presented by ono & chen cpa’s, llc -...
TRANSCRIPT
Presented by Ono & Chen CPA’s, LLC
December 3, 2014
Full service CPA firm specializing in assisting clients that work with the WIP Schedule.
Over 95% of our clients are in construction and/or are government contractors.
We believe in educating our clients and working with them to help them get to the next level.
I. How to Save Money on your CPAII. Bonding from an Accounting
PerspectiveIII. Percentage of Completion Method of
AccountingIV. What is the WIP Schedule?V. Detailed WIP Example
Let’s Begin!
1. Make sure to enter your adjusting journal entries (AJEs) promptly!
2. Don’t make any changes to prior years’ transactions!
3. Make sure to reconcile all bank and credit card accounts monthly!
4. Keep account coding simple!
5. Don’t commingle accounts with your personal accounts!
6. Job costing 101 – All job costs should be coded to a job!
7. Keep your CPA informed at all times on large company purchases, changes to key personnel and jobs!
1. Have a good accounting system (yes, even QB is ok) and a CPA that understands construction!
2. Be profitable but limit those distributions!
3. Cash is KING!
4. Have positive working capital!
5. Have a rainy day fund!
What is it?
1. Investopedia definition: An accounting method in which the revenues and expenses of long-term contracts are recognized yearly as a percentage of the work completed during that year.
2. It is a revenue recognition method recognized by Generally Accepted Accounting Principles (GAAP).
What is a long-term contract?
IRC Section 460(f)(1): In general, the term "long-term 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.
Why is it important?
1. It is the most accurate way to measure revenues on uncompleted contracts.
2. More importantly, it is probably required by the bank, surety company, and even the SBA!
The most important schedule in financial statements using the percentage-of-completion method is the work-in-
progress schedule!
It is a supplementary schedule within the financial statements of a construction contractor (using the percentage-of-completion method) that shows a financial snapshot of a contractor’s uncompleted contracts at a specified time period.
The WIP schedule may be required by your surety/banks on a monthly, quarterly, semi-annual, or annual basis.
COST DRIVES REVENUES!!
Estimated gross profit on completed contract
Gross profit percentage
Percentage complete
Revenues earned to date
Gross profit to date
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?
Formula: Current contract price minus total estimated contract cost.
$600,000 <-> $400,000
Answer: $200,000
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?
Formula: Estimated gross profit divided by current contract price
$200,000 / $600,000
Answer: 33 1/3%
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?
Formula: Cost incurred to date divided by total estimated contract cost
$40,000 / $400,000
Answer: 10%
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?
Formula: Percent complete times current contract price
$600,000 x 10%
Answer: $60,000
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?
Formula: Revenues earned to date minus cost incurred to date
$60,000 <->$40,000
Answer: $20,000
Ono & Chen Builders secures a job with Hawaii DOT on 10/1/13 with the following values:
◦ Contract signed for $500,000
◦ Project manager expects job will cost $250,000
◦ As of 12/31/13, $50,000 of materials have been purchased for the job
Estimated Gross Profit
Gross Profit Percentage
Percent Complete as of 12/31/13
Revenues Earned to Date as of 12/31/13
Gross Profit to Date as of 12/31/13
Estimated Gross Profit = $250,000
Gross Profit Percentage = 50%
Percent Complete as of 12/31/13 = 20%
Revenues Earned to Date as of 12/31/13 = $100,000
Gross Profit to Date as of 12/31/13 = $50,000
Sometimes referred to as overbillings and underbillings, it is the difference between revenues earned to date and amount billed to date to the customer.
These accounts are balance sheet accounts and are an offset against revenues.◦ Cost in Excess of Billings is an asset◦ Billings in Excess of Cost is a liability
Ono & Chen Builders has earned $100,000 of revenues as of 12/31/13 on a contract with Hawaii DOT and has billed Hawaii DOT $50,000 as of 12/31/13.
Ono & Chen Builders has underbilled Hawaii DOT and must record the following journal entry on 12/31/13:◦ DEBIT: Cost in Excess of Billings $50,000◦ CREDIT: Revenues $50,000
Ono & Chen Builders has earned $100,000 of revenues as of 12/31/13 on a contract with Hawaii DOT but has billed Hawaii DOT $130,000 as of 12/31/13.
Ono & Chen has overbilled Hawaii DOT and must record the following journal entry:◦ DEBIT: Revenues $30,000◦ CREDIT: Billings in Excess of Cost $30,000
Note: The journal entries for ‘Cost in Excess of Billings’ and ‘Billings in Excess
of Costs’ are very important. These entries directly offset revenues.
Putting it all together
Original Contract Price 1,250,000.00
Cost of Good SoldDirect Materials 150,000.00 Direct Labor & Burden 390,000.00 Direct Equipment 66,000.00 Direct Subcontractors 120,000.00 General Excise Tax 56,250.00
Total COGS 782,250.00
Estimated Cost to Complete -Estimated Total Cost 782,250.00
Total Billed 1,250,000.00
Total Paid 1,250,000.00
Original Contract Price 1,500,000.00
Cost of Good SoldDirect Materials 240,000.00 Direct Labor & Burden 546,000.00 Direct Equipment 18,000.00 Direct Subcontractors 12,000.00 General Excise Tax -
Total COGS 816,000.00
Estimated Cost to Complete -Estimated Total Cost 816,000.00
Total Billed 1,500,000.00
Total Paid 1,000,000.00
Original Contract Price 500,000.00
Cost of Good SoldDirect Materials 30,000.00 Direct Labor & Burden 22,100.00 Direct Equipment -Direct Subcontractors -General Excise Tax 3,375.00
Total COGS 55,475.00
Estimated Cost to Complete 294,525.00 Estimated Total Cost 350,000.00
Total Billed 75,000.00
Total Paid 75,000.00
Original Contract Price 1,375,000.00 Amended Contract Price 1,425,000.00
Cost of Good SoldDirect Materials 300,000.00 Direct Labor & Burden 780,000.00 Direct Equipment 12,000.00 Direct Subcontractors 36,000.00 General Excise Tax 63,000.00
Total COGS 1,191,000.00
Estimated Cost to Complete 50,000.00 Estimated Total Cost 1,241,000.00
Total Billed 1,400,000.00
Total Paid 1,000,000.00
Ono & Chen CPAswww.onoandchen.com