Accounting principles and procedures Flashcards
1
Q
What is IFRS ?
A
International Financial Reporting Standards
2
Q
Why are IFRS’ important ?
A
IFRS promotes transparency, comparability, and consistency in financial reporting on a global scale, contributing to a more efficient and interconnected international financial system.
3
Q
What is a balance sheet ?
A
is a financial statement that provides a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time
4
Q
What are profit and loss statements?
A
provide a summary of a company’s revenues, costs, and expenses over a specific period, indicating its profitability or losses.
5
Q
What is a liquidity ratio?
A
measures a company’s ability to meet its short-term financial obligations by assessing the availability of liquid assets relative to its current liabilities.
6
Q
Why do auditors prioritize compliance over bookkeeping?
A
to ensure adherence to regulatory standards, legal requirements, and ethical practices, ultimately safeguarding the accuracy and reliability of financial information.
7
Q
What are the potential impacts of a company’s insolvency on a construction project?
A
include delays, cost overruns, and disruptions due to the financial instability of the contracting party.
8
Q
What is the importance of reviewing financial information?
A
in gaining insights into an organization’s fiscal health, making informed decisions, and ensuring transparency and accountability.
9
Q
What is a PQQ process ?
A
process is a preliminary evaluation to assess and shortlist contractors based on their capabilities, experience, and financial stability before inviting them to tender for a project.
10
Q
what does PQQ stand for ?
A
PQQ (Pre-Qualification Questionnaire)
11
Q
What is a Dunn & Bradstreet check?
A
is a business credit report that provides information on a company’s creditworthiness, financial performance, and other relevant business details.
12
Q
What is Vat ?
A
Is a consumption tax placed on a product whenever value is added at each stage of the supply chain from production to the point of sale
13
Q
What does VAT stand for ?
A
Value Added Tax
14
Q
What is corporation tax
A
Paid by businesses in the UK.
15
Q
How is corporation tax calculated ?
A
On a businesses annual profit in a similar way to income tax for individuals
16
Q
What is an audit
A
A process used to check a person or companies compliance with policy procedures and compliance with regulation
17
Q
Why are audits performed ?
A
To ascertain that validity and reliability of information; also to provide an assessment of a systems internal control
18
Q
What is turnover ?
A
Income or revenue that a company receives from its normal business activities. Usually from the sale of goods or a service to a customer
19
Q
What are management accounts
A
Accounts prepared by a company for internal management use, or accounts prepared for a lender such as a bank to evaluate how the business will replay funding
20
Q
Are management accounts audited externally ?
A
No
21
Q
What is the difference between management and financial accounts ?
A
Financial accounting is meant for external stakeholders, Management accounting is presented internally
22
Q
What type of account can be used as a project bank account ?
A
Escrow Account
23
Q
What is a project bank account ?
A
Ringfenced account
Ensures contractos, key subcontractors and key members of the supply chain are paid on the contractually agreed dates
24
Q
What are overheads ?
A
The indirect costs or fixed expenses of operating a business such as:
Rent
Utility bills
Staff salaries
Insurance
25
Explain the principle of tax depreciation
Is the depreciation expense claimed by a taxpayer on a tax return to compensate for the loss in the value of the tangible assets
26
What are the three types of accountancy ratios
Liquidity ratios
Profitability ratios
Gearing ratio
27
Define liquidity ratios
The organisations ability to turn assets into cash in order to pay debts
28
Define profitability ratios
Used to assess a business ability to generate earnings relative to its revenue, operating costs, balance sheets or shareholders equity over time, using data from a specific point in time
29
Define gearing ratio
Measure the proportion of a company’s borrowed funds to its equity.
The ratio indicates the financial risk to which a business is subjected
30
What is financial leverage ?
Is an investment strategy of using borrowed money
31
What are capital allowances ?
The practice of allowing tax payers to get tax relief on their tangible capital expenditure by allowing it to be deducted against their annual taxable income
32
What are the 3 key financial statements/ documents that companies use?
- profit and loss account
- balance sheet
- cash flow forecast
33
What is a Management account?
Management accounts are for the internal use of the management team
34
What is a financial account?
Financial accounts are the company accounts that are required by UK law.
35
What is a profit and loss account?
A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss.
36
What is a balance sheet?
The balance sheet shows what a company owns (it’s assets) and what it owes (it’s liabilities) at a given point in time.
37
What is a cashflow statement?
It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over theaccounting period.
38
What do cashflow statements measure?
It measures the short-term ability of a firm to pay off its bills.
39
Define Insolvency
An inability to pay debts where liabilities exceed assets.
39
Define Capital Allowances
Tax relief on certain items purchased for the business for example tools and equipment.
40
Define Sinking Finds
Funds that are set aside for future expense or long-term debt.
41
Define Companies House
An agency that incorporates and dissolves limited companies within the United Kingdom.
42
Define HMRC
His Majesties Revenue and Customs.
