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Guide to Construction Accounting

GUIDE TO CONSTRUCTION ACCOUNTING

Founded in 1975, Jones, Henle & Schunck (JHS) has grown into one of California’s
most respected CPA firms assisting construction contractors.

JHS is proud of its 40-year contribution to helping and the success of our contractor client in an
thousands of contractors identify and address ever-changing market.
financial issues that give them better control over
regulatory and compliance rules and in mapping You will find schedules included in this guide illus-
and managing the creation of wealth. trating common financial ratios used by our
business partners (banks and surety
Our firm is dedicated to helping
Our firm companies) as well as a step-by-step
companies grow and reach their is dedicated guide on how to compute income
full potential. Our approach is to earned using the percentage-of -
work as a team, helping you
to helping completion method.
make the best decisions for your companies grow
financial statements, your tax Please use the contents page to
and reach their help you navigate through this
situation, and your bottom line.
full potential. easy-to-use guide to construction
We are more than a CPA firm for our accounting and give any of our ac-
clients. Together with our contractors’ counting and tax professionals a call if
banks and surety companies, we are a cohesive you have any questions or would like to discuss
team of business partners working together for a our firm in more detail. Our office locations and
common goal: understanding of the construction contact information are listed below for your
industry, expectations of our business partners, convenience.

135 Town & Country Drive, P.O. Box 9500, Danville, California 94526
ph (925) 820-1821, fx (925) 820-8266

2300 E. Katella Avenue, Suite 370, Anaheim, California 92806


ph (714) 978-1800, fx (714) 978-6722

www.jhs.com
GUIDE TO CONSTRUCTION ACCOUNTING

TABLE OF CONTENTS

SECTION 1
Construction Industry Common Financial Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

SECTION 2
Computing Income Under the Percentage-of-Completion Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2–3

SECTION 3
Independent Accountants’ Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

SAMPLE FINANCIAL STATEMENTS

Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5–6

Statement of Income and Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8–9

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10–17

SUPPLEMENTAL INFORMATION

Schedule 1:
Schedule of Earnings from Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Schedule 2:
Schedule of Completed Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Schedule 3:
Schedule of Contracts in Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Schedule 4:
Schedules of General and Administrative Expenses and Other Income (Expense) . . . . . . . . . . . . . . . . . . . . . . . 21
GUIDE TO CONSTRUCTION ACCOUNTING section one

CONSTRUCTION INDUSTRY COMMON FINANCIAL RATIOS

CALCULATION COMFORT RANgE


Profitability Ratios:
Gross Profit to Sales Gross Profit $ 2,500,000 5 – 10%
Contract Revenue 25,000,000
10%

Overhead to Sales G&A Expenses $ 1,350,000 5 – 10%


Contract Revenue 25,000,000
5%

Overhead to Net Worth G&A Expenses $ 1,350,000 60% or less


Net Worth 3,250,000
42%

Liquidity Ratios:
Accounts Receivable Turnover A/R X 360 (A/R = $2.25M) $ 810,000,000 45 days or less
Revenue 25,000,000 (Excluding Retention)
32.40

Accounts Payable Turnover A/P X 360 (A/P = $1.25M) $ 450,000,000 45 days or less
Cost of Revenues Earned 22,500,000 (Excluding Retention)
20.00

Current Ratio Current Assets $ 3,750,000 Greater than 1.1


Liabilities 2,250,000
1.67

Net Worth Ratios:


Debt to Net Worth Total Debt $ 2,400,000 2.1 to 3.1
Net Worth 3,250,000
0.74

Net Worth to Backlog Net Worth $ 3,250,000 5 – 10% or greater


Cost to Complete Backlog 35,000,000
9%

Sales to Net Worth Contract Revenue $ 25,000,000 Not greater than 13 X


Net Worth 3,250,000
7.69

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GUIDE TO CONSTRUCTION ACCOUNTING section two

