NASCLA Financial Management and Accounting 2 — Questions and Answers
Question 1: What is 'overbilling' in construction accounting?
- Charging clients for premium materials
- Billing the owner for more work than has actually been completed (Correct answer)
- Billing for more employees than are on the job
- Charging above-market rates for specialty work
Correct answer: Billing the owner for more work than has actually been completed
Overbilling occurs when a contractor bills an owner for a greater percentage of work completion than has actually been accomplished, creating a billing in excess of costs.
Question 2: Which of the following best describes a contractor's 'working capital'?
- Total long-term assets of the business
- Current assets minus current liabilities (Correct answer)
- Equipment and vehicle value
- Annual revenue minus annual expenses
Correct answer: Current assets minus current liabilities
Working capital is calculated as current assets minus current liabilities and measures the contractor's short-term financial health and ability to meet obligations.
Question 3: What is the purpose of a contractor's 'schedule of values' submitted with a pay application?
- A schedule showing employee wage rates
- A breakdown of the contract amount allocated to specific work items for progress billing purposes (Correct answer)
- A list of material prices from suppliers
- A schedule of subcontractor payment dates
Correct answer: A breakdown of the contract amount allocated to specific work items for progress billing purposes
A schedule of values allocates the total contract price across specific work items, forming the basis for calculating progress payments as each item is completed.
Question 4: Under the percentage-of-completion method, when is revenue recognized?
- Only when the project is 100% complete
- Proportionally as work progresses based on project completion percentage (Correct answer)
- At the beginning of the project when the contract is signed
- When the final payment is received
Correct answer: Proportionally as work progresses based on project completion percentage
Under the percentage-of-completion method, revenue is recognized in proportion to the project's completion percentage, matching income with the corresponding period's work.
Question 5: A contractor receives a $50,000 payment before starting work. How is this recorded on the balance sheet?
- As revenue earned
- As a liability (deferred revenue or billings in excess) (Correct answer)
- As accounts receivable
- As a long-term asset
Correct answer: As a liability (deferred revenue or billings in excess)
A payment received before the work is performed is recorded as a liability (deferred revenue) because the contractor still owes the client the corresponding work.
Question 6: What does a negative cash flow mean for a construction company?
- The company is highly profitable
- The company is spending more cash than it is receiving, which can cause financial difficulty (Correct answer)
- The company has excessive receivables
- The company has too many long-term assets
Correct answer: The company is spending more cash than it is receiving, which can cause financial difficulty
Negative cash flow means cash outflows exceed inflows during a period, which can threaten the company's ability to pay suppliers, employees, and subcontractors.
NASCLA Financial Management and Accounting 2
What is 'overbilling' in construction accounting?