for internal management use, or for a lender to evelauate hiw a business will repay a loan. These are not audited externally

Question 5

What is the difference between management and financial accounts?

Answer 5

Financial accounting is meant for external stakeholders

Management accounting is presented internally

Question 6

Why does a business keeo company accounts?

Answer 6

Tax purposes - required by law
Demonstrates company’s financial standing (helps get loans)
Ensures cash flow and profitability are being correctly managed

Question 7

What is an escrow account?

Answer 7

A separate account owned by a third party held on behalf of two other parties
Can be used as a project bank account

Question 8

What is a project bank account?

Answer 8

Money is held separately
Ensures contractors etc are paid on agreed dates
Mechanisms are often in place for the release of funds

Question 9

Whar are overheads?

Answer 9

Indirect costs / fixed expenses to the business. E.g. rent, utilities, salaries and insurance

Question 10

Explain the principle of tax depreciation

Answer 10

The depreciation expense claimed by a taxpayer on a tax return to compensate for the loss of value of the asset (e.g. equipment)

Question 11

Name 3 accountancy ratios

Answer 11

Liquidity ratios - show the firm’s ability to turn assets into cash to pay debts
Profitability ratios - assess a business’s ability to generate earnings over time relative to income / balance sheet
Gearing Ratio - measured the proportion of the companies borrowing to its equity - indication financial risk

Question 12

What is financial leverage?

Answer 12

Investment strategy of using borrowed money, specifically the use of various financial instruments or borrowed capital to increase the return of an investment

Question 13

What are capital allowances?

Answer 13

The practice of allowing taxpayers to get tax relief on their tangible capital expenditure by allowing it to be deducted against their annual income

Question 14

Whare are the key financial tatements a company produces?

Answer 14

Profit and loss account
Balance Sheet
Cash Flow Forecast

Question 15

What is expenditure?

Answer 15

A payment to purchase goods / services

Question 16

What is capital expenditure?

Answer 16

CAPEX

spent to acquire or improve an asset

Question 17

What is renue expenditure?

Answer 17

OPEX

For the day to day running of a business (spare parts etc)

Question 18

Why are capex and opex split in the business accounts?

Answer 18

Different tax obligations (capex can benefit from capital allowance)

Question 19

What is a balance sheet?

Answer 19

A snapshot of a company’s financial position at any moment in time
Shows assets and liabilities

Question 20

What is meant by assests and liabilities?

Answer 20

Asset - something you now own

Liabilities - a loan or debt

Question 21

What is a current asset?

Answer 21

An asset that is expected to turn to cash within the year

Question 22

What is a fixed asset?

Answer 22

Long term asset (such as property)

Question 23

What is the difference between a debtor and a creditor?

Answer 23

Creditors - you owe them money

Debtors - they owe money

Question 24

What is a cash flow forecast?

Answer 24

A plan that shows the money you expect to receiv and pay out over a set period. Helps you plan what you expect to happen fiscally

Question 25

What is a cash flow forecast used for?

Answer 25

``` Understand impact of future plans and possible outcomes Track overdue payments Plan for any cash gaps Manage any surplus cash Track if spending is on budget ```

Question 26

Why is cash flow important for.a construcion project?

Answer 26

Allows the client to gain understanding of their financial committment over the duration of the project Can be used to estimate when external funding will be required Acts as a check against valuations

Question 27

How does a cash flow forecast help a company remain solvent?

Answer 27

Cash flow forecasts can predict when a business has money to pay out and when it is coming in. This measn they can identigy negative cash flow so the company can do something about it in good time

Question 28

What is a profit and loss account?

Answer 28

Shows a company's revenue and expenses over a particular period of time

Question 29

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

Answer 29

Balance sheet is a financial snapshot at one given time | Profit and loss account shows the profit and loss over a determined period

Question 30

What is insolvency?

Answer 30

The inability to pay off debts. A generic term that is used to descrive bankruptcy, liquidation and administration

Question 31

Why would you not recommend the appointment of a contractor with a low credit rating?

Answer 31

Risk of contractor / supply chain insolvency | Possibility the conractor has restricted resources on site

Question 32

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

Answer 32

A Dun & Bradstreet report creates a business credit report that could be reviewed like a personal credit report for businesses

Question 33

What are signs of contractor insolvency on a construction project?

Answer 33

``` Slowing down works Supply of materials drying up Changes in management Complaints from subcontractors Additional / inflated payment requests ```

Question 34

Under what circumstances might a QS encounter insolvency?

Answer 34

A project i'm working on may have a contractor / sub contractor who cannot pay their debts I may be approached by a client who needs advice on a contractor who has ceased trading

Question 35

What steps would you take in the case of insolvency?

Answer 35

Inform all parties involved Inform bank / bondsman / insurance Stop any pending payments Secure the site Take ownership of materials off site (if paid for) Schedule all plants and materials Value completed work and any defects Monitor loss and expense incurred by employer Terminate the building contract and employ others to complete

Question 36

What is liquidation?

Answer 36

The formal process to clost a limited company. All assets will be sold (liquidated) for the benefit of any creditors and shareholders before the company is dissolved from the register held at Companies House

Question 37

What is the difference between administration and liquidation?

Answer 37

Administration - someone is appointed to manage the company's affairs on behalf of the creditors Liquidation - shutting down the company and selling off the assets to pay off the creditors

Question 38

What is bankruptcy?

Answer 38

One way individuals can deal with debts they cannot pay - it does not apply to companies. Assets are shared among creditors Allows the individual to make a fresh start