Presented by Ono & Chen CPA s. November 8, 2017

Transcription

1 Presented by Ono & Chen CPA s November 8, 2017

2 Full service CPA firm specializing in the construction industry and assisting clients with the WIP Schedule. Over 95% of our clients are small to medium-sized construction contractors. We believe in educating our clients to help them get to the next level.

3 I. Taxes and Bonding II. Cash vs. Accrual Basis III. Percentage-of-Completion and the WIP IV. Types of Financial Statements V. Bonding Considerations

4

5 What is the cash basis of accounting? What is the accrual basis of accounting?

6 So why does it matter?

7 Common accounts that you won t see on a cash basis financial statement Accounts Receivable Prepaid Expenses Accounts Payable Accrued Expenses Bad Debt

8 Ono & Chen Builders signs a $1 million contract with Hawaii DOT on 11/1/17 Job costs are estimated to total $750,000 Invoice for and receive $400,000 from Hawaii DOT up front on 12/15/17 Job starts on 2/1/18 Job costs ended up totaling $800,000 and job is completed on 6/30/18 Invoice for and receive remaining $600,000 on 7/31/18 (no retention held)

9 2016 Revenues $400,000 Job Costs 0 Gross Profit $400, Revenues $600,000 Job Costs 800,000 Gross Loss -$200,000

10

11 It is a supplementary schedule within the financial statements of a construction contractor using the percentage-ofcompletion method. It shows a financial snapshot of each of the contractor s uncompleted contracts at a specified time period.

12 What is it? Investopedia definition: An accounting method in which the revenues and expenses of long-term contracts are recognized as a percentage of the work completed during that period. It is a revenue recognition method recognized by Generally Accepted Accounting Principles (GAAP). It is generally the most accurate way to measure revenues on uncompleted contracts.

13 What is a long-term contract? IRC Section 460(f)(1): In general, the term "longterm contract" means any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the taxable year in which such contract is entered into.

14 COSTS DRIVES REVENUES!!

15 Estimated gross profit on contract Gross profit percentage Percentage complete Revenues earned to date Gross profit to date

16 Formula: Current contract price minus total estimated contract cost. Example: If you sign a contract for $600,000 and you estimate that your total costs will be $400,000, what is your estimated gross profit?

17 Formula: Current contract price minus total estimated contract cost. $600,000 <-> $400,000 Answer: $200,000

18 Formula: Estimated gross profit divided by current contract price Example: Using previous example (contract price of $600,000, total estimated costs of $400,000, estimated gross profit of $200,000), what is your gross profit percentage?

19 Formula: Estimated gross profit divided by current contract price $200,000 / $600,000 Answer: 33 1/3%

20 Formula: Cost incurred to date divided by total estimated contract cost Example: Using previous example (contract price of $600,000, total estimated costs of $400,000, estimated gross profit of $200,000), if your cost incurred to date is $40,000 on this job, what is your percent complete on this job?

21 Formula: Cost incurred to date divided by total estimated contract cost $40,000 / $400,000 Answer: 10%

22 Formula: Percent complete times current contract price Example: Using previous example (contract price of $600,000, cost incurred to date of $40,000, percent complete of 10%), how much of your revenues have you earned to date?

23 Formula: Percent complete times current contract price $600,000 x 10% Answer: $60,000

24 Formula: Revenues earned to date minus cost incurred to date Example: Using previous example (percent complete of 10%, revenues earned to date of $60,000, cost incurred to date of $40,000), what is your gross profit to date?

25 Formula: Revenues earned to date minus cost incurred to date $60,000 <->$40,000 Answer: $20,000

26

27 Customer Job No. Current Contract Price Total Estimated Cost Estimated Gross Profit (Loss) GP % Costs Incurred to Date % Compl Revenue Earned to Date Gross Profit to Date WIP CPA , , , % 40, % 60,000 20,000

28 $1 million contract signed with Hawaii DOT on 11/1/17 Job costs are estimated to total $750,000 Invoice for and receive $400,000 up front on 12/15/17 Job starts on 2/1/18 Job costs ended up totaling $800,000 and job is completed on 6/30/18. Invoice for and receive remaining $600,000 on 7/31/18 (no retention held).

29 Estimated Gross Profit Gross Profit Percentage Percent Complete Revenues Earned to Date Gross Profit to Date

30 Compiled Financial Statements Reviewed Financial Statements Audited Financial Statements Don t confuse these with the Contractor Financial Statement

31 At a minimum, have the following in place: Have a dedicated Accountant / Bookkeeper with adequate training. Use a CPA who understands both your business AND the construction industry. Understand the requirements of your banks and the bonding company (surety).

32 Make sure to do the following: Timely and accurate financial reporting to banks and surety. Run calculations/projections before bidding on projects. Have signed contracts and change orders Eliminate cash jobs!

33 Ono & Chen CPAs