General Contractor License Business and Finance Management 3 — Questions and Answers
Question 1: A contractor's current ratio is calculated as current assets divided by current liabilities. A ratio below 1.0 generally indicates:
- Strong short-term financial health
- Insufficient liquidity to cover short-term obligations (Correct answer)
- High profitability
- Excessive overhead costs
Correct answer: Insufficient liquidity to cover short-term obligations
A current ratio below 1.0 means the company has more short-term debts than short-term assets, signaling potential cash flow problems.
Question 2: Under the percentage-of-completion accounting method, revenue is recognized:
- Only when the project reaches final completion
- Based on the proportion of work completed to date (Correct answer)
- When the client makes each scheduled payment
- At the start of the contract
Correct answer: Based on the proportion of work completed to date
Percentage-of-completion recognizes revenue proportionally as work progresses, matching revenue with costs incurred.
Question 3: A general contractor wants to protect against losses from employee theft. Which type of insurance is most appropriate?
- General liability insurance
- Workers' compensation insurance
- Commercial crime or fidelity bond insurance (Correct answer)
- Builder's risk insurance
Correct answer: Commercial crime or fidelity bond insurance
Commercial crime insurance or fidelity bonds cover losses resulting from employee dishonesty, including theft of money or property.
Question 4: What is the primary purpose of a 'schedule of values' in construction contracts?
- To list the project's timeline milestones
- To break down the contract sum for progress billing purposes (Correct answer)
- To document material quantities required
- To rank subcontractors by cost
Correct answer: To break down the contract sum for progress billing purposes
A schedule of values allocates the contract sum across work items, forming the basis for monthly progress payment applications.
Question 5: If a contractor's bid is $500,000 and the owner requests a 10% reduction, what technique should the contractor use to identify where savings are possible?
- Increase markup to compensate
- Perform value engineering to reduce scope or find alternatives (Correct answer)
- Reduce the contingency to zero
- Eliminate all subcontractor fees
Correct answer: Perform value engineering to reduce scope or find alternatives
Value engineering systematically analyzes project components to find cost-effective alternatives that maintain required function and quality.
Question 6: A contractor collects a deposit before starting work. On the balance sheet, this unearned revenue is classified as:
- An asset
- Owner's equity
- A liability (Correct answer)
- Operating income
Correct answer: A liability
Unearned revenue (deposits collected before work is performed) is a liability because the contractor owes the service to the client.
Question 7: Which document formally establishes the scope of work, payment terms, and legal obligations between a general contractor and owner?
- Certificate of insurance
- Construction contract (Correct answer)
- Notice to proceed
- Lien waiver
Correct answer: Construction contract
The construction contract is the legally binding agreement defining the rights, responsibilities, and obligations of both parties.
General Contractor License Business and Finance Management 3
A contractor's current ratio is calculated as current assets divided by current liabilities.
A ratio below 1.0 generally indicates: