During this post we’ll run through some practice questions and answers focussing on the Accounting Principles and Procedures competency which is applicable to all pathways of the APC and is required up to Level 1. This means that candidates must demonstrate their awareness and basic understanding which could include having an awareness of profit and loss statements, cash flow forecasts and balance sheets. From my experience of helping colleagues pass their APC over the last 9 years, I compiled the following Q&A practice based on past interviews and really hope this helps candidates feel better prepared for their final assessment interview.
The following Questions & Answers are focussed on the Accounting Principles & Procedures Competency
Question) Please explain your understanding of the term tax depreciation?
Answer) Tax depreciation is where the declining value of an asset is offset against a companies taxable profit. The depreciation in value can be recorded as an expense in order to reduce the amount of taxable income. This can be applied on things such as plant, tools, vehicles, computers, furniture and buildings.
Question) What are overheads?
Answer) The terms overheads refers to the operating cost of the business that are incurred on an ongoing basis. Overheads can be both fixed or variable for example:-
- Fixed overheads could take the form of rent on office buildings or building insurance costs that do not change each month.
- Variable overheads tend to fluctuate depending on the activity of the business for example delivery or utility charges.
Question) What is a Profit and Loss Account?
Answer) They demonstrate a companies sales, running costs and resulting profit or loss over a financial period which is usually 1 year. They are used to show the value of a companies sales compared against its expenses and can also be used to identify any non profitable operations.
Question) What are Balance Sheets?
Answer) Balance sheets show the value of everything the company owns including any outstanding debts that the firm has to repay. They show the value of the business at any given point in time through a summary of its assets and liabilities.
Question) Please explain your understanding of Project Bank Accounts?
Answer) A Project Bank Account (PBA) is a dedicated, ring-fenced bank account used in construction projects to manage payments securely and transparently. It is designed to ensure that all parties involved in a project including subcontractors, suppliers, and the main contractor receive payments directly and promptly from the account, minimising the risk of late or non-payment. A PBA is set up at the start of a construction project, with agreements in place between the employer, main contractor, and participating subcontractors on how payments are made. The employer deposits funds into the PBA for work completed with payments then made simultaneously to all parties listed in the PBA agreement based on pre-agreed terms which bypasses the traditional hierarchical payment flows from Client to Main Contractor down to supply chain level.
Question) What is an escrow account?
Answer) Escrow accounts are contractual agreements that are used as financial instruments within a transaction. The asset or currency being transferred between two primary parties is held by an intermediary third party. The currency being exchanged is held securely by the third party until each of the 2 parties have met their contractual obligations allowing the money to then be transferred. This is often used by mortgage lenders when completing on the buying or selling of the real estate being exchanged.
Question) Please name the three different types of accounting ratios?
Answer) The three different types of accounting ratios are made up of:-
- Liquidity ratios which consider an organisations ability to pay their debt obligations and assess its margin of safety by looking at a number of metrics including their operating cash against short term debts.
- Profitability ratios assess an organisations ability to generate profits from its sales operations and shareholding equity. The ratio indicates how efficiently a company is in generating its profit.
- Gearing ratios compare capital within the company against its debts. The gearing is a measure of a companies financial leverage and sets out what proportion of the firms activities are funded by shareholders vs its creditor funds.
Question) Why does a business keep company accounts?
Answer) Company accounts are required in order to:-
- Record and measure a companies profitability.
- For tax calculation purposes including calculating taxable deductions.
- Legislation requires companies to keep accurate records.
- Business Growth is encouraged by identifying profitable operations whilst also allowing management to minimise any loss making activities.
Question) What is financial leverage?
Answer) Financial leverage is the concept of using borrowed funds in the form of debt to enhance business operations and increase the companies profitability and rates of return. In the event that the rate of return invested via borrowed funds is higher than the interest on those funds then more profit can be generated.
Question) What is the difference between a current asset vs. a fixed asset?
Answer) Current assets can normally be converted into cash within one financial year and are regarded as assets that allow day to day operation of the business. Examples may include money owed to the company following sales of its products or services, inventory and prepaid expenses. Fixed assets typically cannot be converted into cash within one year. These kinds of assets are recorded on a company’s balance sheet as fixed assets the company owns on a long term basis. Examples include vehicles, office furniture, machinery, buildings and land.
Question) What is the difference between a profit and loss account and a balance sheet?
Answer) A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss. The balance sheet shows what a company owns (its assets) and what it owes (its liabilities) at a given point in time.
Question) What are the key financial statements that all companies must provide?
Answer) These are made up of:-
- Profit & Loss accounts – the incomes and expenditures of a company and the resulting profit or loss.
- Balance Sheets – the companies assets and liabilities.
- Cash flow statements – a statement summarising the company’s cash inflows and outflows over a specific period of time.
Question) What is a cashflow statement?
Answer) It is the summary of the actual or anticipated ingoing and outgoing cash in a firm over the accounting period. It is broken down into operating, investing and financing activities. It measures the short term ability of a firm to pay off its bills.
Question) What is a Cash Flow Forecast?
Answer) A cash flow forecast summarises the amount of cash or cash equivalents entering and leaving a company or project entity. On construction projects they usually show as an ‘S’ curve. There is typically smaller financial outlay at project commencement, a steep increase during the midway point and a tapering off towards the end.
Question) What is an S-Curve?
Answer) S-Curve meaning ‘standard’ refers to the shape of the expenditure profile when shown in graphical form. During the start of a project, the rate of expenditure is typically lower due to site setup and lower value enabling works. As the scheme progresses to the middle of the programme, the rate of expenditure will typically increase as more expensive building components such as M&E and Structural Steel works are installed. Towards the back end of the programme, the rate of expenditure will slow down which is shown by the flattening of the S-Curve.
Question) Why do chartered surveyors need to understand and be able to interpret company accounts?
Answer) This is required in order to:-
- Review and have an understanding of their own firms accounts.
- To assess the financial strength of contractors and those tendering for contracts.
- For reviewing the profitability and sustainability of the businesses they engage with.
- Credit insurers and bond insurers may also require input from surveyors on any policies they provide.
Question) What is the difference between debtors and creditors?
Answer) Creditors are companies that another firm owes money to for example if you owe a sub-consultant a payment for their fees then they are a creditor. Debtors are companies that owe money to another firm for example a client who is due to make a payment of their fees is a debtor.
Question) What are Financial Statements?
Answer) Financial statements are forecasts of income and expenditure that can be used as an analytical tool to identify potential shortfalls and surpluses in a companies accounts.
Question) What are the key indicators of insolvency within a companies accounts?
Answer) Key indicators of a companies insolvency could include:-
- A low credit rating.
- A falling working capital ratio suggesting that the company has taken on more contracts than it can finance.
- Low returns on equity.
- A high gearing ratio indicating a heavy reliance on loans.
- A falling cashflow.
Question) What steps would you take in the event of a Main Contractor insolvency?
Answer) I would ensure all contractual procedures related to insolvency are followed, especially regarding termination rights and obligations. I would make records on payments made, work progress and materials on site. If the contractor’s insolvency means they can no longer fulfil their obligations, the contract should be terminated following the specified procedures. The site should be secured to prevent further damage or unauthorised access if the contract permits this. It may also be necessary to inform subcontractors to remove materials or to secure their assets. A chartered surveyor should prepare a detailed valuation statement reflecting the current state of the project. This includes assessing completed works, retention sums, and any outstanding claims, such as loss and expense. If the contract includes provision for step-in rights through collateral warranties a lender or developer may take over the project.
Accounting Principles & Procedures Questions & Answers PDF
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