Masonry Magazine August 1984 Page. 21
ing principles used, information about receivables, property, plant and equipment, long term debt, leases, contingencies and other matters, which can be done only by the use of footnotes.
A contracting company should submit for bonding or banking purposes a statement with supplementary schedules, or separately as additional information, a schedule of contracts in progress.
In any given set of financial statements, the only portion that is the accountant's is his report letter; the statements, schedules and footnotes are all yours. Accountants generally draft the statements and footnotes because their clients frequently do not have anyone on their staff who has been trained to do that.
Contractor's Statements are Different
There are substantial differences between financial statements issued by a construction company and those issued by a manufacturer or mercantile establishment. Contracting tends to be a complex business. As a result, even smaller contractors tend to have complex financial statements, at least if they are properly prepared.
First, contractors have two acceptable methods of recognizing revenue: the percentage-of-completion method and the completed contract method. If the company can provide reliable estimates, the percentage method should be used because it presents a stronger balance sheet and tends to avoid drastic swings in your income statement.
Second, a significant portion of the balance sheet for a contractor reporting on the percentage-of-completion method is "costs and estimated earnings in excess of bill-
NC. CONTRACT SCHEDULE
une 30, 1983
ings on uncompleted contracts (underbilling)" or if on a completed contract basis, "costs in excess of billings on uncompleted contracts (underbilling)." Determining and understanding the amount recorded as underbilling on a financial statement is extremely important to the users of those statements, primarily bonding companies and lenders.
The same is true for overbilling, which shows up on the liability side of the balance sheet under the title "billings in excess of costs and estimated earnings on uncompleted contracts" for the contractor on the percentage-of-completion method and "billings in excess of costs on uncompleted contracts" for those on the completed contract method.
Third, contractors can report income for financial purposes on the percentage method that shows their company in the best light, yet you can report for income tax purposes on the completed contract, cash or modified accrual basis. The use of one of these methods results in lower income tax payments on a current basis. If you show earnings on a current basis, you must show on your financial statements income taxes that will be paid in the future or deferred taxes.
Other differences include the frequent occurrence of joint ventures, claims and retainages of both receivables and payables.
Contract Schedule
One of the prime sources of information about a contractor's financial condition is the contract schedule. Example V presents one form. What is important is that all
xcess of
Recorded To Date
Recorded in Prior Years
Recorded in Current Perind
Costs and
Gross
Estimated
Contract
Contract
Profit
Earnings
Revenues
Costs
(Loss)
Contract
Revenues
Contract
Costs
Cross
Profit
Contract
Revenues
Contract
Costs
Gross
Profit
(Loss)
5 520,914 5 467,859
$
53,055 $448,602 $ 414,222 $ 34,380 $ 72,312 5 53.637 5 18.675
1,158,825 1,063,630
95,195
659,917
620,492 31,425
498,908 435,138 63,770
6,500,935 5,415,641 1.085.294 2.130,153 1.605,214 324,939 4,370,782 3,610,427 760,355
78,259
721,741 623,568
98,153
49,226
625,774 610,214
15,560
721,741
623,588 98,153
625,774 610,214 15.560
230,000 269,508
(39,508)
131,404
124,885
6.519
98,596
144,623 (46,027)
6127,485 59,758,189 58,450,440 $1,307,749 53,370,076 $52,972,813 5397,263 56,188,112 35,477,627 5910.486
9
10
11
12
13
14
15 16
17
18
MASONRY-JULY/AUGUST, 1984 21