Financial management: Alabama Contractor Business & Law Practice Questions

What is the basic accounting equation?

Everything the business owns (assets) is financed either by creditors (liabilities) or by the owners (equity). The balance sheet is built on this equation.

Which statement shows revenue, expenses and net income for a period?

The income statement (profit and loss statement) covers a period such as a month, quarter or year. The balance sheet is a snapshot at one date.

Which statement shows what a company owns and owes on a specific date?

The balance sheet lists assets, liabilities and owner's equity as of a single date.

Which statement explains why cash went up or down, by operating, investing and financing activities?

A company can show a profit and still run short of cash. The statement of cash flows tracks actual cash movement in three categories.

Which of these is a current liability?

Current liabilities are debts due within a year, such as payables, accrued payroll and the current part of loans. Trucks and cash are assets; retained earnings are equity.

Money customers owe the contractor for work already billed is recorded as what?

Accounts receivable are amounts owed to the business. They are a current asset, including retainage receivable that is expected within a year.

How is the current ratio calculated?

The current ratio measures short-term liquidity. Sureties and lenders commonly look for a ratio well above 1.0.

Current assets are $300,000 and current liabilities are $200,000. What are the current ratio and working capital?

Current ratio = 300,000 / 200,000 = 1.5. Working capital = current assets - current liabilities = $100,000.

What does the quick (acid-test) ratio leave out that the current ratio includes?

Quick ratio = (cash + marketable securities + receivables) / current liabilities. It excludes inventory and prepaids, which are slower to turn into cash.

Total liabilities are $400,000 and owner's equity is $250,000. What is the debt-to-equity ratio?

Debt-to-equity = 400,000 / 250,000 = 1.6. A higher ratio means the business relies more on borrowed money.

Revenue is $1,000,000, cost of construction is $820,000 and overhead is $130,000. What is net profit before tax?

Gross profit = 1,000,000 - 820,000 = $180,000. Net profit before tax = 180,000 - 130,000 = $50,000 (5% of revenue).

In the income statement of a contractor, what is gross profit?

Gross profit (gross margin) is what remains after direct job costs. Overhead, interest and taxes are subtracted afterward to reach net income.

What is the main difference between cash and accrual accounting?

The cash method records transactions when money changes hands. The accrual method matches revenue and costs to the period in which they occur, which gives a truer picture for contractors and is what sureties and lenders expect.

Under the percentage-of-completion method, how is revenue on a long-term contract recognized?

Percentage of completion spreads revenue and profit over the life of the job. The completed-contract method waits until the job is finished. Tax rules for small contractors may allow either.

A job has a $500,000 contract, $300,000 cost to date and $400,000 total estimated cost. What percent complete is it on a cost-to-cost basis?

Percent complete = cost to date / total estimated cost = 300,000 / 400,000 = 75%. Earned revenue would be 75% x $500,000 = $375,000.