Financial Management and Accounting Flashcards

What is the purpose of a 'construction budget' versus a 'project estimate'?

Answer: An estimate is used for bidding; a budget is used internally to control and track actual project spending

An estimate is prepared for bidding purposes, while a budget is the approved internal plan against which actual job costs are monitored and controlled throughout construction.

Which of the following is a direct job cost in construction accounting?

Answer: Labor wages paid to workers on a specific project

Direct job costs are expenses directly attributable to a specific project, such as labor wages, materials, subcontractors, and equipment used exclusively on that job.

What is the purpose of a contractor's 'contingency' in a project budget?

Answer: To cover unforeseen costs and risks not included in the base estimate

A contingency is an amount added to the project budget to cover unexpected costs, risks, and uncertainties that were not fully accounted for in the original estimate.

Which financial ratio measures how quickly a contractor can pay its current debts with current assets?

Answer: Current ratio

The current ratio (current assets divided by current liabilities) measures a company's ability to meet its short-term obligations with its short-term assets.

Under IRS rules, which depreciation method allows contractors to write off more of an asset's value in the early years?

Answer: Accelerated depreciation (MACRS)

MACRS (Modified Accelerated Cost Recovery System) is the IRS-required depreciation method for most business assets and front-loads larger deductions in the early years of an asset's life.

What does 'underbilling' indicate in construction accounting?

Answer: A contractor has completed more work than it has billed for, representing earned but uncollected revenue

Underbilling occurs when the contractor has completed more work than it has invoiced, meaning earned revenue has not yet been billed — a common cash flow risk.