43
What are Liquidity ratios?
Liquidity rations measure the ability of a company to pay off its current liabilities by converting its current assets into cash.
44
What is liquidity ratio?
Liquidity ratio calculation = current assets / current liabilities.
45
What is liquidity ratio usually?
The ratio is usually around 1.5 but it depends on the sector of activity.
46
What liquidity ratio is a early indicator or insolvency?
A liquidity ratio of less than 0.75
47
What is the profitability ratio ?
The trading profit margin ratio = turnover – (cost of sales / turnover).
47
What are Profitability ratios?
Profitability ratios measure the performance of a company in generating its profits.
48
Why might companies have a low profitability margin ?
Low margins may be due to a growth strategy from the company and do not always result from bad management.
49
What are Financial Gearing Ratios?
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.
50
What do Financial Gearing Ratios help measure?
They help to measure solvency.
51
Why do chartered quantity surveyors need to understand and be able to interpret company accounts?
* To aid in preparing their own business accounts.
* For assessing the financial strength of contractors and those tendering for contracts.
* For assessing competition.
52
What is the purpose of a P & L?
* To monitor and measure profit (or loss).
* To compare against past performance and against company budgets.
* For valuation purposes and to compare against competitors.
* To assist in forecasting with future performance.
* To calculate taxation.
53
What are Creditors?
Creditors are business entities that are owed money by another entity that they have extended credit to.
54
What are debtors?
Debtors are business entities that owe money to another respective company.
55
Give me an example of creditors
For example if you have provided services to a client and they owe payment of your fees, you become a creditor to that client.
56
Give me an example of debtors
For example if you have used a sub-consultant and still owe them payment of their fees then
you become a debtor of the sub-consultant.
57
What are Management Accounts?
* The accounts prepared by a company for internal management use.
* Accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the
funding.
57
Are Management Accounts audited externally?
No
58
What is a Financial Statement?
Forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses.
59
What is a Profit and Loss account?
* They demonstrate a companies sales, running costs and profit or loss over a financial period (usually year).
* They are used to show sales vs expense (invoicing vs time and disbursements).
* They can also be used to identify non-profitable work.
60
What is a Balance Sheet?
* They shows the value of everything the company owns made up of its assets and liabilities.
* The balance sheet demonstrates the value of the business at any given point in time.
61
What is a Cash Flow forecast?
A cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity.
62
On construction projects what do cash flow forecasts usually show ?
An 'S' curve.
There is typically a small financial outlay at the start, a steep increase during the midway point and a taper towards the end.
63
What does an S curve mean ?
S-Curve means "standard" and refers to the shape of the expenditure profile when shown in graphical form.
64
Why is the rate of expenditure typically lower at the start of a project?
The rate of expenditure is lower at the start due to site setup and lower value enabling works.
65
How are S curves used by surveyors ?
* To track, analyse and assess business accounts and performance.
* For assessing the financial strength of contractors.
* To compare actual progress of the work against pre-contract predictions.
65
What happens to the rate of expenditure as a project progresses to the middle of the program?
The rate of expenditure typically increases as more expensive building components such as M&E (Mechanical and Electrical) and Structural Steel Work are installed.
66
What does the flattening of the S-Curve indicate in the expenditure profile of a project?
The flattening of the S-Curve indicates a slowdown in the rate of expenditure towards the end of the project.
66
How does the rate of expenditure change towards the back end of a project program?
The rate of expenditure slows down, which is shown by the flattening of the S-Curve.
67
Can Escrow Accounts be used as a project bank account?
Yes
67
What needs to be done to escrow accounts to release funds such as payment certificates ?
Mechanisms must be in place
68
What are Escrow Accounts?
* A sperate account owned by a third party, held on behalf of two other parties.
* A bank account with defined contractual conditions for the release of funds.
69
When have you used company accounts in your work?
* To assess the financial strength of contractors at Pre-Qualification Stage and tender stages.
70
How do you analyse a company’s accounts?
The client’s accountants will carry out the detailed analysis but I can look at the warning signs by calculating ratios such as liquidity ratios, profitability ratios and gearing ratios myself.
I should always use the group or consolidated accounts rather than the company accounts unless it is a
limited company
71
How do you carry out a credit check? Give an example.
* I use the Credit Safe website to which my company subscribes to access a company’s accounts.
* I considered both the group accounts and the company accounts.
72
What would i do if i carry out a credit check and the rating is low?
I calculate some key ratios and pass on all the information to my client’s accountants for them to analyse further.
73
What are signs of insolvency in company accounts or credit checks?
* A low credit rating.
* A liquidity ratio below 0.75.
* A low return on equity.
* A highly geared company that is heavily reliant on loans.
* A falling cashflow statement.
73
What measures would you recommend if your client wanted to
appoint a contractor with a low credit rating?
* I would explore the option of requesting a performance bond that my client could call on if they Main Contractor failed to perform.
