Accounting Principles and Procedures Flashcards
(27 cards)
What is tax depreciation?
Tax depreciation allows a business to reduce its taxable profit by recognising the decline in value of certain capital assets over time, such as plant, machinery or IT equipment. For management consultants understanding this is crucial when advising clients on structuring capital investments efficiently and complying with HMRC rules on capital allowances.
What are overheads?
Overheads are the ongoing costs not directly linked to a specific project or service. Fixed overheads (e.g rent and insurance) remain stable, while variable overheads (utlities,travel) fluctuate. Consultants should identify and advise on overhead reduction strategies to improve client’s operational efficiency and profitability.
What is a Profit and Loss Account?
A P&L account summarise a company’s revenues, costs and net profit/loss over a financial period. For consultants, it helps assess business performance, identify unprofitable activities, and inform decision- making on resource allocation.
What are Balance Sheets?
A balance sheet provides a snapshot of a business’s financial position at a point in time, showing it’s assets, liabilities and equity. It helps consultants assess financial health and advise clients on solvency and investment capability.
What is a Project Bank Account (PBA) ?
A PBA is a dedicated account used in construction to ensure secure, and prompt payments to all parties. For consultants, this supports good practice in project governance, transparency, and managing financial risk in delivery chains.
What is an escrow account?
An escrow account involves a third party holding funds until all parties meet agreed conditions. It’s common in property transactions and reduces financial risk. Consultants may advise on escrow mechanisms in deals or disputes resolutions.
Name three types of accounting ratios
- Liquidity ratios (e.g current ratio) show ability to meet short-term obligations.
- Profitability ratios (e.g net profit margin) measure earnings efficiency.
- Gearing ratios (e.g debt to-equity) assess financial leverage.
Consultants use these to evaluate business risk and investment viability.
Liquidity Ratios= Current Assets/ Current Liabilities
Profitability Ratios= Net Profit Margin= Net Profit/ Revenue
Gearing Ratios: Total Debt/ Total Equity.
Why keep company accounts?
To monitor profitability, comply with tax/legal duties, support strategic planning and attract investment. Consultants use accounts to help clients manage costs, optimise tax positions, and plan sustainably.
What is financial leverage?
It refers to using debt to increase investment potential. Consultants assess whether leverage is being used effectively and whether the risk-return balance aligns with client objectives.
Current vs Fixed Assets?
Current assets: Liquid within 12 months (e.g receivables)
Fixed assets: Long-term investments (e.g buildings, machinery).
Consultants review asset structures to improve liquidity or support refinancing.
Difference between a P&L and a Balance Sheet?
P&L: Tracks performance over time (income vs expenses).
Balance sheet: Snapshot of assets and liabilities at a point in time.
Both are vital for assessing business sustainability.
Key Financial Statements?
- P&L
-Balance Sheet - Cash flow statement
Each gives insight into performance, stability and liquidity- essential for investment and risk advice.
What is a Cash Flow Statement?
It tracks actual cash in/out over a period. Consultants assess this to ensure clients can meet obligations and identify cash shortages before they impact delivery.
What is an S-Curve?
An S-curve visually project spend over time-slow start, rapid middle, then slow finish. Consultants use it to monitor performance and trigger early warning for cost control.
Why do surveyors need to interpret accounts?
- Understand client’s financial health
- Advise on tender or contractor strength
-Support risk assessments and insurance/ bonding decisions
For consultants, this is essential to provide strategic financial insight.
What is a Cash Flow Forecast?
A projection of future cash movements. It’s vital in project planning, especially in construction, to monitor budgeted vs actual spend.
Debtors Vs Creditors
Debtors: Owe money to the company
Creditors: The company owes money to .
Consultants use this info to mange working capital or cash flow risks.
What are Financial Statements?
A collective term for formal records (P&L, Balance Sheet, Cash Flow) used to track business performance and plan ahead.
Indicators of insolvency?
- Negative cash flow
- High gearing
-Poor liquidity
-Declining profitability
Consultants use these to flag early warning signs and suggest preventative strategies.
Steps if Main Contractor becomes insolvent?
- Review contract clauses and notify stakeholders.
-Secure the site and materials
-Value completed works - Communicate with supply chain
- Exploring step-in-rights if collateral warranties are in place
Consultants manage this process to reduce disruptions and financial loss.
Can you explain the double- entry bookkeeping system?
Double-entry bookkeeping is an accounting systems where every financial transaction affects at least two accounts, maintaining the accounting equation: Assets= Liabilities + Equity. For example, purchasing equipment for cash decreases the cash and increases the equipment account, ensuring the books remain balanced.
What is the difference between management and financial accounts?
Management accounts are internal reports used by management for decision-making often produced monthly and may include forecasts and budgets. Financial accounts are statutory reports prepared annually for external stakeholders, adhering to accounting standards like IFRS or UK GAAP.
What is the Purpose of an audit?
An audit provides an independent examination of financial statement, ensuring accuracy and compliance with accounting standards, thereby enhancing stakeholder confidence.
Why is cash flow important for a business?
Cash flow indicates the liquidity position for a business, ensuring it can meet its obligations. Positive cash flow is crucial for sustaining operations and funding growth.
