Mississippi Contractor License 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✓
• 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 lenders require a separate bank account for each job
• b.To shift overhead costs off the company's tax return
• c.To satisfy the surety's bookkeeping requirements
• d.To compare each job's actual costs against its estimate✓

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 invoice is mailed to the owner
• d.The work is performed✓

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.Percentage of completion✓
• 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 been completed✓
• 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 show whether the contractor can pay near-term bills✓
• b.They set the contractor's workers' compensation rate
• c.They determine which building codes apply to each project
• d.They decide which OSHA standards apply to the company's work

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✓
• c.The company's office building and land
• d.A long-term equipment 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.

A contractor reports cash of $60,000, accounts receivable of $180,000, inventory of $90,000, and current liabilities of $120,000. What is the acid-test (quick) ratio?

• a.2.25 to 1
• b.2.75 to 1
• c.2.0 to 1✓
• d.0.5 to 1

The quick, or acid-test, ratio counts only the assets that can be turned into cash quickly, so inventory is excluded: ($60,000 + $180,000) / $120,000 = 2.0. Including the $90,000 of inventory gives 2.75, which is the current ratio, not the quick ratio. Dropping cash instead of inventory gives 2.25, and using cash alone gives 0.5. Sureties like this ratio because it tests whether near-term bills can be paid without having to sell material first.

Which statement correctly distinguishes a balance sheet from an income statement?

• a.The balance sheet lists the revenue and expenses earned during a period, while the income statement lists what the company owns and owes
• b.The balance sheet reports assets, liabilities, and equity at one point in time, while the income statement covers a span of time✓
• c.Both reports cover the same twelve-month period and differ only in how much detail each one shows
• d.The balance sheet is prepared only when the company is sold, while the income statement is prepared every month

A balance sheet is a snapshot: it shows what the company owns, what it owes, and the owners' remaining stake as of one specific date. An income statement (profit and loss statement) is a movie: it reports revenue earned and expenses incurred across a period such as a month, quarter, or year. Reversing the two is a common mix-up, and both statements are prepared regularly, not just at a sale.

A contracting company has total liabilities of $450,000 and owner's equity of $300,000. What is its debt-to-equity ratio?

• a.0.67 to 1
• b.2.5 to 1
• c.0.6 to 1
• d.1.5 to 1✓

Debt-to-equity = total liabilities / owner's equity = $450,000 / $300,000 = 1.5. It says creditors have supplied $1.50 for every $1.00 the owners have in the business. Flipping the fraction gives 0.67, using total assets of $750,000 in the numerator gives 2.5, and dividing liabilities by total assets gives 0.6 (that is the debt-to-assets ratio). Lenders and sureties read a rising debt-to-equity ratio as thinner owner commitment and higher risk.

On a contractor's balance sheet, accumulated depreciation appears as:

• a.A contra-asset deducted from equipment cost to show net book value✓
• b.A current liability owed to the lender that financed the equipment purchase
• c.An equity account that grows as the owners leave profits in the business
• d.A cash reserve set aside in a separate account to replace the equipment

Accumulated depreciation is a contra-asset account: it carries a credit balance and is deducted from the original cost of the fixed assets to show net book value. It is not money owed to anyone, so it is not a liability, and it is not part of the owners' stake. It also is not a fund of cash — no money is set aside, which is why a company can be fully depreciated on paper and still have to borrow to replace a machine.

A contractor's revenue for the year is $800,000 and direct job costs are $600,000. What is the gross profit percentage?

• a.33.3%
• b.25.0%✓
• c.75.0%
• d.133.3%

Gross profit is revenue minus direct job costs: $800,000 - $600,000 = $200,000. Gross profit percentage measures that against revenue: $200,000 / $800,000 = 25%. Dividing the $200,000 by cost instead of revenue gives 33.3%, which is the markup, not the margin. The 75% figure is the cost ratio, and 133% comes from dividing revenue by cost. Confusing markup with margin is one of the most expensive arithmetic errors a contractor can make.

A contractor's revenue is $1,200,000, direct job costs are $900,000, and general overhead is $250,000. What is the net profit percentage?

• a.25%
• b.5.6%
• c.4.2%✓
• d.20.8%

Net profit = $1,200,000 - $900,000 - $250,000 = $50,000, and $50,000 / $1,200,000 = 4.2%. Stopping at gross profit gives 25%, which ignores the overhead the company must still cover. Dividing net profit by direct costs gives 5.6%, and dividing overhead by revenue gives 20.8%. The gap between a 25% gross margin and a 4.2% net margin shows how little room there is once overhead is paid.

