General Contractor License Business and Finance Management Questions and Answers — Questions and Answers
Question 1: A contractor has current assets of $250,000 and current liabilities of $120,000. What is the company's working capital?
- $120,000
- $130,000 (Correct answer)
- $250,000
- $370,000
Correct answer: $130,000
Working capital is a measure of a company's liquidity and operational efficiency. It is calculated by subtracting current liabilities from current assets. In this case, $250,000 (Current Assets) - $120,000 (Current Liabilities) = $130,000.
Question 2: A construction company primarily undertakes large, multi-year government infrastructure projects. Which accounting method would provide the most accurate picture of the company's financial performance over the life of the projects?
- Completed Contract Method
- Cash Basis Method
- Percentage of Completion Method (Correct answer)
- Cost-Plus Method
Correct answer: Percentage of Completion Method
The Percentage of Completion Method (PCM) recognizes revenue and expenses as work progresses on a long-term project. This provides a more accurate and consistent view of financial performance over time, which is crucial for multi-year contracts. The Completed Contract Method (CCM) defers all recognition until the project is finished, which can distort financial statements. Cash basis is simpler but doesn't match revenues with the expenses incurred to generate them in the correct period.
Question 3: A client needs a small, urgent repair project completed, but the full scope of the work is unknown and difficult to define upfront. Which type of contract would be most appropriate for this situation, protecting the contractor from financial loss due to unforeseen complexities?
- Lump Sum (Fixed Price) Contract
- Guaranteed Maximum Price (GMP) Contract
- Unit Price Contract
- Time and Materials (T&M) Contract (Correct answer)
Correct answer: Time and Materials (T&M) Contract
A Time and Materials (T&M) contract is ideal for projects where the scope is not clearly defined. The contractor is reimbursed for the actual cost of materials and is paid an hourly or daily rate for labor. This structure provides flexibility and protects the contractor from losing money on a project with an uncertain scope.
Question 4: To measure a company's ability to meet its short-term obligations using only its most liquid assets, a financial manager would calculate the:
- Current Ratio
- Debt-to-Equity Ratio
- Quick Ratio (Acid-Test Ratio) (Correct answer)
- Working Capital Turnover
Correct answer: Quick Ratio (Acid-Test Ratio)
The Quick Ratio, or Acid-Test Ratio, is a liquidity ratio that measures a company's ability to pay its current liabilities without relying on the sale of inventory. The formula is (Cash + Accounts Receivable) / Current Liabilities. This is a more conservative measure than the Current Ratio because it excludes less-liquid assets like inventory.
Question 5: Which of the following AIA documents is the cover sheet that summarizes the total amount due to the contractor in a payment application, including retainage and a summary of change orders?
- AIA G701 - Change Order
- AIA G703 - Continuation Sheet
- AIA G702 - Application and Certificate for Payment (Correct answer)
- AIA G706 - Contractor's Affidavit of Payment
Correct answer: AIA G702 - Application and Certificate for Payment
The AIA G702, Application and Certificate for Payment, serves as the cover sheet for a contractor's payment application. It summarizes the contract status, value of work completed, retainage, previous payments, and the current amount due. It is used in conjunction with the AIA G703, which provides a detailed breakdown of the work.
Question 6: A construction company records revenue from a project only after all work has been fully completed and the client has accepted the project. This company is using which accounting method?
- Accrual Method
- Completed Contract Method (Correct answer)
- Percentage of Completion Method
- Installment Method
Correct answer: Completed Contract Method
The Completed Contract Method (CCM) is an accounting practice where all revenue, expenses, and resulting profit or loss from a long-term contract are recognized in the single accounting period when the contract is fully completed. This method is often used for shorter projects or when estimates are unreliable.
General Contractor License Business and Finance Management Questions and Answers
A contractor has current assets of $250,000 and current liabilities of $120,000.
What is the company's working capital?