Minnesota Residential Contractor Exam — All Questions

A contracting company has current assets of $240,000 and current liabilities of $120,000. What is its current ratio?

• a.0.5 to 1
• b.1.2 to 1
• c.2.0 to 1✓
• d.12 to 1

Current ratio = current assets / current liabilities = $240,000 / $120,000 = 2.0. A ratio of 2.0 means the company has $2 of short-term assets for every $1 of short-term debt, which generally indicates healthy short-term liquidity. Sureties and lenders watch this ratio closely; a ratio below 1.0 signals the company may struggle to pay near-term obligations.

Working capital is calculated as:

• a.Current assets minus current liabilities✓
• b.Total revenue minus total expenses for the year
• c.The value of all equipment the company owns
• d.The owner's original cash investment

Working capital = current assets - current liabilities. It measures the short-term funds available to run daily operations, buy materials, meet payroll, and absorb delays before receivables come in. Positive working capital is essential in construction because contractors often pay costs long before the owner pays them. It is different from annual net profit and from equipment value.

On a project, the owner withholds 10% from each progress payment until the work is satisfactorily completed. This withheld amount is called:

• a.A liquidated damage
• b.Retainage (retention)✓
• c.A change order
• d.Overhead

Retainage (retention) is a portion of each progress payment the owner holds back — commonly 5% to 10% — and releases after the contractor satisfactorily completes the work and addresses punch-list items. It gives the owner leverage to ensure completion, but it also strains the contractor's cash flow, so contractors must plan for it and pass appropriate retainage terms down to subcontractors.

Why do contractors use job costing (tracking costs to each specific project)?

• a.Because the law forbids one combined company bank account
• b.To avoid ever having to file a tax return
• c.Only to make the paperwork look more professional
• d.To compare actual costs against the estimate for each job and see which jobs are profitable✓

Job costing assigns labor, materials, equipment, and subcontractor costs to each individual project. This lets the contractor compare actual costs to the original estimate in real time, catch overruns early, price future work more accurately, and identify which types of jobs actually make money. Without job costing, a company can be busy and still lose money without knowing which project caused the loss.

The basic accounting equation is:

• a.Assets = Liabilities + Owner's Equity✓
• b.Assets = Revenue - Expenses
• c.Profit = Assets + Liabilities
• d.Owner's Equity = Revenue x Expenses

The fundamental accounting equation, which underlies every balance sheet, is Assets = Liabilities + Owner's Equity. In other words, everything the company owns is financed either by what it owes to others (liabilities) or by the owners' stake (equity). Rearranged, Owner's Equity = Assets - Liabilities. The balance sheet must always 'balance' according to this equation.

Under the accrual method of accounting, revenue is recorded when:

• a.The cash is deposited in the bank
• b.The owner signs the original contract
• c.The building permit is issued
• d.It is earned by performing the work, regardless of when payment is received✓

The accrual method records revenue when it is earned and expenses when they are incurred, regardless of when cash actually moves. This gives a truer picture of a construction company's financial performance than the cash method, which records income and expenses only when money changes hands. Because contractors often perform work long before being paid, accrual (and percentage-of-completion) accounting better reflects real profitability.

A long construction project recognizes revenue gradually as the job progresses rather than all at the end. This accounting approach is called:

• a.Cash-basis accounting
• b.The percentage-of-completion method✓
• c.First-in, first-out (FIFO)
• d.Double-entry bookkeeping

The percentage-of-completion method recognizes revenue and profit in proportion to the work completed over the life of a long-term project — for example, if a job is 40% complete, roughly 40% of the expected revenue is recognized. This matches income to the effort expended each period and avoids distorting results by booking all revenue only when the job finishes, giving a more accurate ongoing picture of performance.

'Overbilling' on a construction project means the contractor has:

• a.Charged the owner more than the total contract price
• b.Paid subcontractors more than they were owed
• c.Billed for more work than has actually been completed to date✓
• d.Forgotten to send an invoice for completed work

Overbilling (billings in excess of costs) occurs when the amount invoiced to the owner is greater than the value of work actually completed so far. It can help cash flow, but it also means the contractor is holding money for work not yet performed, which can mask problems and create a liability. The opposite, underbilling, ties up the contractor's own cash and can signal poor billing discipline.

Why do sureties and lenders pay close attention to a contractor's working capital and current ratio?

• a.They indicate whether the contractor can pay near-term bills and complete work without running out of cash✓
• b.They determine the color scheme the contractor may use in advertising
• c.They set the maximum height of buildings the contractor may construct
• d.They decide which OSHA standards apply to the company

Working capital (current assets minus current liabilities) and the current ratio (current assets divided by current liabilities) measure short-term liquidity — the contractor's ability to pay bills, meet payroll, and buy materials while waiting to be paid. Sureties issuing bonds and banks extending credit rely on these figures to judge whether the contractor can finance and finish jobs, so weak liquidity can limit bonding capacity.

On a balance sheet, which of the following is a current asset?

• a.A company-owned excavator expected to last ten years
• b.Accounts receivable expected to be collected within a few months✓
• c.The company's office building
• d.A long-term bank loan the company owes

Current assets are resources expected to be converted to cash or used up within one year, such as cash, accounts receivable, and materials inventory. Accounts receivable — money owed by customers and due shortly — is a classic current asset. Long-lived equipment and buildings are fixed (long-term) assets, and a long-term loan is a liability, not an asset.