Q: If the billings in excess of cost and profits are considerable large in relation to cost and profits in excess of billings, is that a concern?
A: No. It's usually a good thing. Such a situation may reflect very prudent cash management on the part of the contractor. The prospect for sufficient cash flow to finance on-going projects is enhanced if billings in excess of cost and profits exceed cost and profits in excess of billings.
In general, it is greatly to the contractor's advantage if billings in excess of cost and profits exceed cost and profits in excess billings. If there are billings outstanding, the contractor stands to receive cash in the near term. But cost and profits in excess of billings implies the contractor is paying some portion of project costs without cash support of the client and without billing the client for those costs.
Note, too, that there may be limits in the contracts that apply to billings in excess of cost and profits. The situation can vary by project.
Q: Can you explain again on poll question #4?
A: Poll question 4 is as follows:
“Information in NOTE 3 and in the Contract Status Report indicates that the amount of 2013 gross profit explained by contracts that closed during 2013 is:
- $67,883.
- $98,608.
- $258,390.”
The correct answer is $67,883. The Contract Status Report states that gross profit recognized for 2013 for the combination of projects that closed during the year and projects that remain uncompleted was $258,390. NOTE 3 states that earned revenue on uncompleted contracts in 2013 was $190,507. Therefore, the amount of gross profit on contracts the closed during 2013 was $67,883 or $258,390 – $190,507.
Course overview: Understanding and Analyzing Contractor Financial Statements: Part I of II