A contractor's income statement shows a $90,000 profit for the year, yet the company cannot cover this week's payroll. What is the MOST likely explanation?

• a.Profit is earned as work is performed, while the cash sits in unpaid receivables✓
• b.An income statement showing a profit proves the bank balance must be just as large
• c.Profit and cash are always the same number, so the bookkeeper posted an entry wrong
• d.Payroll is not an expense, so it never enters the profit calculation

Profit and cash are different measures. Accrual-based profit is recognized when the work is performed, while the cash arrives only when the owner pays — often 30 to 60 days later, and retainage later still. A contractor can therefore be profitable on paper and insolvent at the bank, which is why more contractors fail from cash starvation than from unprofitable work. Payroll is very much an expense; it is simply paid long before the matching revenue is collected.

A contractor budgets $180,000 of annual overhead and averages a 30% gross margin on the work sold. What annual revenue is needed just to break even?

• a.$257,143
• b.$54,000
• c.$234,000
• d.$600,000✓

Break-even revenue = fixed overhead / gross margin percentage = $180,000 / 0.30 = $600,000. At that volume the 30% margin generates exactly $180,000 of gross profit, which pays overhead and leaves zero profit. Multiplying overhead by the margin gives $54,000, adding 30% to overhead gives $234,000, and dividing by the 70% cost percentage gives $257,143. Building the annual overhead budget first is what makes this calculation possible.

A work-in-progress schedule shows 'costs and estimated earnings in excess of billings' on a job. What does that condition indicate?

• a.The company has billed the owner for more work than it has actually performed so far
• b.The company has performed more work than it has billed and is financing the job itself✓
• c.The company has finished the job and the owner has released all of the retainage held
• d.The company recorded the job's entire contract value as revenue when the deal was signed

Costs and estimated earnings in excess of billings is underbilling: the value earned to date exceeds what has been invoiced, so the contractor's own cash is funding the owner's project. It appears as an asset, but it is a warning sign of slow billing, unbilled change-order work, or a cost overrun that has not yet been recognized. The opposite condition, billings in excess of costs, is overbilling and is carried as a liability.

What is the primary purpose of a work-in-progress (WIP) schedule?

• a.To list every tool and piece of equipment currently checked out to each field crew
• b.To record the hours every employee worked during the current pay period
• c.To compare contract value, cost to date, cost to complete, and billings per job✓
• d.To show the depreciation taken this year on each vehicle and machine the company owns

A WIP schedule lines up every open contract and shows, job by job, the contract value, costs incurred to date, estimated cost to complete, percent complete, revenue earned, and amounts billed. From those columns it computes each job's underbilling or overbilling and its projected profit. Bonding companies and lenders read the WIP before the income statement because it reveals fade in job margins long before the year-end results do.

A contractor carries $150,000 in accounts receivable on annual revenue of $1,825,000. What is the average collection period (days sales outstanding)?

• a.30 days✓
• b.2.5 days
• c.12 days
• d.90 days

Daily sales = $1,825,000 / 365 = $5,000, so days sales outstanding = $150,000 / $5,000 = 30 days. Dividing revenue by receivables gives 12, which is the receivables turnover in times per year, not days. Treating the annual figure as one month of sales gives about 2.5 days. Rising days sales outstanding means cash is arriving more slowly, which squeezes payroll even when the jobs themselves are profitable.

A contractor buys a truck for $48,000, expects a salvage value of $8,000, and will use it for five years. What is the annual straight-line depreciation expense?

• a.$9,600
• b.$40,000
• c.$1,600
• d.$8,000✓

Straight-line depreciation = (cost - salvage value) / useful life = ($48,000 - $8,000) / 5 = $8,000 per year. Forgetting to subtract salvage gives $9,600, the $40,000 figure is the whole depreciable base rather than one year of it, and $1,600 comes from depreciating only the salvage amount. The same $8,000 is charged in each of the five years, which is what makes the method 'straight line.'

Why is depreciation described as a non-cash expense?

• a.The cash left when the asset was bought, so the annual charge moves no new money✓
• b.The tax authorities refund the depreciation amount to the company in cash each year
• c.The charge is only an estimate, so it is left out of the income statement entirely
• d.The equipment lender pays the depreciation charge directly on the company's behalf

Cash leaves the business once, when the equipment is purchased. Depreciation then spreads that already-spent cost across the years the asset is used, so the expense reduces reported profit without any further cash going out the door. That is why a cash-flow statement adds depreciation back to net income. Nobody refunds or pays the charge, and it does appear on the income statement.