COMPUTING INCOME UNDER THE PERCENTAGE-OF-COMPLETION METHOD

A B C D E F G
A-B E+F I*C
TOTAL FROM INCEPTION TO DECEMbER 31, 20XX

Estimated Earned Contract


Contract Estimated Estimated gross Contract Costs gross Contract
Number Contract Description Revenue Costs Profit Revenue to Date Profit billings
2131 One Maritime P $ 2,102,063 $ 1,377,284 $ 724,779 $ 2,060,021 $ 1,349,738 $ 710,283 $ 1,974,732
3177 Ascend School 1,229,253 921,940 307,313 1,009,719 757,722 251,997 1,115,490
4072 Murphy School 1,478,287 1,108,715 369,572 575,395 431,262 144,133 554,650
4113 425 Market Spr 1,101,600 771,120 330,480 620,131 435,062 185,069 546,174
4170 Kaiser St Prid 1,495,722 1,279,724 215,998 975,877 835,478 140,399 1,377,851
4179 Kaiser Ssf - P 2,127,400 1,701,920 425,480 1,119,900 894,396 225,504 1,101,920
4211 Dot 3,514,815 3,233,630 281,185 1,803,130 1,659,726 143,404 2,421,854
4243 3300 College D 2,418,748 2,225,248 193,500 779,380 717,460 61,920 1,069,489
4247 Mezzetta Court 1,295,692 906,984 388,708 870,222 609,788 260,434 759,438
4268 Sonoma State D 4,015,000 3,533,200 481,800 3,162,429 2,781,807 380,622 3,218,475
4295 One Cal 14Th F 4,193,000 3,815,630 377,370 2,931,819 2,667,660 264,159 3,096,500
4310 Carmichael Lib 2,524,279 2,145,637 378,642 1,159,448 985,273 174,175 1,012,500
Uncompleted contracts
less than $450,000 7,601,688 5,539,533 2,062,155 2,010,146 1,414,694 595,452 1,909,117

$35,097,547 $28,560,565 $ 6,536,982 $19,077,617 $ 15,540,066 $ 3,537,551 $20,158,190

Step 1 - Determine estimated gross profit (Estimated Revenue - Estimated Costs)


Step 2 - Calculate percent complete (Contract Costs to Date / Estimated Costs)
Step 3 - Calculate earned gross profit (Percent Complete * Estimated Gross Profit)
Step 4 - Calculate earned revenue (Gross Profit From Inception + Contract Costs to Date)

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GUIDE TO CONSTRUCTION ACCOUNTING section two

COMPUTING INCOME UNDER THE PERCENTAGE-OF-COMPLETION METHOD

H I J K L M N
B-E E/B D-G G-D

AT DECEMbER 31, 20XX


Costs and billings in FOR ThE YEAR
Estimated Excess of ENDED DECEMbER 31, 20XX
Estimated Earnings in Costs and Earned
Contract Costs to Percent Excess of Estimated Contract Contract gross
Number Contract Description Complete Complete billings Earnings Revenue Costs Profit
2131 One Maritime P $ 27,546 98% $ 85,289 $ - $ 1,188,539 $ 727,669 $ 460,870
3177 Ascend School 164,218 82% - 105,771 924,895 707,254 217,641
4072 Murphy School 677,453 39% 20,745 - 575,395 431,262 144,133
4113 425 Market Spr 336,058 56% 73,957 - 620,131 435,062 185,069
4170 Kaiser St Prid 444,246 65% - 401,974 975,877 835,478 140,399
4179 Kaiser Ssf - P 807,524 53% 17,980 - 1,119,900 894,396 225,504
4211 Dot 1,573,904 51% - 618,724 1,803,130 1,659,726 143,404
4243 3300 College D 1,507,788 32% - 290,109 779,380 717,460 61,920
4247 Mezzetta Court 297,196 67% 110,784 - 870,222 609,788 260,434
4268 Sonoma State D 751,393 79% - 56,046 3,162,429 2,781,807 380,622
4295 One Cal 14Th F 1,147,970 70% - 164,681 2,931,819 2,667,660 264,159
4310 Carmichael Lib 1,160,364 46% 146,948 - 1,159,448 985,273 174,175
Uncompleted contracts
less than $450,000 4,124,839 179,240 78,211 1,711,561 1,126,443 585,118

$13,020,499 $ 634,943 $ 1,715,516 $ 17,822,726 $ 14,579,278 $ 3,243,448

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GUIDE TO CONSTRUCTION ACCOUNTING section three

