Accounting For Construction

Front 1

How do you determine the sell price given a desired Profit Margin?

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Sell Price = Cost/(1-Desired Gross Profit Margin Percentage)

Front 2

Markup Percentage

Back 2

Markup Percentage = (Sales Price – Unit Cost)/Unit Cost

Front 3

Liquidity Ratios

Back 3

Measures a company's short run ability to meet financial obligations.

Current assets ÷ Current liabilities = Liquidity Ratio

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Quick Ratio

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Quick Ratio - measures how well the business can meet its debt without having to see inventory. Calculated by dividing current liabilities into the current assets minus inventory.
(Current assets - Inventory) ÷ Current liabilities = Quick Ratio

Front 5

Asset Management Ratios

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Asset Management Ratios - Measures how effectively a company is managing its assets.
Net profit ÷ Total assets = Return on assets

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Debt Management Ratios

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Debt Management Ratios - Measures the extent to which a company utilizes debt to magnify earnings and minimize losses, therefore, minimizing risk.
Total debt ÷ Total assets = Debt ratio

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Profitability Ratios

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Profitability Ratios - Profitability ratios show the relationship between income or revenues versus investments and assets. Ratios can be used to determine overall profitability of the business or may indicate specific job profitability.
Net income ÷ Revenues = Profit margin

Front 8

Margin of Profit

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Margin of Profit - Used to compare the profitability of various types of jobs, suggesting areas of concentration for the contractor.

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Cash Method Of Accounting

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Cash Method - Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid. This method provides a accurate picture of actual revenue, but may offer misleading information regarding long term revenue.

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Accrual Method Of Accounting

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Accrual Method - Records income at the time income is earned. Transactions are counted when the order is made, delivered, or completed, regardless of when the money is actually received. While this method shows the day to day flow of revenue, it can offer misleading information as to cash reserves.

Front 11

What are the two most important aspects of revenue recognition?

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The two most important aspects of revenue recognition are matching and consistency.

Front 12

If contracts cannot be completed in a taxable year, the Tax Reform Act of 1986 allows for the use of one of what three accounting methods for this type of long-term project?

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1. Completed Contract Method

2. Percentage of Completion Method

3. Cost Comparison Method

Front 13

In reference to Contract accounting what is the Completed Contract Method?

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Completed Contract Method - Instead of estimating income according to partial project cost, the completed project method recognizes profits only when the project is completed. The primary benefit is the ability to defer taxes. This method can only be used by small businesses whose gross receipts do not exceed $10 million for the last three years.

Front 14

In reference to Contract accounting what is the Percentage of Completion Method?

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Percentage of Completion Method - Assigns cost and profits according to degree of actual project completion. This method matches revenue to expenses incurred, giving a better overall picture of your finances. Unfortunately, it relies on estimates, and accurate numbers can only be realized when the project is complete.

Front 15

In reference to Contract accounting what is the Cost Comparison Method?

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Cost Comparison Method - Recognizes 90% of the estimated expenses and income calculated by the percentage of completion method to current fiscal year. The remaining 10% of the project expenses and income are deferred to the year the project is completed.

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Depreciation

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Depreciation. Process of allocating the cost of a fixed asset over the assets' useful life. For example: a $10,000 piece of equipment has a ten year life. Its value can be reduced by $1,000 per year. That $1,000 can be entered in the accounts as an expense each year.

Front 17

What are two methods to determine depreciation?

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1. Straight-line Depreciation.

2. Accelerated Depreciation.

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Straight-line Depreciation

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Straight-line Depreciation. The process of writing off the depreciable value of an asset at a uniform rate throughout its usable life. Widely used for estimating equipment costs for a certain job and cost control for ongoing projects.

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Accelerated Depreciation

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Accelerated Depreciation. This method provides a greater tax shield effect than straight-line depreciation. Companies with large tax burdens may find this method preferable. The asset is depreciated at a faster rate early in its life cycle. Accelerated depreciation methods are popular for writing off equipment that might be replace before the end of its useful life.

