Accounting, Principles & Procedures Level 1

Question 1

What is VAT?

Answer 1

• Value Added Tax
• 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

Question 2

What is corporation tax?

Answer 2

• Corporation tax is paid by businesses in the UK
• Calculated on their annual profit in a similar way to income tax for individuals

Question 3

What is an audit?

Answer 3

• Process used to check a person or companies’ compliance with policy, procedures & regulation
• Audits are performed to ascertain the validity & reliability of information; also, to provide an assessment of a system’s internal control

Question 4

What is turnover?

Answer 4

• Income or revenue that a company receives from its normal business activities
• Usually from the sale of goods & services to customers

Question 5

What are management accounts?

Answer 5

• 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 repay funding.
• Management accounts will not be audited externally

Question 6

What is the difference between management and financial accounts?

Answer 6

• Financial accounting is meant for external stakeholders
• Management accounting is presented internally

Question 7

Why does a business keep company accounts?

Answer 7

• Tax purposes, as required by law
• Demonstrates the company’s financial standing (supports loan or borrowing applications)
• To ensure cash flow and profitability in a company is being correctly managed

Question 8

What is an escrow account?

Answer 8

• A separate account owned by a 3rd party, held on behalf of 2 parties
• can be used as a project bank account

Question 9

What is a project bank account?

Answer 9

• Ringfenced bank account (the money is held in escrow)
• Ensures contractors, key subcontractors & key members of the supply chain are paid on the contractually agreed dates
• Usually, mechanisms are in place for the release of funds (such as payment certificates)

Question 10

What are overheads?

Answer 10

The indirect costs or fixed expenses of operating a business:
- Rent / leasing costs
- Utility bills
- Staff salaries
- Insurance

Question 11

Explain the principle of tax depreciation?

Answer 11

Tax depreciation is the depreciation expense claimed by a taxpayer on a tax return to compensate for the loss in value of the tangible assets. Examples include property, plant and equipment.

Question 12

Name 3 types of accountancy ratios

Answer 12

• Liquidity ratios - the organisations ability to turn assets into cash in order to pay debts
• Profitability ratios - used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders’ equity over time, using data from a specific point in time
• Gearing ratio - Measures the proportion of a company’s borrowed funds to its equity. The ratio indicates the financial risk to which a business is subjected, since excessive debt can lead to financial difficulties

Question 13

What is financial leverage?

Answer 13

• Financial leverage is an investment strategy of using borrowed money
• Specifically, the use of various financial instruments or borrowed capital to increase the potential return of an investment

Question 14

What are capital allowances?

Answer 14

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

Question 15

What are the key financial statements / documents that companies produce?

Answer 15

• Profit & loss account
• Balance sheet
• Cash flow forecast

Question 16

Can you explain the difference between ‘gross’ and ‘net’ in accounting terms?

Answer 16

Gross refers to the total amount of income before deductions, while net is the total after deductions or adjustments

Question 17

What is expenditure?

Answer 17

Expenditure represents a payment with either cash or credit to purchase goods or services

Question 18

What is capital expenditure?

Answer 18

• CAPEX (capital expenditure) is spent to acquire or improve an asset such as equipment or buildings

Question 19

What is revenue expenditure?

Answer 19

-OPEX (revenue expenditure) are costs in the day to day running of the business. For example, servicing a machine, spare parts etc

Question 20

Why are CAPEX and OPEX budgets split out in business accounts?

Answer 20

• They have different tax obligation, for example CAPEX can benefit from capital allowances

Question 21

What is a balance sheet?

Answer 21

• A balance sheet is a ‘snapshot’ of a company’s financial position at a given point in time
• It reports on a company’s assets, liabilities & ownership equity

Question 22

What is meant by assets and the liabilities?

Answer 22

• Asset = a van or land which is owned
• Liability = a loan or a debt

Question 23

What is a current asset?

Answer 23

Cash or other assets that are expected to be converted to cash within a year

Question 24

What is a fixed asset?

Answer 24

Assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings & equipment.

Question 25

What is the difference between debtors & creditors?

Answer 25

- Creditors - is an individual or business that has lent funds to a business & is owed money - Debtor - is an individual or business who has borrowed funds from business & so it owes money

Question 26

What is a cash flow forecast?

Answer 26

- A cashflow forecast is a plan that shows how much money you expect your business or project to receive & pay out over a set period. - It can also help you understand when money will enter & leave your bank account

Question 27

What is a cash flow forecast used for?

Answer 27

- Understand the impact on future plans & possible outcomes - Keep track of overdue payments - Plan for upcoming cash gaps - Manage surplus cash - Track whether spending is on target

Question 28

What is cashflow important for a construction project?

