Financial Management and Accounting Flashcards

What is 'overbilling' in construction accounting?

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.

Which of the following best describes a contractor's 'working capital'?

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.

What is the purpose of a contractor's 'schedule of values' submitted with a pay application?

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.

Under the percentage-of-completion method, when is revenue recognized?

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.

A contractor receives a $50,000 payment before starting work. How is this recorded on the balance sheet?

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.

What does a negative cash flow mean for a construction company?

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.