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the board of Directors


XYZ Construction Company, Inc.
Oakland, California
We have reviewed the accompanying financial statements of XYZ Construction Company, Inc., which comprise
the balance sheet as of December 31, 2014, and the related statements of income and retained earnings,
and cash flows for the year then ended, and the related notes to the financial statements. A review includes
primarily applying analytical procedures to management’s financial data and making inquiries of company
management. A review is substantially less in scope than an audit, the objective of which is the expression
of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the
design, implementation and maintenance of internal control relevant to the preparation and fair presentation
of the financial statements that are free from material misstatement whether due to fraud or error.
Accountants’ Responsibility
Our responsibility is to conduct the review engagement in accordance with Statements on Standards for
Accounting and Review Services promulgated by the Accounting and Review Services Committee of the
AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting
whether we are aware of any material modifications that should be made to the financial statements for
them to be in accordance with accounting principles generally accepted in the United States of America. We
believe that the results of our procedures provide a reasonable basis for our conclusion.
Accountants’ Conclusion
Based on our review, we are not aware of any material modifications that should be made to the accompanying
financial statements in order for them to be in accordance with accounting principles generally accepted in
the United States of America.
Other Matter
The supplementary information included in the accompanying Schedules 1, 2, 3 and 4 is presented for
purposes of additional analysis and is not a required part of the basic financial statements. The information
is the representation of management. We have reviewed the information and, based on our review, we are
not aware of any material modifications that should be made to the information in order for it to be in
accordance with accounting principles generally accepted in the United States of America. We have not
audited the information and, accordingly, do not express an opinion on such information.
JONES, HENLE & SCHUNCK

Danville, California
February 5, 2015
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GUIDE TO CONSTRUCTION ACCOUNTING section three: sample financial statements

XYZ Construction Company, Inc.


Balance Sheet
December 31, 2014

ASSETS
Current Assets:
Cash $ 2,453,481
Receivables:
Contracts — current $ 3,194,972
Contracts — retention 819,543
Total receivables 4,014,515
Costs and estimated earnings in excess of
billings on uncompleted contracts 634,943
Prepaid expenses and deposits 67,130
Total current assets 7,170,069
Property and equipment, net 210,666
Investments 2,100,000
Total assets $ 9,480,735

(See independent accountants’ review report and accompanying notes to financial statements)
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XYZ Construction Company, Inc.


Balance Sheet
December 31, 2014

LIAbILITIES AND STOCKhOLDER’S EQUITY


Current Liabilities:
Accounts payable $ 2,751,136
Line of credit 865,511
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,715,516
Accrued expenses 598,088
Income taxes payable 243,562
Current portion of long-term debt 67,262
Total current liabilities 6,241,075
Long-term debt, net of current maturities 178,324
Total liabilities 6,419,399
Stockholder's Equity:
Common stock, $10 par value,
100,000 shares authorized,
20,615 shares issued and outstanding $ 206,151
Retained earnings 2,855,185
Total stockholder's equity 3,061,336

Total liabilities and stockholder's equity $ 9,480,735

(See independent accountants’ review report and accompanying notes to financial statements)
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GUIDE TO CONSTRUCTION ACCOUNTING section three: sample financial statements

XYZ Construction Company, Inc.


Statement of Income and Retained Earnings
December 31, 2014

Contract revenue $ 40,613,112

Contract costs:
Labor and labor burden $ 15,185,327
Materials 9,949,468
Subcontractors 4,668,134
Equipment 1,758,018
Other 1,088,060

Total contract costs 32,649,007

Gross profit 7,964,105

General and administrative expenses 7,362,865

Operating profit 601,240

Other expense, net (12,622)

Income before provision for income taxes 588,618

Income tax expense (229,062)

Net income 359,556

Retained earnings, beginning of year 2,495,629

Retained earnings, end of year $ 2,855,185

(See independent accountants’ review report and accompanying notes to financial statements)
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XYZ Construction Company, Inc.


Statement of Cash Flows
December 31, 2014

Cash Flows from Operating Activities:


Cash received from customers $ 15,407,144
Cash paid to subcontractors, suppliers, employees and affiliates (13,787,598)
Interest paid (36,839)
Interest received 3,700
Income taxes paid (311,102)
Miscellaneous income received 20,517

Net cash provided by operating activities 1,295,822

Cash Flows from Financing Activities:


Advances on line of credit 1,056,366
Payments on line of credit (1,679,644)
Repayments on note payable from stockholder (63,734)

Net cash used in financing activities (687,012)

Net increase in cash 608,810

Cash, beginning of year 1,844,671

Cash, end of year $ 2,453,481

(See independent accountants’ review report and accompanying notes to financial statements)
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XYZ Construction Company, Inc.


