RICS - APC - Accounting Principles

What are key financial statements that companies provide?

Profit and loss accounts, balance sheets, cash flow statements.

What is the difference between management and financial account?

Management accounts are for the internal use of the management team, financial accounts are the company accounts that are required by UK law.

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

A profit and loss accounts shows the incomes and expenditures of a company and resulting profit or loss. the balance sheet shows company's assets and liabilities at given point in time.

What is a cashflow statement?

It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period. It measures the short - term ability of a firm to pay off its bills.

Explain capital allowances

tax relief on certain items purchased for the business for example tools and equipment.

Sinking Finds

founds that are set aside for future expense or long - term debt.

Insolvency

Insolvency is an inability to pay debts where liabilities exceed assets.

Companies House

An agency that incorporates and dissolves limited companies within the United Kingdom.

HMRC

Her Majesties Revenue and Customs.

Liquidity ratios

measure the ability of a company to pay off its current liabilities by converting its current assets into cash. Liquidity ratio calculation is current assets divided by current liabilities.

Liquidity ratios what can indicate?

The ratio is usually around 1.5 but it depends on the sector of activity. A liquidity ratio of less than 0.75 can be early indicator of insolvency.

What are profitability ratios?

Profitability ratios measure the performance of a company in generating its profits. The trading profit margin ratio = turnover - (cost of sales/ turnover).

What can indicate

What can indicate low margin. Low margins can be due to a growth strategy and it doesn't always indicate poor management.

What are Financial Gearing Ratios

These measure the financial structure of the company which are crucial indicators for the external suppliers of debt and equity as well as for internal management. They help to measure solvency. the payment of interest reduce the profit.

Why chartered surveyors need to understand and be able to interpret company accounts?

To aid in preparing their own business accounts. For assessing the financial strength of the contractors and those tendering for contracts. For assessing competition.

What is the purpose P & L

To monitor and measure profit (or loss). To compare against past performance and against company budgets. For valuation purposes. Calculate taxation. Forecasting

What are creditors

Creditors are business entities that are owed money by another entity that they have extended credit to. Perhaps, if you have provoded services to a client and they owe payment of your fees, you become creditor to that client.

What are debtors

Debtors are business entities that owe money to another respective company.

What are Management Accounts?

The internal management use. Accounts prepared for a lender, such as a bank to evaluate how you will be able to repay the funding. These accounts are not be audited externally.

Financial Statement

Financial Statement is forecasts of income and expenditure that can be used as as analytical tool to identify potential shortfalls and surpluses.

Profit and loss account

they demonstrate a companies sales, running costs, profit loss over a financial period usually 1 year. They are use to show sales vs expense. They can also be used to identify non- profitable work

Balance Sheet

Balance Sheet shows the value

Cash flow forecast

Cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity.

Cash flow forecast on construction projects

Cash flow forecast on construction projects usually show as an S curve. Typically there is a small financial outlay at the start, a steep increase during the midway point and a taper towards the end.

What is an S - Curve?

S- Curve means standard and refers to the shape of the expenditure profile when shown in graphical form.

What is an S - Curve?

At the start expenditure is lower for site set up and enabling works, in the middle of the programme the rate of expenditure will typically increase as more expensive building components such as M&E or steel works are installed. Then it slows down.

How financial ratios, statements, cash flow forecast and S- curve are used by surveyors?

To track, analyse and assess business accounts and performance. For assessing the financial strength of contractors. To compare actual progress of the work against pre- contract predictions.

Escrow Accounts

A separate account owned by a third party, held on behalf of two other parties. A bank account with defined contractual conditions for the release of founds. Project bank account. Payment certificates for relese of founds

When have you used company accounts in your work?

To assess the financial strength of contractors at Pre - Qualification Stage and tender stages.

How do you analyse a company's accounts?

I would look at the worning signs by calculating ratios such as liquidity ratios, profitability ratios and gearing ratios. I would calculated ratios myself.

How do you carry out a credit check?

I use the Credit Safe website to which my company subscribes to access a companys accounts. I consider both the group accounts and the company accounts. I would also calculate ratios and involve clients accountants.

what are signs of insolvency

low credit score and liquidity ratio below 0.75, a failing working capital ratio, a low return on equity, company reliant on loans, failing cash flow statement.

Would you recommend the appointment of a contractor with low credit rating

No as they might be increased risk of the contractor failing to deploy sufficient resources and materials to the project and increase the risk of contractor insolvency.

What would you do if the client wanted to appoint a contractor with a low credit rating?

Performance bond that my client could use if main contractor would not perform, review tender submission if its not excessively front loaded, review interim valuations accordingly