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Source Document:

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Source Document: The foundation of accounting work. This is the document, which proves the transaction occurred. These include check stubs, invoices received, invoices sent, cash receipt records, time cards, or other documents which are the basis for accounting journals or entries.

Front 21

Points on Loans:

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Points on Loans: A one-time charge made as a percentage of the loan, deducted up front from the amount of the loan. If the points are three percent, then $3 is deducted from every $100 of the loan and the contractor is given $97. Interest is paid on the full loan amount. Points are usually negotiable and must be considered with the interest rate in determining the true cost of the loan.

Front 22

What are the five basic account types:

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Accounting is based on five basic account types: Assets, Liabilities, Equity, Income and Expenses.

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Asset:

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Asset: Anything of value owned by the business: cash, accounts receivable, money loaned by the business, land, prepaid insurance, equipment, building(s), and furniture and fixtures. Or, items possessing service potential or a future benefit to the owner. Assets are divided into two kinds: current assets and fixed assets.

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Current Asset:

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Current Asset: An asset which can be converted into cash within one year or one operating cycle: cash, accounts receivable, inventory, loans owed to the business, notes receivable, and prepaid expenses are examples.

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Fixed Asset:

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Fixed Asset: Tangible property used in the operation of a business, which does not fall into the category of current assets. It often includes land, equipment, buildings, and furniture and fixtures.

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Liability:

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Liability: A creditor’s claims on a company’s assets. Liabilities are divided into two kinds: current and fixed.

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Current Liability:

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Current Liability: Must be paid within one year in the normal course of business. Examples are notes payable, accounts payable, unpaid wages and taxes due.

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Fixed Liability:

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Fixed Liability: Any obligations or debts which are due and payable over a comparatively long period, normally more than one year, and which do not fall into the category of current liabilities.

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Long-Term Liability:

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Long-Term Liability: Any obligations or debts which are due and payable over a comparatively long period, normally more than one year, and which do not fall into the category of current liabilities.

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Cash Budget:

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Cash Budget: An organized method of comparing expected receipts against planned expenses to ensure that there are sufficient funds to meet payroll, accounts payable, and other short-term obligations.

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Cash Discount:

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Cash Discount: A cash discount is a reduction in the selling price of merchandise or a percentage off the invoice price in exchange for payment under agreed upon terms.

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Net Working Capital:

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Net Working Capital: The amount that Current Assets exceed Current Liabilities. For example, if a business has Current Assets of $100,000 and Current Liabilities $50,000, then its Net Working Capitol is $50,000. Net Worth: the amount that assets exceed liabilities.

Front 33

Operating Cycle:

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Operating Cycle: The time required to purchase or manufacture a company’s inventory, sell the product (goods or services), and collect the revenue from the sale of the product.

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Balance Sheet:

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Balance Sheet. A financial statement consisting of a one or two-page summary of company assets, liabilities and net worth for that accounting period. This summary shows the financial status of a company at a specific date. Balance sheets are used to track the changes in value of the things you own or owe.

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Income Statement:

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Income Statement. Also called profit and loss statement (P&L), is a company's financial statement that indicates how the revenue is transformed into net income (profit). An income statement shows whether the company made or lost money during the period being reported. The income statement represents the entire accounting period.

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Statement of Cash Flow:

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Statement of Cash Flow. The primary purpose of this is to provide information about your cash receipts and payments during any given period. It shows receipts, payments, and net change that results from operating, investing and financing activities.

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In preparing a cash flow forecast, you must take into consideration:

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1. Revenue that will be generated in the next several months
2. Revenue that will be generated for the period fore casted
3. Seasonality of the business

4. State of the economy

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Internal Control:

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Internal Control: Internal control is a system of checks and balances within a business that helps ensure that the company's assets are properly safeguarded and that the financial information produced by the company is accurate and reliable.