Statement of Cash Flows
December 31, 2014

Reconciliation of Net Income to Net Cash


Provided by Operating Activities:
Net income $ 359,556

Adjustments to Reconcile Net Income to Net Cash


Provided by Operating Activities:
Depreciation and amortization 81,231

(Increase) decrease in:


Receivables 455,899
Costs and estimated earnings in excess of
billings on uncompleted contracts 187,493

Increase (decrease) in:


Accounts payable 349,043
Billings in excess of costs and estimated
earnings on uncompleted contracts (55,360)
Income taxes payable (67,540)
Deferred income taxes (14,500)

Net cash provided by operating activities $ 1,295,822

(See independent accountants’ review report and accompanying notes to financial statements)
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GUIDE TO CONSTRUCTION ACCOUNTING section three: sample financial statements

XYZ Construction Company, Inc.


Notes to Financial Statements
December 31, 2014

NOTE 1 ORgANIZATION
XYZ Construction Company, Inc. (Company) is a contractor specializing in clean up of hazardous materials.
The Company was incorporated in California in 1993 and performs most of its work in Northern California.

NOTE 2 SUMMARY OF SIgNIFICANT ACCOUNTINg POLICIES


The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those estimates.
The Company performs its work under fixed-price, modified fixed-price, and time and material contracts.
Contracts may be modified by incentive and penalty provisions. The lengths of the Company’s contracts vary
but are typically less than one year. In accordance with normal practice in the construction industry, the
Company includes asset and liability accounts relating to construction contracts, including related deferred
income taxes, in current assets and liabilities even when such amounts are realizable or payable over a period
in excess of one year.
Revenues from construction contracts are recognized on the percentage-of-completion method, measured by
the percentage of costs incurred to date to estimated total costs for each contract. Revenues from construction
claims are recognized when realization is probable and can be reliably estimated.
Contract costs include all direct material, labor, subcontractor costs and indirect costs related to contract
performance, such as indirect labor, equipment, insurance, disposal, rent, utilities, permits and air monitoring
costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are determined. Changes in job
performance, job conditions and estimated profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to costs and revenues and are recognized
in the period in which the revisions are determined.
The asset “costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues
recognized in excess of amounts billed. The liability “billings in excess of costs and estimated earnings on
uncompleted contracts” represents billings in excess of revenues recognized.

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XYZ Construction Company, Inc.


Notes to Financial Statements
December 31, 2014

NOTE 2 SUMMARY OF SIgNIFICANT ACCOUNTINg POLICIES (continued)


The Company grants credit to customers in the normal course of operations. Contract receivables are based
on management’s evaluation of outstanding receivables at year end. Allowance for doubtful accounts, if any,
is provided based on the review of outstanding receivables, historical experience and economic conditions.
Uncollectible accounts are expensed in the period such amounts are determined.
The Company’s financial instruments include cash, contract receivables, other assets, accounts payable
and other payables. The value of these financial instruments approximates fair value due to their short-
term nature.
Financial instruments that potentially subject the Company to credit risk include cash and contract receivables.
The Company maintains its demand deposits in commercial banks with Federal Deposit Insurance Corporation
limits. The Company may apply a mechanic’s lien against any unpaid contract receivables in accordance with
state law.
Property and equipment are stated at cost. Depreciation and amortization is provided using the straight-line
and double-declining methods over the assets’ estimated useful lives of five to seven years for all equipment
and thirty-nine years for leasehold improvements.
Income taxes are provided based on current enacted and applicable income tax rates. Current and deferred
income taxes are calculated based on an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed annually for differences between
the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts
in the future based on enacted tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.

NOTE 3 PROPERTY AND EQUIPMENT


Property and equipment consists of the following:
Equipment $ 640,195
Vehicles 172,391
Leasehold improvements 50,000
Furniture and fixtures 108,641
971,227
Less accumulated depreciation and amortization (760,561)
$ 210,666

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XYZ Construction Company, Inc.


