FINANCIAL PROPOSAL |

Financial proposal of UNITED CONSTRUCTION COMPANY

Cash
Cash is the easiest of the accounting methods to use. Revenue is recognized when the payment
from the owner is received and expenses are recognized when bills are paid. Profit at any point
equals the cash receipts less the cash disbursements.

Because of the easiness of its use, it is often a favorite of small construction companies. Another
advantage of the cash method of accounting is that it can easily be used to defer income tax.

The company can further reduce the profit by paying any bills that are due during the first few
weeks of the next year on the last day of the current year.

Percentage of Completion
The percentage-of-completion method requires construction companies to recognize revenues,
expenses, and estimated profits on a construction project through the course of the project.
Revenues are recognized when the company bills the project's owners.

The revenue associated with the retention is recognized, along with the revenues from the bill,
unlike with the accrual accounting method, which allows the company to defer recognizing
retention as revenue until it has the right to receive the retention. Expenses are recognized when
the company receives a bill from the supplier or subcontractors.

Under the percentage-of-completion method the estimated profits must be equally distributed
over the entire project based on the expected cost of the project. Revenues, expenses, and the
estimated profits are calculated based on the percentage of the project that is complete.

Completed Contract
The completed contract method recognizes revenues and expenses at the completion of the
project. The benefit of recognizing revenues and expenses at the completion of the project is that
the revenues and expenses are known.

THE BALANCE SHEET

The balance sheet is a snapshot of a company's financial assets, liabilities, and the value of the
company to its owner—often referred to as net worth or equity – at a specific point in time.
Balance sheets are commonly prepared at the end of each month and at the end of the fiscal year.
A typical balance sheet for a construction company using the percentage-of-completion
accounting method is shown in a following figure.

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UNITED CONSTRUCTION COMPANY

BALANCE SHEET

ASSETS Current year Last year

Cash

Account receivable 2,449,392 1,444,254

Account receivable retention 3,433,270 2,830,230
Costs and profits in excess of billing 25,365 21,855
Notes receivable 32,586 20,234

prepaid expense 5,621 4,825

Other current assets 11,254 7,225
Total current assets 5,957,488 4,373,389
FIXED AND OTHER ASSETS
Building and landing 175,862 175,862
Construction equipment 95284 95284

Trucks and autos 51245 31,556

Office equipment 56896 42,846

Total fixed assets 379,287 345248

Loss ACC deprecation 229,512 182990

Net fixed assets 154775 162255

Other assets 178544 171256

Total assets 1,024,039 835190

LIABLITIES

Current liabilities

Account payable trade 325,458 228,585

Account payable retention 22,546 18,254

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Billing in excess of costs and profits 5218 11.562

Notes payable 15,648 16658

Accrued taxes 10,521 8,254

Accrued vacation 3,564 3,002

Other current liabilities 25,438 35,648

Total current liabilities 423,907 367,213

Long term liabilities 153215 99,073

Total liabilities 577122 466,286

OWNERS EQUITY

Capital stock 10,000 10,000

Retained earnings 446917 368904

Current period net income 0 0

Total equity 446,917 368904

Total liability and equity 1,024,039 835190

The balance sheet is divided into three sections:

– assets,
– liabilities, and
– owner's equity.
The balance sheet reports the values of each of the accounts in the balance sheet portion of the
chart of accounts at the time the balance sheet is printed. For example, the amount reported as
cash on the balance sheet in a previous figure comes from account number 110 from the chart of
accounts shown above.

Assets
Assets are those resources held by the company that will probably lead to some future cash
inflows. For example, a piece of property is an asset because it could be sold to produce a cash
inflow. A pallet of custom framing brackets left over from a job would not be considered an asset
unless there was a reasonable chance that the brackets could be used on a future job for which
the company would be paid to build.

Assets are divided into three broad categories:

– current assets,

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– long-term assets,
– and other assets.

CASH:
Cash includes demand deposits (such as savings and checking accounts), time deposits (such as
certificates of deposits) with a maturity of one year or less, and petty cash.

ACCOUNTS RECEIVABLE:
Accounts receivable are invoices owed to the company that will likely be paid within one year
and have not been formalized by a written promise to pay, such as a note
receivable. For construction companies the monthly bills or draws to the owners of the
construction projects constitute an account receivable until the bill is paid.
When retention is held, it is common practice to divide the accounts receivable into two
categories: accounts receivable-trade and accounts receivable-retention.

INVENTORY:
Inventory includes materials that are available for sale or are available and expected to be
incorporated into a construction project within the next year. Many construction companies have
little or no inventory. Subcontractors are the most likely group of contractors to carry inventory.

NOTES RECEIVABLE:
Notes receivable includes all invoices due to the company that will likely be paid within one
year and have been formalized by a written promise to pay. Invoices, short-term loans, or
advances to employees that have been formalized by a written promise to pay and are likely to be
paid within a year are considered notes receivable.

TOTAL CURRENT ASSETS:

Total current assets represent the total value of the current assets.

FIXED ASSETS:
On the balance sheet show in our figure the fixed assets have been broken down
into the following categories:
– building and land,
– construction equipment,
– trucks and autos

Liabilities
Liabilities are obligations for a company to transfer assets or render services at some future time
for which the company is already committed to. Loans and warranty reserves are common
liabilities.
Liabilities are divided into two broad categories:

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– current liabilities
– and long-term liabilities.

Current liabilities
are those liabilities that are expected to be paid within one year.
Current assets are usually used to pay current liabilities.

ACCOUNTS PAYABLE:
Accounts payables are debts that the company owes and expects to pay within one year that are
not evidenced by a written promise to pay. For construction companies the monthly bills that
they receive from their suppliers and subcontractors constitute accounts payable until the bill has
been paid.

When retention is withheld from the subcontractor payments, it is common practice to divide
accounts payable into two categories:
– accounts payable-trade and
– accounts payable-retention.
The retention that is being withheld from the supplier or subcontractor's payments on projects
that the requirements for release of the retention have not been met is recorded in the accounts
payable-retention category.

Owner's Equity
Owner's equity is the claim of the company's owner or shareholders on the assets that remain
after the liabilities are paid. Owner's equity may also be referred to as net worth. Owner's equity
is recorded differently on the balance sheet for corporations, sole proprietors, and partnerships.

For corporations the owner's equity is commonly broken down into three categories:
– capital stock,
– retained earnings, and
– current period net income.

– The capital stock represents the initial investment in the company by the shareholders.
– The retained earnings represent prior accounting period's profits or earnings retained by the
corporation to invest in company operations rather than be distributed to the shareholders.
– The current period net income represents the profits or losses incurred during the current
accounting period.

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