A contractor buys a $40,000 excavator and also pays $900 to repair an existing skid steer. How are these two costs normally treated?

• a.Both are operating expenses deducted in the month they are paid
• b.The excavator is a capital expenditure and the repair is an operating expense✓
• c.Both are capital expenditures recorded as assets and depreciated over several years
• d.The excavator is an operating expense and the repair is capitalized as a new asset

A capital expenditure buys or substantially improves an asset that will serve the business for years, so it goes on the balance sheet and is depreciated over its useful life. An ordinary repair simply keeps an existing asset running, so it is an operating expense charged in full in the current period. Treating the excavator as an expense would understate assets and distort a single month's profit; treating a routine repair as an asset would overstate both.

A contractor borrows $60,000 on a note at 8% simple annual interest and repays it after six months. How much interest is owed?

• a.$4,800
• b.$400
• c.$62,400
• d.$2,400✓

Simple interest = principal x rate x time = $60,000 x 0.08 x 0.5 = $2,400. Using a full year gives $4,800, using one month gives $400, and $62,400 is the total payoff of principal plus interest rather than the interest alone. The time factor must be expressed in years, so six months is 0.5 and ninety days would be 0.25.

A contractor needs money to cover payroll and materials during the gap before owners pay, and the amount needed rises and falls all year. Which financing tool fits best?

• a.A term loan repaid in fixed monthly installments over the next five years
• b.A revolving line of credit drawn down and repaid as the cash need rises and falls✓
• c.An equipment loan secured by one machine and amortized over that machine's life
• d.A lease on a specific piece of equipment with a purchase option at the end

A line of credit is revolving: the contractor draws only what is needed, pays interest only on the outstanding balance, and repays as receivables come in, which matches a working-capital need that changes week to week. A term loan delivers a lump sum on a fixed repayment schedule and suits a one-time purchase. Equipment loans and leases are tied to specific machines and finance assets, not payroll.

How is retainage withheld by owners reflected in a contractor's financial statements, and what is its practical effect?

• a.As a receivable the contractor has earned but cannot yet collect✓
• b.As an expense of the job that permanently reduces that contract's gross profit
• c.As a liability owed to the owner until the punch list has been fully completed
• d.As overhead spread evenly over every job the company has open

Retainage the owner holds is money the contractor has already earned, so it is carried as a retainage receivable — an asset — until it is released. It is not an expense and it does not reduce the contract's profit; it only delays the cash. Because retainage is withheld from every progress payment across every job, it can amount to a large sum financed by the contractor, which is why it belongs in any cash-flow forecast.

A company with average owner's equity of $600,000 and total assets of $1,200,000 earned net income of $90,000. What is its return on equity?

• a.7.5%
• b.6.7%
• c.15%✓
• d.150%

Return on equity = net income / owner's equity = $90,000 / $600,000 = 15%. Dividing by total assets instead gives 7.5%, which is return on assets, and inverting the fraction or slipping a decimal produces the other figures. Return on equity tells the owners what their invested stake earned during the year, and a surety compares it with what the same money could earn elsewhere at less risk.

A contractor reports revenue of $1,200,000, cost of goods sold of $900,000, and average inventory of $75,000. What is the inventory turnover?

• a.16 times a year
• b.0.08 times a year
• c.1.6 times a year
• d.12 times a year✓

Inventory turnover = cost of goods sold / average inventory = $900,000 / $75,000 = 12 times a year. Using revenue instead of cost of goods sold gives 16, inverting the fraction gives 0.08, and a decimal slip gives 1.6. A higher turnover means material is moving to jobs instead of sitting in the yard tying up cash; a falling turnover often signals overbuying or obsolete stock.

A crew is paid every Friday, material invoices come due in 30 days, and the owner pays about 60 days after each billing. What does this cycle require?

• a.Enough working capital to carry payroll and materials for weeks before cash returns✓
• b.A guarantee that the job will show a large profit when it is finally completed
• c.Nothing unusual, since the payroll checks clear only after the owner's money arrives
• d.A bigger markup on the bid, which by itself brings the receivable in sooner

The contractor pays cash out on Friday but does not get it back for roughly two months, so every active job consumes working capital until the receivable is collected. The company must fund that gap out of cash reserves or a line of credit, and the faster it grows the more cash it swallows. A healthy markup improves profit but does not make the owner pay any sooner, and payroll cannot be deferred until the money arrives.

