The BASICS of Construction Accounting. Copyright. Course Presenters. Participant Guide: Session 3

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1 Session 3 The BASICS of Construction Accounting An Introduction to Construction Accounting & Financial Management Principles Presented by Mary Davolt, CPA, CCIFP & Jill Stone, CCIFP Copyright This presentation and all associated materials (including but not limited to workbooks, handouts, CD ROMs, etc.) are copyrighted by CFMA and may not be altered, adapted, reproduced, or redistributed in any manner without express written permission from CFMA s Vice President of Content Management and Education and/or Chief Operations Officer. Unauthorized use of any CFMA copyrighted materials is expressly forbidden by law. Questions regarding usage and content should be directed to: CFMA, 100 Village Blvd., Suite 200, Princeton, NJ Phone: E Mail: education@cfma.org Web: 2 Course Presenters Mary Davolt, CPA, CCIFP CFO, Englewood Construction Inc. Mary.Davolt@englewoodconstruction.com Jill Stone, CCIFP Controller, Executive Construction, Inc. jstone@ecibuild.com CFMA. All rights reserved. 1

2 Session 3 Agenda: I. Section 6 - Computing Earned Revenue II. III. Section 7 - Cost Reporting Analysis Section 8 - Elements of Financial Statements 4 Last week in Review Earned Revenue Billings = Costs in Excess of Billings (Asset) or Billings in Excess of Cost (Liability) Accounting For Change Orders Critical Components to WIP 5 Accounting for Change Orders Change Order APPROVED Include Change Order in Revenue and Costs UNAPPROVED Probable that Change Order costs will result in change in contract? NO Costs result in reducing gross profit YES Change Order greater than costs? NO Contract revenue recognized at the lesser of cost or anticipated revenue YES Revenue in excess of cost recorded only if assured beyond a reasonable doubt CFMA. All rights reserved. 2

3 7 Polling Question #1: What components are required to calculate CIEB/BIEC? a) Contract Amount, Cost to Date, Overhead Costs b) Contract Amount, Percent Complete, Gross Profit c) Contract Amount, Cost to Date, Total Estimated Cost, Billings d) Billings, Profit, Overhead Costs 8 The Basics Section Six: Computing Earned Revenue CFMA. All rights reserved. 3

4 Earned Revenue Topics What is Earned Revenue? Practice calculation A Look at the WIP (CIP) schedule CIEB/BIEC How are loss jobs treated? Impact when gross margin changes at near 100% 10 What is Earned Revenue? That portion of the total contract amount that a company is able to record during a particular accounting period. 11 Calculating Earned Revenue CFMA Basic Construction Co., Inc. was awarded a $20,000,000 contract job for which they estimated costs to be $18,000,000 They are projecting gross profit of $2,000,000. At the end of Year 1, they have costs to date of $4,500,000 and did not expect any changes in the estimated costs. In year 2 they received a change order for $100,000 for additional work for the owner. This would have a cost of $80,000. Additionally a subcontractor went bankrupt on the job and liens had to be paid off. This was going to increase the costs of the job by 1,020, CFMA. All rights reserved. 4

5 Workbook Reference-6 Exercise & Discussion Percentage-of-Completion Cost-to-Cost Method Exercise Year 1 Exercise Year 2 Cumulative effect of change in gross profit? Calculating Percentage Complete Exercises 13 Polling Question #2: What would you rather have on your Balance Sheet? a) Cost in Excess of Billings - everyone knows it is better to have assets than liabilities b) Billings in excess of cost c) I have no idea 14 CIEB/BIEC Topics Additional Practice calculations CIEB/BIEC Analysis Which would you prefer on your balance sheet? How does net CIEB/BIEC affect cash or line of credit? CFMA. All rights reserved. 5

6 Exercise & Discussion Costs in Excess - Asset Compute CIEB & record entry Discuss examples of what creates a costs in excess position. Review example construction WIP What s greatest danger of a CIEB position? 16 Cost In Excess Scenario Prepare the entry CFMA Basic Construction Co., Inc. began work on the office building just awarded. Contract Value $20,000,000 Estimated Costs $18,000,000 Estimated Gross Profit $2,000,000 Gross Profit % 10% Cost to Date $4,500,000 Estimated costs to complete $13,500,000 $18,000,000 Billings to Date $4,500,000 The lump sum contract incurred some costs by year-end, but the original total estimated cost was not changed from the original estimate Calculate the following from the above data: Revenue Earned $5,000,000 Billings to date $4,500,000 Prepare the journal entry Amount & Dr or (Cr) Asset Liabilty 17 Income account Cost & Est. Earnings in Excess of Billings (analysis) Reflects drain on cash flow Over-recognized earnings Suggests poor billing disciplines Increases financial risk CFMA. All rights reserved. 6