Notes to Financial Statements
December 31, 2014

NOTE 4 LINE OF CREDIT


The Company has a $2,500,000 line of credit with a commercial bank. Advances bear interest at 2.5% in excess
of LIBOR rate on the first $100,000 of advances and prime plus 0.25% on any additional advances. It is secured
by all Company assets, commercial guarantee by the Company and related parties, and personal guarantees
by the stockholder. The line of credit expires in September 2015, and it is management’s intention to renew
the facility. At December 31, 2014, the outstanding balance was $865,511.

NOTE 5 NOTE PAYAbLE – STOCKhOLDER


Unsecured note payable to the stockholder, monthly
payments of $6,573 plus interest at 5.4% per annum.
The note matures in May 2018. $ 245,586
245,586

Less current maturities (67,262)


$ 178,324

Maturities of note payable are as follows:


December 31, 2015 $ 67,262
December 31, 2016 70,985
December 31, 2017 74,915
December 31, 2018 32,424
$ 245,586

NOTE 6 EMPLOYEE bENEFIT PLANS


The Company has a profit sharing plan whereby it may contribute up to 25% of compensation for all participants.
The plan includes 401(k) salary deferral provisions and covers all employees who have completed one year
of service. Employer matching contributions are discretionary up to 100% of the employee salary deferrals
and vest ratably over six years. The Company’s current year contribution was approximately $36,500.
The Company participates in union-sponsored multi-employer defined benefit pension plans under the
terms of collective-bargaining agreements that cover union field employees. The respective union representatives
administer the plans. Contributions to the plans are based on a fixed rate per hour worked. Pension expense
under these plans was approximately $1,019,000 for the year ended December 31, 2014.

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XYZ Construction Company, Inc.


Notes to Financial Statements
December 31, 2014

NOTE 6 EMPLOYEE bENEFIT PLANS (continued)


The risks of participating in these multi-employer defined benefit pension plans are different from single-
employer plans in the following aspects:
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to
employees of other participating employers.
If a participating employer stops contributing to the plans, the unfunded obligations of the plans may
be borne by the remaining participating employers.
If a Company stops participating in any of its multi-employer plans, it may be required to pay those plans
an amount based on the plans’ underfunded status as a withdrawal liability.
Governmental regulations impose certain requirements relative to union-sponsored multi-employer pension
plans. In the event of plan termination or employer withdrawal from the plans, an employer may be liable
for a portion of the plans’ unfunded vested benefits. Management has not received information from the
plans’ administrators to determine its share of possible unfunded vested benefits. Management does not
anticipate any issues with the renegotiations of agreements. Management has no intention to withdraw
from the plans and is not aware of any expected terminations.
The Company’s participation in these multi-employer defined benefit pension plans for the annual period
ended December 31, 2014, is outlined in the table below. The “EIN/Pension Plan Number” column provides
the Employer Identification Number (EIN) and the three-digit plan number, if applicable. Unless otherwise
noted, the most recent Pension Protection Act (PPA) zone status available in 2014 is for the plans’ year end
at December 31, 2013. The zone status is based on information that the Company received from the plans
and is certified by the plans’ actuary. Among other factors, plans in the red zone are generally less than 65%
funded, plans in the yellow zone are less than 80% funded, and plans in the green zone are at least 80%
funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement
plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the
expiration dates of the collective-bargaining agreements to which the plans are subject. Contributions for
all pension funds have increased due to the increase in construction volume for the year ended December
31, 2014, resulting in increased labor. The Company’s contributions did not represent more than 5% of total
contributions to the plans as indicated in the plans’ most recently available Forms 5500 for any of the plans
to which the Company contributes.
The following table presents the Company’s participation in these plans as of and for the year ended
December 31, 2014.

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XYZ Construction Company, Inc.


