C33 Business Financial 3 — Questions and Answers
Question 1: A painting contractor issues a change order increasing the contract by $3,000. How should this be recorded in the job cost accounting system?
- It should be ignored until the project is complete
- It should be added to the original contract value and tracked separately (Correct answer)
- It should be recorded as miscellaneous income
- It should be deducted from the original contract to show a credit
Correct answer: It should be added to the original contract value and tracked separately
Change orders must be documented, added to the revised contract value, and tracked separately to maintain accurate job cost records.
Question 2: Under California's prompt payment laws, if a general contractor wrongfully withholds payment from a painting subcontractor, the subcontractor may be entitled to:
- Only the original contract amount
- The original amount plus 2% monthly interest penalty (Correct answer)
- Double the withheld amount as a penalty
- The right to file a criminal complaint immediately
Correct answer: The original amount plus 2% monthly interest penalty
California's prompt payment statutes allow subcontractors to recover the withheld amount plus a 2% per month interest penalty for unjustified late payment.
Question 3: A painting contractor's net profit margin is calculated as:
- Net Profit ÷ Total Assets × 100
- Net Profit ÷ Net Revenue × 100 (Correct answer)
- Gross Profit ÷ Total Liabilities × 100
- Net Revenue ÷ Operating Expenses × 100
Correct answer: Net Profit ÷ Net Revenue × 100
Net profit margin expresses net profit as a percentage of net revenue, showing how much of each sales dollar becomes profit after all expenses.
Question 4: Which IRS schedule must a self-employed sole proprietor painting contractor use to report business income and expenses on their personal tax return?
- Schedule A
- Schedule B
- Schedule C (Correct answer)
- Schedule D
Correct answer: Schedule C
Schedule C (Profit or Loss from Business) is used by sole proprietors to report business income and deductible expenses on Form 1040.
Question 5: A painting contractor is considering whether to lease or buy a spray rig. Which financial concept helps evaluate the long-term cost difference between these two options?
- Depreciation schedule analysis (Correct answer)
- Accounts receivable turnover
- Debt-to-equity ratio
- Gross margin percentage
Correct answer: Depreciation schedule analysis
Analyzing the depreciation schedule of a purchased asset versus lease payments helps determine the true long-term cost of ownership versus leasing.
Question 6: A California painting contractor hires a worker and classifies them as an independent contractor to avoid payroll taxes. Under California AB5, this misclassification can result in:
- No penalty if the worker agrees in writing
- Back taxes, penalties, and potential license action by the CSLB (Correct answer)
- Only a warning for first-time violations
- A civil fine of no more than $100
Correct answer: Back taxes, penalties, and potential license action by the CSLB
AB5 uses a strict ABC test for worker classification, and misclassification can expose contractors to back payroll taxes, penalties, and CSLB disciplinary action.
Question 7: What is the purpose of a contractor's 'overhead markup' added to direct job costs when preparing a bid?
- To cover the cost of the specific paint materials on that job
- To recover fixed business expenses not directly tied to individual jobs (Correct answer)
- To pay the state licensing fee for the project
- To fund the client's warranty reserve
Correct answer: To recover fixed business expenses not directly tied to individual jobs
Overhead markup ensures that each job contributes to covering fixed business expenses like rent, insurance, and office staff that exist regardless of which jobs are running.
C33 Business Financial 3
A painting contractor issues a change order increasing the contract by $3,000.
How should this be recorded in the job cost accounting system?