Accounting Principles and Procedures

Question 1

What is UK GAAP?

Answer 1

Generally Accepted Accounting Practice - accounting standards published by the UK Financial Reporting Council (FRP).

Question 2

What does The Companies Act 2006 require companies to do in terms of accounting?

Answer 2

The Companies Act 2006 requires UK businesses to file financial statements according to accounting standards set by the UK (GAAP) or the International Financial Reporting Standards (IFRS).

Question 3

What is the purpose of UK GAAP?

Answer 3

To ensure that businesses provide investors and creditors with relevant information, and paint a clear and accurate picture of an entity’s financial position.

Question 4

What is IFRS?

Answer 4

International Financial Reporting Standards – international accounting standards. Public liability companies must comply.

Question 5

What is IFRS 16?

Answer 5

New lease accounting standard from 2019 all companies must comply with. Leases must be accounted for on balance sheet.

Question 6

Please name the three different types of accounting ratios?

Answer 6

1) Liquidity ratio - used to determine a company’s ability to pay its short-term debt obligations.
2) Profitability ratio - indicates how efficiently a company is in generating its profit.
3) Gearing ratio - measures how much debt it uses relative to its equity.

Question 7

What are the key financial statements?

Answer 7

1) Profit and Loss Statements
2) Balance Sheets
3) Cash Flow statements

Question 8

What is a profit and loss account (income statement)?

Answer 8

Summary of income (revenue) and expenditure in a given period (usually 1 year), showing resulting profit / loss.

Demonstrates ability to make profit.

Question 9

What expense might a company have?

Answer 9

1) Salaries
2) Rent / mortgage payments
3) Energy bills
4) Depreciation

Question 10

What is a balance sheet?

Answer 10

Shows assets (cash, property, debtors) and liabilities (borrowings, overdrafts, loans, creditors) demonstrating the company’s financial position at a given date.

Demonstrates a company’s net worth and if it has enough assets to cover its liabilities.

Question 11

What is a cash flow statement?

Answer 11

Summary of ingoing and outgoings of cash in accounting period (includes VAT)

Question 12

What are company accounts / annual accounts / statutory accounts and what do they include?

Answer 12

Financial summaries required to be submitted by limited companies to Companies House and HMRC annually. It must include:

1) Balance sheets
2) Profit and loss account
3) notes about the accounts
4) A director’s statement

Question 13

What accounting standards must company accounts meet?

Answer 13

Your statutory accounts must meet either:

1) International Financial Reporting Standards (IFRS)
2) New UK Generally Accepted Accounting Practice (UK GAAP)

Question 14

What are management accounts?

Answer 14

Accounts prepared for internal use and are not audited.

Question 15

When are companies exempt from requiring audit of their company accounts?

Answer 15

Your company may qualify for an audit exemption if it has at least 2 of the following:

1) an annual turnover of no more than £15 million
2) assets worth no more than £7.5 million
3) 50 or fewer employees on average

Question 16

What are creditors and debtors?

Answer 16

● Creditors are owed money
● Debtors owe money

Question 17

What is a cash flow forecast?

Answer 17

The estimated amount of cash or cash equivalents entering and leaving a company or project entity.

On construction projects they usually show as an ‘S’ curve. There is typically smaller financial outlay at project commencement, a steep increase during the midway point and a tapering off towards the end.

Question 18

What is an S-Curve?

Answer 18

Refers to the shape of the expenditure profile when shown in graphical form. During the start of a project, the rate of expenditure is typically lower due to site setup and lower value enabling works. As the scheme progresses to the middle of the programme, the rate of expenditure will typically increase as more expensive building components such as M&E and Structural Steel works are installed. 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 19

What is an escrow account?

Answer 19

A financial arrangement where a third party, known as an escrow agent, holds funds or assets on behalf of two other parties until certain conditions e.g. contract obligations are met. E.g. project bank account.

Question 20

Why do charted surveyors need to understand how to interpret company accounts?

Answer 20

● aid their own business accounts
● assessing financial strength of contractors and those tendering
● assessing competition

Question 21

What are consolidated accounts?

Answer 21

A set of accounts that combines the financial results of a group of companies, rather than showing the results of each company separately

Question 22

What accounting principles are there and when are they used?

Answer 22

Private Limited Companies - either IFRS or UK GAAP

Public Limited Companies - required to use UK-adopted International Financial Reporting Standards (IFRS) for their consolidated financial statements. They may choose between UK-adopted IFRS and UK GAAP for their individual financial statements.

Question 23

What are capital allowances?

Answer 23

Tax relief on certain items purchased for the business e.g. tools.

Question 24

What are sinking funds?

Answer 24

Funds that are set aside for future expenses or long-term debt.

Question 25

What is insolvency?

Answer 25

An inability to pay debts where liabilities exceed assets.

Question 26

What is Companies House?

Answer 26

UK government agency that : 1) Registers limited companies 2) Makes their information publicly available 3) Dissolve limited companies (cease legal existence)

Question 27

How do companies know which reporting framework to comply with?

Answer 27

Checking guidance there is certain thresholds e.g. small companies = FRS 102

Question 28

What is FRS 102?

Answer 28

FRS 102 is a UK Generally Accepted Accounting Practice (UK GAAP) standard, based on the IFRS for SMEs, but it includes amendments to comply with UK company law and provides additional accounting options.

Question 29

What is an asset / liability and what are some examples?

