NASCLA Financial Management and Accounting 1 — Questions and Answers
Question 1: What is the primary purpose of job cost accounting in construction?
- To track overall company profit only
- To track costs by individual project to monitor profitability and budget compliance (Correct answer)
- To satisfy IRS audit requirements
- To calculate employee payroll taxes
Correct answer: To track costs by individual project to monitor profitability and budget compliance
Job cost accounting tracks all labor, material, equipment, and overhead costs by project, allowing contractors to compare actual costs against estimates and manage project profitability.
Question 2: Which financial statement shows a company's revenues, expenses, and net profit over a period of time?
- Balance sheet
- Income statement (Profit and Loss statement) (Correct answer)
- Cash flow statement
- Accounts payable ledger
Correct answer: Income statement (Profit and Loss statement)
The income statement, also called a Profit and Loss statement, summarizes revenues and expenses over a specific period to show the company's net profit or loss.
Question 3: What is the difference between 'gross profit' and 'net profit' for a contractor?
- Gross profit includes taxes; net profit does not
- Gross profit is revenue minus direct job costs; net profit is gross profit minus overhead expenses (Correct answer)
- Gross profit is total revenue; net profit is cash on hand
- There is no meaningful difference between the two
Correct answer: Gross profit is revenue minus direct job costs; net profit is gross profit minus overhead expenses
Gross profit equals revenue minus direct job costs (labor, materials, subs), while net profit is gross profit minus all overhead and administrative expenses.
Question 4: Which method of accounting is most commonly required for contractors with annual revenues exceeding $26 million?
- Cash basis accounting
- Percentage-of-completion method (Correct answer)
- Completed contract method
- Single-entry bookkeeping
Correct answer: Percentage-of-completion method
The percentage-of-completion method recognizes revenue and expenses proportionally as a project progresses and is required by the IRS for large long-term contractors.
Question 5: What does 'accounts receivable' represent on a contractor's balance sheet?
- Money the contractor owes to suppliers
- Money owed to the contractor for completed work that has not yet been paid (Correct answer)
- Equipment owned by the contractor
- Advance payments made to subcontractors
Correct answer: Money owed to the contractor for completed work that has not yet been paid
Accounts receivable represents amounts owed to the contractor by clients for work already performed and billed but not yet collected.
Question 6: A contractor's 'overhead rate' is calculated by dividing total overhead costs by:
- Total revenue
- Total direct labor costs or total direct costs (Correct answer)
- Number of employees
- Number of projects completed
Correct answer: Total direct labor costs or total direct costs
The overhead rate is calculated by dividing total overhead costs by total direct labor or direct costs, used to allocate indirect costs to individual projects.
NASCLA Financial Management and Accounting 1
What is the primary purpose of job cost accounting in construction?