Notes to Financial Statements
December 31, 2014

NOTE 6 EMPLOYEE bENEFIT PLANS (continued)

2014 PPA FIP/RP Expiration of


Zone Status Status Collective
Pension EIN/Pension as of Plan’s Pending/ 2014 bargaining
Trust Fund Plan Number Year End Implemented Contribution Agreement
Laborers
Pension Trust
94-6277608 Yellow
Fund For Yes $ 193,621 6/30/2019
001 8/31/2014
Northern
California

OE Pension 94-6090764 Red 223,855


Yes 6/30/2016
Trust Fund 001 12/31/2013
$ 417,476

Under the Employee’s Retirement Income Security Act of 1974, as amended in 1980, the Company may be
liable, on termination or withdrawal from the plan, for an allocated share of the plan’s unfunded benefits.
Information with respect to the Company’s portion of the value of net assets available for plan benefits and
actuarial present value of vested accumulated plan benefits was not available from the plan’s administrator.
However, management of the Company is not aware of any unfunded vested benefits to which they are a
party. The Company currently has no intention to terminate or withdraw from the plan.

NOTE 7 LEASE COMMITMENTS


The Company leases its office and warehouse facilities and vehicles under non-cancelable operating leases
from a limited liability company which the stockholder owns. The lease agreement for the office and warehouse
facilities requires the Company to pay property taxes, insurance, common area expenses and maintenance
costs. The office and warehouse lease expires in December 2016. Total lease expense was approximately
$335,500 for the year ended December 31, 2014. Of this, the Company incurred approximately $312,000 in
lease expense to the related party.
Future minimum annual lease payments are approximately as follows:
December 31, 2015 $ 309,972
December 31, 2016 309,972
$ 619,944

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GUIDE TO CONSTRUCTION ACCOUNTING section three: sample financial statements

XYZ Construction Company, Inc.


Notes to Financial Statements
December 31, 2014

NOTE 8 COSTS AND ESTIMATED EARNINgS ON UNCOMPLETED CONTRACTS


Costs incurred on uncompleted contracts $ 15,540,066
Estimated earnings 3,537,551
19,077,617
Less billings to date (20,158,190)
$ (1,080,573)

The foregoing balance is included in the accompanying


balance sheet under the following captions:

Costs and estimated earnings in excess of


billings on uncompleted contracts $ 634,943

Billings in excess of costs and estimated


earnings on uncompleted contracts (1,715,516)

$ (1,080,573)

NOTE 9 CONTRACT bACKLOg


The Company has contract backlog as follows:

Estimated gross revenues on contracts in


progress at December 31, 2014 $ 35,097,547
Less amounts earned at December 31, 2014 (19,077,617)
16,019,930
Additional contracts entered into subsequent
to December 31, 2014 8,501,868
$ 24,521,798

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XYZ Construction Company, Inc.


Notes to Financial Statements
December 31, 2014

NOTE 10 INCOME TAXES


Income tax provision for the year consists of the following:

FEDERAL STATE TOTAL


Current $ 190,062 $ 53,500 $ 243,562
Deferred (9,600) (4,900) (14,500)

$ 180,462 $ 48,600 $ 229,062

Deferred income tax benefit reflect the net effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting and the amounts used for income tax purposes.
On January 1, 2009, the Company adopted the standard which clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements as required by the “Accounting for Uncertainty
in Income Taxes” topic of the FASB Accounting Standards Codification. The standard prescribes a recognition
threshold and measurement for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The adoption of the standard did not have an effect on the Company.
The Company files U.S. federal and California state income tax returns. The Company’s federal income tax
returns of tax years 2011 and subsequent thereto remain subject to examination by the Internal Revenue
Service. The impact of any examination adjustments would be incurred at the stockholder level. The Company’s
California income tax returns of the tax years 2010 and subsequent thereto remain subject to examination
by the Franchise Tax Board. In addition, net operating loss carryforwards which may be used in future years
are still subject to adjustment.
The Company did not have unrecognized tax liabilities as of December 31, 2014, and does not expect this to
change over the next 12 months. In connection with the adoption of this accounting standard, the Company
will recognize interest and penalties accrued on any unrecognized tax as a component of income tax expense.
As of December 31, 2014, the Company has not accrued interest and penalties related to uncertain tax positions.

NOTE 11 bUSINESS CONCENTRATIONS


One customer accounted for approximately 15% of the contract revenue for the year ended December 31,
2014, and three customers accounted for approximately 36% of the contract receivables at that date.

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GUIDE TO CONSTRUCTION ACCOUNTING section three: sample financial statements

XYZ Construction Company, Inc.