* I would also review the tender submission to ensure this is not excessively front loaded.
* When reviewing interim valuations, I would ensure that these are accurate and not over claimed.
74
Why would you not recommend the appointment of a contractor with a low credit rating?
* There may be an increased risk of the contractor not performing satisfactorily.
* It could present increased risk of the contractor failing to deploy sufficient resources and materials to
the project.
* It could increase the risk of the contractor’s insolvency.
75
Please can you explain the difference between gross and net in accounting terms?
Gross refers to the total amazing of income before deductions, while net is the total after deductions or adjustments
76
Why is it beneficial for surveyors to understand company accounts ?
For assessing the financial health of competing surveying practices.
To assess the financial stability of tendering contractors and subcontractors
To aid in preparing company accounts within their own surveying practice.
77
What is expenditure ?
Expenditure represents a payment with either cash or credit to purchase goods or services.
78
What is capital expenditure?
CAPEX
Capital expenditure is spend to acquire or improve an asset such as equipment or buildings
79
What is revenue expenditure?
OPEX
Revenue expenses are costs in the day to day running of the business. For example servicing a machine
80
Why are CAPEX and OPEX budgets split out in business accounts ?
They have different tax obligations, for example CAPEX can benefit from capital allowances.
80
What is a balance sheet ?
Is a shapshot of a company’s financial position at a given point in time.
81
What do balance sheets report on ?
A company’s assets, liabilities and ownership equity.
82
Give an example of an asset?
A van or land which is owned
83
Give an example of the liability ?
A loan or debt.
84
What is a current asset?
Cash and other assets that are expected to be converted to cash within a year.
85
What is a fixed asset?
Assets which are purchased for long year use and are not likely to be converted quickly into cash, such as land, buildings and equipment.
86
What is a debtor ?
Is an individual or business who has borrowed funds from a business and so owes it money
87
What is a creditor ?
Is an individual or business who has lent funds to a business and is owed money.
88
What is the cash flow forecast used for ?
⁃ understand the impact on future plans and possible outcomes.
⁃ Keep track of overdue payments
⁃ Plan for upcoming cash gaps
⁃ Manage surplus cash
⁃ Track whether spending is on target
88
What is a cash flow forecast ?
Is a plan that shows how much money you expect your business or project to recurve and pay out over a set period.
89
What can cash flow forecasts help you do?
Plan how much you expect to make in sales and spend in costs.
Help you understand when money will enter and leave your bank account.
90
Why is cash flow important for a construction project ?
Allows the client to gain an understanding of their financial commitment over the duration of the project and when they are likely to spend the money
And can help estimate when external funding will be required.
91
How does a cash flow forecast help a company remain solvent ?
It can predict when a business or project has money to pay out and when money is coming ins this can highlight if the business or project will have negative cash flow meaning they can do something about it in good time.
92
What is a profit and loss account ?
It shows a company’s revenue and expenses over a particular period of time, typically either one month or consolidated months over a year.
93
What is the difference a balance sheet and a profit and loss account ?
Balance sheet is a financial snapshot at one given time shower the financial position of the company.
Profit and loss account is showing the profit or loss over a determined period.
94
What do profit and loss account figures show ?
Whether the business has made a profit or a loss over that period.
95
What is insolvency ?
The inability to pay off debts or creditors.
96
Why would you not recommend the appointment of a contractor with a low credit rating ?
Risk of contractor or supply chain insolvency.
Possibility of the contractor not performing satisfactory or has restricted resources on site.
97
How could you determine the financial standing of a company prior to doing business with them ?
A Dun & Bradstreet report creates a business credit report that could be viewed like a personal credit report for businesses.
97
What are the signs of contractor insolvency on a construction project ?
⁃ slowing down works
⁃ Supply of materials drying up
⁃ Increase in defective works
⁃ Changes in management
⁃ Additional or inflated payment requests
⁃ Complaints
98
Under what circumstances might a QS encounter insolvency ?
⁃ you many be approached by a client who has a project where the contractor has ceased trading and needs advice
⁃ A project that you are working on may have a contractor or subcontractor who is having serious financial difficulties
99
What is liquidation?
The shutting down of a company and selling off the assets to pay off the creditors
100
What steps would you take in the event of contractor insolvency ?
1. Inform all parities involved and secure the site.
2. Inform the bonds man ( insurance / bank )
3. Consider stopping pending payments to the contractor and seek legal advice.
4. Take ownership of materials off site ( if paid for in valuations)
5. Schedule all plant and materials
6. Value completed works and value any defects
7. Monitor loss and expense incurred by the employer
8. Terminate the building contract and employ others to complete
101
What is administration ?
Where someone ( the administrator) is appointed to manage the companies affairs on behalf of the creditors.
102
What is bankruptcy?
Is a way individuals to deal with debts they cannot pay. It does not apply to companies or partnerships.
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