Accounting Principles

Question 1

What is the difference between management and financial accounts?

Answer 1

Management - are used for the internal use of the management team
Financial - company accounts that are required by the UK law

Question 2

What are the key financial statements that companies provide?

Answer 2

• balance sheet
• profit and loss account
• cash flow forecast

Question 3

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

Answer 3

Profit and loss- shows a companies income vs expenditures over a financial period
Balance sheet - shows a companies assets vs liabilities at a certain point in time

Question 4

What is a cashflow statement?

Answer 4

A cashflow is a forecast to show a companies expected income and outgoings to determine the short term ability to pay off business expenses

Question 5

What are liquidity ratios?

Answer 5

Measures the ability for a company to pay off its liabilities by turning its assets into cash
Calculation = current assets / current liabilities

Question 6

What liquidity ratio can indicate insolvency ?

Answer 6

A ratio of less than 0.75 can be an early indicator of insolvency

Question 7

Is a low trading profit margin ratio bad?

Answer 7

No this isn’t always bad and can be signs of a company attempting a growth strategy

Question 8

What are financial gearing ratios?

Answer 8

Measure the financial structure of a company, which are critical indicators for the external suppliers of debt and equity.
Highly geared companies rely mainly on borrowing

Question 9

What are profitability ratios?

Answer 9

Measures the performance of a company in generating profits

Trading profit margain ratio = turnover - (cost of sales/ turnover)

Question 10

What is a financial statement ?

Answer 10

Forecasts a companies income vs expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses

Question 11

What is an ‘S’ curve?

Answer 11

It is the shape of a projects typical cashflow forecast.

Start of the project there is lower expenditure as tasks such as site enabling works are being carried out

Mid point of the curve more expensive elements are being installed such as the frame and M&E installations

End point the curve the expenditure rate flattens out as the finishing touches are being executed such as ff&e

Question 12

What is an escrow account?

Answer 12

A project bank account.
Owned by a third party and held on behalf of 2 other parties

Question 13

When have you used company accounts in your work?

Answer 13

During the pre qualification stage of tender stages I have used accounts to assess a companies financial strength

Question 14

Define insolvency

Answer 14

The inability to pay debts where liabilities exceed assets

Question 15

What are the signs of insolvency in company accounts or credit checks?

Answer 15

Liquidity ratio of below 0.75
Low credit rating
Falling cashflow statement

Question 16

What measures would you recommend if your client wanted to appoint a contractor with a low credit rating?

Answer 16

I would explore the option of requesting a performance bond that my client could call on in the event that the main contractor fails to perform
Review the tender submission to ensure it is not excessively front loaded