Notes to Financial Statements
December 31, 2014

NOTE 12 SUbSEQUENT EVENTS


The Company’s management has evaluated subsequent events and transactions through February 5, 2015,
which is the date the financial statements were available to be issued. Management confirms that no
significant events or transactions have occurred subsequent to the balance sheet date and through February
5, 2015, that would require adjustment to, or disclosure in, the financial statements.

NOTE 13 CONTINgENCIES
The Company is involved in various matters of construction litigation, claims and disputes which have arisen
in the ordinary course of its business. While the resolution of any of these matters may have an impact on
the financial results for the period in which the matter is resolved, management believes that the ultimate
disposition of these matters will not, in the aggregate, have a material adverse effect upon their business or
financial position, results of operations or cash flows.
The Company enters into agreements with subcontractors on their projects. Some agreements do not require
the subcontractor to provide payment or performance bonds. If the subcontractor were to default on its
contract, the Company would be liable for completion of the subcontract. Management does not anticipate
any subcontractor defaulting on their contract obligations.

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GUIDE TO CONSTRUCTION ACCOUNTING section three: supplemental information

XYZ Construction Company, Inc.


Schedule 1: Schedule of Earnings from Contracts
For the Year Ended December 31, 2014

Contract Contract gross


Revenue Costs Profit

Completed contracts $ 22,790,386 $ 18,069,729 $ 4,720,657

Contracts in progress 17,822,726 14,579,278 3,243,448

Totals $ 40,613,112 $ 32,649,007 $ 7,964,105

(See independent accountants’ review report and accompanying notes to financial statements)
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GUIDE TO CONSTRUCTION ACCOUNTING section three: supplemental information

XYZ Construction Company, Inc.


Schedule 2: Schedule of Completed Contracts
For the Year Ended December 31, 2014

FROM INCEPTION FOR ThE YEAR ENDED


TOTAL TO DECEMbER 31, 2013 DECEMbER 31, 2014
Earned Earned Earned
Contract Contract Contract Contract gross Contract Contract gross Contract Contract gross
Number Description Revenue Costs Profit Revenue Costs Profit Revenue Costs Profit
2054 The Olympic Cl $ 1,433,971 $ 1,270,857 $ 163,114 $ 33,025 $ 20,353 $ 12,672 $ 1,400,946 $ 1,250,504 $ 150,442
3043 Lucille Nixon 1,647,065 1,320,474 326,591 482,917 318,568 164,349 1,164,148 1,001,906 162,242
3128 Madera Element 708,120 425,337 282,783 114,046 73,939 40,107 594,074 351,398 242,676
3145 Kaiser S.T.Occ 336,170 253,216 82,954 225,274 175,540 49,734 110,896 77,676 33,220
3176 Emporium Dome 993,360 656,592 336,768 794,663 548,929 245,734 198,697 107,663 91,034
3259 Kaiser 4Rh Flo 1,119,080 706,012 413,068 611,058 387,913 223,145 508,022 318,099 189,923
3275 555 28Th Floor 278,685 207,263 71,422 146,009 117,963 28,046 132,676 89,300 43,376
3288 Silvercrest 345,058 184,590 160,468 84,300 50,211 34,089 260,758 134,379 126,379
4005 Jefferson Scho 571,592 359,622 211,970 - - - 571,592 359,622 211,970
4051 425 Market 20T 1,055,625 852,935 202,690 - - - 1,055,625 852,935 202,690
4058 425 Market 34T 2,057,140 1,635,337 421,803 - - - 2,057,140 1,635,337 421,803
4105 Gunn High Scho 299,000 226,885 72,115 - - - 299,000 226,885 72,115
4120 Watsonville Sc 529,270 344,231 185,039 - - - 529,270 344,231 185,039
4149 University Vil 325,880 231,558 94,322 - - - 325,880 231,558 94,322
Completed
contracts less
than $250,000 13,944,912 11,248,746 2,696,166 363,250 160,510 202,740 13,581,662 11,088,236 2,493,426

$25,644,928 $19,923,655 $5,721,273 $ 2,854,542 $ 1,853,926 $ 1,000,616 $22,790,386 $18,069,729 $4,720,657

(See independent accountants’ review report)


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GUIDE TO CONSTRUCTION ACCOUNTING section three: supplemental information

XYZ Construction Company, Inc.


