Accounting Principles & Procedures (Checked)

Question 1

What is accounting?

Answer 1

• Requirement by GAAP
• Collection, analysis and communication of economic information used to make business decisions

Question 2

What is the difference between Company Accounts and Management / Financial Accounts?

Answer 2

Management Accounts are used by the management team to make business decisions.

Company accounts include a cash flow statement, profit and loss account, balance sheet, director’s report and audit confirmation and have to be sent to HMRC yearly.

Question 3

What are the three forms of management/financial reports?

Answer 3

• Cash flow statement
• Profit and loss statement
• Balance sheet

Question 4

What does a cash flow statement show?

Answer 4

Cash movements occurred during a given period (3 months)

Question 5

What additional information can you gain from a cash flow?

Answer 5

• Construction works follow an S shape
• Determines the short term viability of a business and its ability to pay bills
• For a firm it would show EBITDA, returns on investments, taxation at the end of financial year, capital expenditure on fixed asserts and receipts from disposal of old assets, equity dividend payments.

Question 6

What is a balance sheet?

Answer 6

• Shows accumulated wealth of business during a given moment
• Shows assets and liabilities at a given date

bALance = A&L

Question 7

What is a profit and loss statement?

Answer 7

• Shows level of profit generated by a business during a given period
• Firm’s income and expenditure transactions

Question 8

What else does a profit and loss statement show?

Answer 8

• Indication of financial health
• Reveals profit or loss
• Details gross profit over a year, used as a KPI for comparing with previous performance
• Shows investors how profitable a firm is

Question 9

How does a profit and loss statement relate to a balance sheet?

Answer 9

• Net profit and loss is added to capital on a balance sheet (basically profit treated as an asset)
• However, P&L shows profit over time. BS shows assets and debts on a precise date.
• Best to have together for analysis.

Question 10

What types of profit are there?

Answer 10

• Net before tax
• Net after tax (available for shareholders)
• Unallocated (after paying shareholders)

Question 11

What should a set of a public company accounts include?

Answer 11

• Chairman’s statement
• Cash flow statement
• Profit and loss account
• Balance sheet
• Director’s report
• Audit confirmation (report is true and fair)

Question 12

What is IFRS 16?

Answer 12

• A new lease standard
• Most firm’s have a lease for their office so will be affected
• Full cost of lease should be on balance sheet as a liability
• Came into effect January 2019
• Exempt if lease is under 12 months

Question 13

What are the IFRS?

Answer 13

• Founded in 2001
• Introduced a global language for financial statements

Question 14

Example of how you handle accounts in your role?

Answer 14

Oracle

• Provide PO number for invoice
• Receive invoice and send to account’s team who raise it on the system
• Receipt it on the system

Question 15

Another example of how you handle accounts in your role?

Answer 15

Managing budgets

• Set budget
• Cash flow out
• Record expenditure
• Review regularly to ensure not exceeding
• Record transactions

Question 16

How do Lendlease prepare their company accounts?

Answer 16

• Must deliver accounts every year to Companies House, even if the company if dormant
• Non-compliance with this could lead to the UK Government assuming the company no longer undertakes business / is in operation. It could strike it from the register.
• If struck off register, the assets become property of The Crown.

Question 17

What are the legal requirements Lendlease should have to adhere to?

Answer 17

• Profit and loss account
• Balance sheet (signed by director on behalf of the board)
• Not to the accounts
• Group accounts (if appropriate)
• Director’s report signed by secretary or director
• Business review if the company does not qualify as small
• Auditor’s report stating the name of the auditor and signed and dated by them (unless the company is exempt from audit)

Question 18

What are accounting records?

Answer 18

Records that show:

• All money received and spent
• Record of assets and liabilities

Question 19

What if your company deals in stock?

Answer 19

• Records of stock at the end of each financial year
• Record of all goods sold (unless to retail sellers)
• Include buyers and sellers

Question 20

How long must accounting records be kept for?

Answer 20

Private companies must keep accounting records for 3 years from the date they were made

Public companies must keep accounting records for 6 years from the date they were made

Question 21

How can records be kept?

Answer 21

Paper / digital format

Question 22

Do companies have to use professional accountants?

Answer 22

No, can be done themselves
Professional advice will help meet legal requirements

E.g. Institute of Chartered Accountants in England and Wales (ICAEW)

Question 23

What standards are behind accounting theory?

Answer 23

International Financial Reporting Standards (IFRS)

Set of common rules fo that financial statements can be consistent, transparent and comparable

Issued by the International Accounting Standards Board (IASB)

Question 24

Who issues the IFRS?

Answer 24

Issued by the International Accounting Standards Board (IASB)

Question 25

What standards are used in the UK?

Answer 25

UK GAAP Generally Accepted Accounting Practise This is the body of accounting standards published by the UK's Financial Reporting Council (FRC)

Question 26

What is a profit and loss statement?

Answer 26

Summarises revenues and costs and expenses incurred during a fiscal quarter

Question 27

What is gross profit?

Answer 27

Revenue - Cost of Goods Sold / Cost of Service = Gross profit

Question 28

What is net profit / net earnings?

Answer 28

Total Revenue - Total Expenses - Net profit

Question 29

What is financial auditing?

Answer 29

Auditors come in behind accountants and verify their work Examine the financial statements prepared by accountants and ensure they represent the company's financial position accurately

Question 30

What companies are exempt from auditing?

Answer 30

Small and micro businesses: - Annual turnover must not be more than £10.2m - Balance sheet total must be not more than £5.1m - Average number of employees must be not more than 50

Question 31

What do you look for when analysing consultant fee proposals?

Answer 31

- Total fee and how it was calculated - Level of resource, seniority, experience and availability - Fee drawdown - T&Cs - Exclusions - Assumptions (e.g. programme)

Question 32

How are fee proposals calculated?

Answer 32

- Based on a percentage of construction cost or a lump sum - Smaller consultants may use an hourly or daily rate due to limited involvement on project - Others may invoice based on deliverables (e.g. issue of a report)

Question 33

How do you review the financial viability of tenderers?

Answer 33

Their financial reports (level of profitability, liquidity, solvency) In the RfP ask for: - Insurances and liability limits - Confirm they've met all obligations to pay creditors and staff during the last year - If they have any claims pending against them from the last three years - To sign a permission form to ask their bank for a reference - Due diligence (credit check, market rumours, research)

Question 34

What is an asset?

Answer 34

Property owned by a person or company, regarded as having value and available to meet debts or commitments. (Anything that can be converted into cash) E.g. cash, property, plant, new equipment

Question 35

What is a liability?

Answer 35

An obligation to or something that you owe somebody else. They are settled over time through the transfer of money / goods / services. E.g. Long term debt, loans, creditors

Question 36

How could a financial audit of a contractor be carried out?

Answer 36

- Company accounts - Companies House - D&B Report