7 Exercise and Discussion Billings in Excess - Liability Compute BIEC / Record Entry Discuss examples of what creates a billings in excess position. Review Example Construction WIP to reinforce discussion. What s biggest danger of a BIEC position? 19 Billings In Excess Scenario Prepare the entry CFMA Basic Construction Co., Inc. received a change order for $100,000 for additional work for the owner with added cost of $80,000. A subcontractor went bankrupt on the job and increased the costs of the job by $1,020,000 Contract Value $20,100,000 Estimated Costs $19,100,000 Estimated Gross Profit $1,000,000 Gross Profit % 5% Cost to Date $17,190,000 Estimated costs to complete $1,910,000 $19,100,000 Billings to Date $20,000,000 Calculate the following from the above data: Revenue Earned $18,090,000 Billings to date $20,000,000 Prepare the journal entry Asset Liabilty Amount & Dr or (Cr) 20 Workbook Reference-7 The WIP Schedule CFMA. All rights reserved. 7

8 Billings in Excess of Costs and Est. Earnings (analysis) Key source of financing Management sandbagging! Suggest smart billing disciplines Unrecognized vendor liability-subs Decreases risk?? (on job level) 22 CIEB/BIEC Question Which position would your Financial Advisors most likely want to see on your statements, CIEB or BIEC? 23 How are Loss Jobs Treated? When to recognize What to recognize What to look for CFMA. All rights reserved. 8

9 The Basics Section Seven: Cost Reporting Analysis 25 Cost Reporting Topics How does WIP tie to cost reports? Why is cost at completion critical? Is same cost coding structure used in all types of construction? Sample cost reports 26 The Basics Section Eight: Elements of Financial Statements CFMA. All rights reserved. 9

10 Accounting Conceptual Framework Key Objective Qualitative Attributes Elements of Statements Assumptions Principles Constraints 28 Polling Question #3: How often does your company (or client s companies) generally prepare financial statements? Monthly Quarterly Twice a year Annually 29 Do your financial statements include a Work in Process/Construction in Process schedule and completed contract schedule Neither Completed Contracts only Construction in Process Only Both Polling Question #4: CFMA. All rights reserved. 10

11 Accounting Conceptual Framework KEY OBJECTIVE Provide useful info to decision makers QUALITATIVE CHARACTERISTICS Relevance Reliability Verifiability Comparability Consistency ASSUMPTIONS Economic Entity Going Concern Monetary Unit Periodicity PRINCIPLES Historical Cost Rev. Rec. Matching Full Disclosure ELEMENTS Assets, Liabilities, Equity Revenues/Expenses Gains/Losses Owner Invest./Distribs. Comprehensive Income CONSTRAINTS Cost-Benefit Materiality Industry Practice Conservatism 31 Basic Financial Statements Balance Sheet Statement of Income Statement of Retained Earnings Statement of Cash Flows Work-in-Process Schedule? 32 Supplementary Information Not required by GAAP Meets needs of various users Content and form vary by company Should include WIP Schedule CFMA. All rights reserved. 11

12 Workbook References - 8,9 FASB Accounting Standards Codification Financial Statements 34 End of Session 3 Wrap Up / Q&A Mary Davolt, CPA, CCIFP CFO, Englewood Construction Inc. Phone: Mary.Davolt@englewoodconstruction.com Jill Stone, CCIFP Controller, Executive Construction, Inc. Phone: jstone@ecibuild.com 35 Review Question #1 What is the formula for determining the percentage of completion? a) Amount of costs incurred to date/billings to date b) Amount of billings to date/estimated costs c) Costs incurred to date/estimated total costs at completion d) Amounts paid to date/billings to date CFMA. All rights reserved. 12

13 Review Question #2 Your job cost analysis shows costs in excess of billing, what questions should you be asking? a) Are there change order costs in the job for work that hasn t been approved? b) Is it time to do another billing? Did we miss a billing? c) Is there potential losses/cost over runs? d) All of the above 37 Review Question #3 Supplemental Schedules for Contractors Typically Include? a) Accounts Receivable Aging, showing Retention separately stated b) Accounts Payable Schedule showing Retention separately c) A & B d) Schedule of Notes Payable e) Schedule of Construction in Progress 38 Don t forget to join us for Session 4 of The BASICS of Construction Accounting Thursday, May 29, :00 5:00 PM EST To receive your CPE Certificate for this session, please complete the PROLibraries evaluation survey. Just log into your account and click on My Webinars to take the survey and print your certificate. FOR MORE INFORMATION: Ariel Sanchirico : asanchirico@cfma.org : CFMA : 100 Village Blvd., Suite 200 : Princeton, NJ CFMA. All rights reserved. 13