Schedule 3: Schedule of Contracts in Progress
For the Year Ended December 31, 2014

AT
DECEMbER 31, 2014
FOR ThE YEAR ENDED
TOTAL FROM INCEPTION TO DECEMbER 31, 2014 Costs and billings in DECEMbER 31, 2014
Estimated Excess of
Estimated Earned Contract Estimated Earnings in Costs and Earned
Contract Contract Estimated Estimated gross Contract Costs gross Contract Costs to Percent Excess of Estimated Contract Contract gross
Number Description Revenue Costs Profit Revenue to Date Profit billings Complete Complete billings Earnings Revenue Costs Profit
2131 One Maritime P $ 2,102,063 $ 1,377,284 $ 724,779 $ 2,060,021 $ 1,349,738 $ 710,283 $ 1,974,732 $ 27,546 98% $ 85,289 $ - $ 1,188,539 $ 727,669 $ 460,870
3177 Ascend School 1,229,253 921,940 307,313 1,009,719 757,722 251,997 1,115,490 164,218 82% - 105,771 924,895 707,254 217,641
4072 Murphy School 1,478,287 1,108,715 369,572 575,395 431,262 144,133 554,650 677,453 39% 20,745 - 575,395 431,262 144,133
4113 425 Market Spr 1,101,600 771,120 330,480 620,131 435,062 185,069 546,174 336,058 56% 73,957 - 620,131 435,062 185,069
4170 Kaiser St Prid 1,495,722 1,279,724 215,998 975,877 835,478 140,399 1,377,851 444,246 65% 401,974 975,877 835,478 140,399
4179 Kaiser Ssf - P 2,127,400 1,701,920 425,480 1,119,900 894,396 225,504 1,101,920 807,524 53% 17,980 - 1,119,900 894,396 225,504
4211 Dot 3,514,815 3,233,630 281,185 1,803,130 1,659,726 143,404 2,421,854 1,573,904 51% - 618,724 1,803,130 1,659,726 143,404
4243 3300 College D 2,418,748 2,225,248 193,500 779,380 717,460 61,920 1,069,489 1,507,788 32% - 290,109 779,380 717,460 61,920
4247 Mezzetta Court 1,295,692 906,984 388,708 870,222 609,788 260,434 759,438 297,196 67% 110,784 - 870,222 609,788 260,434
4268 Sonoma State D 4,015,000 3,533,200 481,800 3,162,429 2,781,807 380,622 3,218,475 751,393 79% - 56,046 3,162,429 2,781,807 380,622
4295 One Cal 14Th F 4,193,000 3,815,630 377,370 2,931,819 2,667,660 264,159 3,096,500 1,147,970 70% - 164,681 2,931,819 2,667,660 264,159
4310 Carmichael Lib 2,524,279 2,145,637 378,642 1,159,448 985,273 174,175 1,012,500 1,160,364 46% 146,948 - 1,159,448 985,273 174,175
Uncompleted
contracts less
than $450,000 7,601,688 5,539,533 2,062,155 2,010,146 1,414,694 595,452 1,909,117 4,124,839 179,240 78,211 1,711,561 1,126,443 585,118
$35,097,547 $28,560,565 $6,536,982 $ 19,077,617 $15,540,066 $ 3,537,551 $ 20,158,190 $ 13,020,499 $ 634,943 $1,715,516 $17,822,726 $14,579,278 $3,243,448

(See independent accountants’ review report)


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GUIDE TO CONSTRUCTION ACCOUNTING section three: supplemental information

XYZ Construction Company, Inc.


Schedule 4: Schedules of General and Administrative Expenses
and Other Income (Expense)
For the Year Ended December 31, 2014

gENERAL AND ADMINISTRATIVE EXPENSES


Salaries and benefits $ 6,175,394

Rent 422,460

Office expenses 282,751

Advertisement and promotion 59,278

Professional fees 68,767

Vehicle expenses 197,451

Depreciation and amortization 81,231

Shop expenses 35,479

Miscellaneous 40,054

Total general and administrative expenses $ 7,362,865

OThER INCOME (EXPENSE)


Interest income $ 3,700

Interest expense (36,839)

Miscellaneous income 20,517

Other expense – net $ (12,622)

(See independent accountants’ review report)


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