Answer 28

- Allows the client to gain an understanding of their financial commitment over the duration of the project & when they are likely to spent the money - Can be used to estimate when external funding will be required - Acts as a check against valuations & can give early indication of financial difficulties

Question 29

How does a cashflow forecast help a company remain solvent?

Answer 29

- Cash flow forecasts can predict when a business or project has money to pay out & when money is coming in - This can highlight if the business or project will have negative cash flow, meaning they can do something about it in good time

Question 30

What is a profit & loss account?

Answer 30

- A profit & loss account shows a company's revenue & expenses over a particular period of time, typically either one month or consolidated months over a year - These figures show whether the business has made a profit or a loss over that period of time

Question 31

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

Answer 31

- Balance sheet is a financial 'snapshot' at one given time showing the financial position of the company - Profit & loss account is showing the profit or loss over a determined period

Question 32

What is insolvency?

Answer 32

- Insolvency is effectively the inability to pay off debts or creditors (the people you owe money to) - The term 'insolvency' is often a generic term used to describe bankruptcy, liquidation, administration, etc

Question 33

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

Answer 33

- Risk of contractor or supply chain insolvency - Possibility of the contractor not performing satisfactorily or has restricted resources on site

Question 34

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

Answer 34

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

Question 35

What are the signs of contractor insolvency on a construction project?

Answer 35

- Slowing down works - Supply of materials drying up - Increase in defective work - Changes in management - Additional or inflated payment requests - Complaints from subcontractors

Question 36

Under what circumstances might a QS encounter insolvency?

Answer 36

- A project that you are working on may have a contractor or a subcontractor who is having serious financial difficulties which mean they cannot pay their debts - You may be approached by a client who has a project where the contractor has ceased trading and needs advice - You could be appointed by an external body (generally a liquidator or administrator) to prepare a report on a commercial aspect of a project

Question 37

What steps would you take in the event of insolvency?

Answer 37

- inform all parties involved and secure the site - inform the bondsman (bank / insurance company) - stop any pending payment (can defend on the ground of counter claims for costs) - take ownership of materials off-site (if paid for in valuations) - schedule all plant & materials - value completed works and value any defects - monitor loss & expense incurred by the employer - terminate the building contract & employ others to complete

Question 38

What is liquidation?

Answer 38

- in it's simplest form liquidation is a formal process which brings about the closure of a limited company - as part of the process all company assets will be sold - or liquidated - for the benefit of outstanding creditors and/or shareholders before the company is struck off - or dissolved - from the register held at Companies House

Question 39

What is the difference between administration & liquidation?

Answer 39

- Administration is where someone (the administrator) is appointed to manage the company's affairs on behalf of the creditors - Liquidation involves the shutting down of a company & selling off the assets to pay off the creditors

Question 40

What is bankruptcy?

Answer 40

- Bankruptcy is one way for the individuals to deal with debts they cannot pay. It does not apply to company's or partnerships - Assets are shared among those you owe money to (creditors) - Allows the individual to make a fresh start free from debt (with some restrictions)

Question 41

What are the 5 basic accounting concepts?

Answer 41

1. Business identity 2. Going concern 3. Monetary period 4. Accounting period 5. Accrual

Question 42

What is meant by the accounting concept 'business identity'?

Answer 42

- A business is treated separately from the owners as far as their financial transactions are concerns - Personal transactions should not be recorded UNLESS it involves adding or withdrawing resources (such as loans to / from the owner)

Question 43

What is the meant by the business concept 'going concern'?

Answer 43

- assumes an entity will continue to operate indefinitely, so doesn't record them based on liquidation value

Question 44

What is meant by the business concept 'monetary period'?

Answer 44

- only business transactions that can be expressed as money are recorded

Question 45

What is meant by the business concept 'accounting period'?

Answer 45

- each business choses their accounting period - monthly, quarterly or annually based on either fiscal or calendar year

Question 46

What is meant be the business concept 'accrual'?

Answer 46

- income is recorded when earned - expenses are recorded as incurred - regardless of the time when cash is received or withdrawn

Question 47

What are the key Accounting Frameworks?

Answer 47

- Generally Accepted Accounting Principles (GAAP) - International Financial Reporting Standards (IFRS)

Question 48

What is the key difference between GAAP and IFRS in relation to the treatment of property?

Answer 48

GAAP: - no specific definition of property, therefore property is held as PPE - PPE are recognised at cost & depreciated over time with no revaluations to fair value IFRS: - draws a distinction between PPE and investment properties - PPE is recognised at cost and depreciated over time with optional revaluation - investment properties can be carried out at cost and if depreciated, fair value disclosure is required