Answer 29

Asset - something owned that could be converted to cash e.g. building, stock, equipment Liability - debts or obligations owed to others e.g. bills, loans, salary owed, payments to suppliers owed

Question 30

What is the difference between financial and management accounts?

Answer 30

Management accounts - Accounts prepared for internal use and are not audited. Financial Accounts - Company accounts required to be submitted to Companies House and HMRC

Question 31

How would you assess the financial strength of an entity, e.g. for a valuation?

Answer 31

● Analyse financial statements with my finance directors, focusing on key metrics like the balance sheet, income statement, and cash flow statement. ● Dun and Bradstreet Report

Question 32

Can you tell me about a common financial measure?

Answer 32

1) Liquidity ratio - used to determine a company's ability to pay its short-term debt obligations. 2) Profitability ratio - indicates how efficiently a company is in generating its profit. 3) Gearing ratio - assess a company's financial risk and stability by measuring how much debt it uses relative to its equity.

Question 33

What is the acid test ratio?

Answer 33

Used to assess a company's ability to meet its short-term liabilities with its most liquid assets. It's calculated by dividing quick assets (e.g. cash, cash equivalents) by current liabilities.

Question 34

What is ROCE?

Answer 34

Return on Capital Employed. A profitability ratio, measures how efficiently a company is using its capital to generate profits.

Question 35

What is net assets per share?

Answer 35

The value of a company's net assets (assets minus liabilities), expressed on a per-share basis.

Question 36

What is working capital ratio?

Answer 36

A financial metric that measures a company's ability to meet its short-term financial obligations.

Question 37

Can you tell me what the role of an auditor is?

Answer 37

Auditors verify the accuracy and reliability of an organization's financial records, ensuring compliance with accounting standards and regulation

Question 38

How do public limited company accounts differ from private limited company accounts?

Answer 38

● A public limited company must submit full audited accounts within six months following its accounting year end ● A private limited company can submit accounts up to nine months after the end of its accounting year

Question 39

Is VAT included in a balance sheet or a profit & loss account?

Answer 39

VAT is not typically included in the profit and loss account. Instead, the balance of VAT owed to or owed by HMRC (the tax authority) is shown on the balance sheet.

Question 40

How do you account for the impact of inflation when reporting to clients?

Answer 40

Liaise with our in-house cost manager. Use indices such as BCIS.

Question 41

Please explain your understanding of the term tax depreciation?

Answer 41

Tax depreciation is where the declining value of an asset is offset against a companies taxable profit. The depreciation in value can be recorded as an expense in order to reduce the amount of taxable income. This can be applied on things such as plant, tools, vehicles, computers, furniture and buildings.

Question 42

What are overheads?

Answer 42

The operating cost of the business that are incurred on an ongoing basis. Overheads can be both fixed or variable: ● Fixed overheads e.g. rent on office buildings or building insurance costs that do not change each month. ● Variable overheads fluctuate depending on the activity of the business e.g. delivery or utility charges.

Question 43

Please explain your understanding of Project Bank Accounts?

Answer 43

A dedicated, ring-fenced bank account used in construction projects to manage payments securely and transparently. It is designed to ensure that all parties involved in a project including subcontractors, suppliers, and the main contractor receive payments directly and promptly from the account, minimising the risk of late or non-payment. A PBA is set up at the start of a construction project, with agreements in place between the employer, main contractor, and participating subcontractors on how payments are made. The employer deposits funds into the PBA for work completed with payments then made simultaneously to all parties listed in the PBA agreement based on pre-agreed terms which bypasses the traditional hierarchical payment flows from Client to Main Contractor down to supply chain level.

Question 44

Why does a business keep company accounts?

Answer 44

● Record and measure profitability. ● For tax calculation purposes. ● Legislation requires companies to keep accurate records. ● Business growth is encouraged by identifying profitable operations whilst also allowing management to minimise any loss making activities.

Question 45

What is financial leverage?

Answer 45

Financial leverage is the concept of using borrowed funds in the form of debt to enhance business operations and increase the company's profitability and rates of return. In the event that the rate of return invested via borrowed funds is higher than the interest on those funds then more profit can be generated.

Question 46

What are current and fixed assets?

Answer 46

Current Assets - assets that a company expects to convert into cash within one year e.g. cash, stock, accounts receivable Fixed Assets - assets that a company expects to use for longer than one year e.g. buildings, machinery, vehicles, equipment

Question 47

What are the key indicators of insolvency within a companies accounts?

Answer 47

● A low credit rating. ● A falling working capital ratio suggesting that the company has taken on more contracts than it can finance. ● Low returns on equity. ● A high gearing ratio indicating a heavy reliance on loans. ● A falling cashflow.

Question 48

What steps would you take in the event of a Main Contractor insolvency?

Answer 48

1) I would ensure all contractual procedures related to insolvency are followed, especially regarding termination rights and obligations. 2) I would make records on payments made, work progress and materials on site. 3) ​If the contractor’s insolvency means they can no longer fulfill their obligations, the contract should be terminated following the specified procedures. 4) The site should be secured to prevent further damage or unauthorised access if the contract permits this. 5) It may also be necessary to inform subcontractors to remove materials or to secure their assets​. 6) A chartered surveyor should prepare a detailed valuation statement reflecting the current state of the project. This includes assessing completed works, retention sums, and any outstanding claims, such as loss and expense.​ 7) If the contract includes provision for step-in rights through collateral warranties a lender or developer may take over the project.