General Contractor License Business and Finance Management 2 — Questions and Answers
Question 1: A contractor's overhead rate is calculated by dividing total overhead costs by which figure?
- Gross revenue
- Direct labor costs (Correct answer)
- Net profit
- Total material costs
Correct answer: Direct labor costs
Overhead rate is calculated by dividing total overhead costs by direct labor costs to allocate indirect expenses to projects.
Question 2: Which financial statement shows a contractor's assets, liabilities, and equity at a specific point in time?
- Income statement
- Cash flow statement
- Balance sheet (Correct answer)
- Work-in-progress schedule
Correct answer: Balance sheet
The balance sheet is a snapshot of financial position at a given date, showing what the company owns versus what it owes.
Question 3: A subcontractor fails to complete work and causes a project delay. Under a typical subcontract agreement, the general contractor may:
- Withhold all future payments permanently
- Back-charge the subcontractor for resulting costs (Correct answer)
- Terminate all subcontracts on the project
- File a mechanics lien against the subcontractor
Correct answer: Back-charge the subcontractor for resulting costs
Back-charges allow the GC to deduct costs incurred due to a subcontractor's default from amounts owed to that subcontractor.
Question 4: What does the term 'accounts receivable turnover' measure in a contracting business?
- How quickly the company pays its suppliers
- How efficiently the company collects money owed to it (Correct answer)
- The ratio of revenue to total assets
- The average cost per project completed
Correct answer: How efficiently the company collects money owed to it
Accounts receivable turnover measures how many times receivables are collected over a period, indicating billing and collection efficiency.
Question 5: A contractor purchases a $120,000 piece of equipment with a 5-year useful life and $0 salvage value. Using straight-line depreciation, the annual depreciation expense is:
- $12,000
- $24,000 (Correct answer)
- $30,000
- $60,000
Correct answer: $24,000
Straight-line depreciation divides cost by useful life: $120,000 ÷ 5 = $24,000 per year.
Question 6: Which type of bond guarantees that a contractor will pay subcontractors and material suppliers on a project?
- Bid bond
- Performance bond
- Payment bond (Correct answer)
- License bond
Correct answer: Payment bond
A payment bond protects subcontractors and suppliers by guaranteeing they will be paid even if the general contractor defaults.
Question 7: When preparing a job cost report, 'cost to complete' refers to:
- Total costs spent on the project to date
- Estimated remaining costs needed to finish the project (Correct answer)
- The original contract price minus profit
- Overhead costs allocated to the job
Correct answer: Estimated remaining costs needed to finish the project
Cost to complete is the projected amount still needed to finish the project, used to forecast final job profitability.
General Contractor License Business and Finance Management 2
A contractor's overhead rate is calculated by dividing total overhead costs by which figure?