Under the completed-contract method of accounting, revenue and expenses on a job are recognized:

• a.Evenly each month from the notice to proceed through the final punch list
• b.In proportion to the costs incurred on the job in each accounting period
• c.When the job is finished and accepted, rather than as the work progresses✓
• d.At the moment the contract is signed, because the full price is known then

The completed-contract method defers all revenue, cost, and profit on a job until the contract is substantially complete, then recognizes them at once. It is simple and matches cash-basis instincts, but it makes results lurch from period to period and tells a lender little about work in progress. Recognizing results in proportion to costs incurred describes the percentage-of-completion method, which most sureties prefer for long-duration contracts.

A job cost report shows the job about 50% complete but labor costs already at 80% of the labor estimate. What should the contractor do FIRST?

• a.Bill the owner for the extra labor as a change order without any further review
• b.Wait until the job closes out to see whether the numbers correct themselves
• c.Shift the overrun to another job's cost code so that the report looks balanced
• d.Find the cause now and re-forecast the remaining cost to complete the job✓

A cost variance is a signal, and its value is entirely in acting on it early. The contractor should find out whether the overrun came from a productivity problem, an inaccurate estimate, unrecorded extra work, or miscoded time, then update the estimated cost to complete so the WIP schedule and the profit forecast tell the truth. Moving costs between jobs corrupts the whole cost system, and extra work is billable only if it is genuinely a change in scope that the owner approves.

In construction cost control, a 'committed cost' is best described as:

• a.An amount obligated by a signed subcontract or purchase order but not yet invoiced✓
• b.The share of the contract price the owner agrees to release at project closeout
• c.Any cost the contractor has actually paid out in cash during the current month
• d.The profit the company has promised to distribute to its owners at year end

Committed costs are dollars the company is already legally on the hook for through executed subcontracts and purchase orders, even though no invoice has arrived and no cash has moved. Comparing committed plus actual costs against the budget shows the real remaining exposure on a job, while looking only at invoices paid to date makes a job appear far healthier than it is. The gap between committed and actual is simply work ordered but not yet billed.

How should a signed change order that increases the contract price be handled on the work-in-progress schedule?

• a.Left out until the owner actually pays for the added work
• b.Added to both the contract value and the estimated cost of the job✓
• c.Recorded as extra profit only, with no change to the job's estimated total cost
• d.Treated exactly like a pending change order that the owner has not yet approved

An approved change order changes the deal, so both the revised contract value and the revised estimated cost belong in the WIP schedule; percent complete, revenue earned, and the over/underbilling position all shift as a result. Leaving approved changes out understates revenue earned and makes a job look overbilled when it is not. Pending change orders are treated more conservatively precisely because the owner has not yet agreed to pay for them.

A contractor lists current assets of $420,000, fixed assets of $310,000, current liabilities of $265,000, and long-term debt of $180,000. What is working capital?

• a.$285,000
• b.$155,000✓
• c.$240,000
• d.$45,000

Working capital = current assets - current liabilities = $420,000 - $265,000 = $155,000. Only the current items belong in the calculation. Subtracting the long-term debt instead gives $240,000, using fixed assets gives $45,000, and $285,000 is total assets minus total liabilities, which is owner's equity rather than working capital. Sureties often size a contractor's bonding capacity as a multiple of working capital.

Retained earnings on a contracting company's balance sheet represent:

• a.The cash currently sitting in the company's main operating bank account
• b.The total revenue the company has billed since it opened for business
• c.Profits kept in the business rather than paid out to the owners✓
• d.The amount the owners originally paid in to capitalize the company

Retained earnings is the running total of every year's net income less any distributions or dividends taken by the owners. It sits in the equity section and measures how much profit has been reinvested in the business over its life. It is not a pile of cash — those retained profits were typically spent on equipment, materials, and receivables — and it is separate from the owners' original paid-in capital.

The statement of cash flows reports:

• a.The value of every asset and debt the company holds on the closing date
• b.Revenue earned and expenses incurred in the period whether or not cash moved
• c.The estimated cost to complete each open job in the company's current backlog
• d.Cash received and paid out, grouped as operating, investing, and financing✓

The cash-flow statement traces the actual movement of money during a period and sorts it into three buckets: operating activities such as collections and payroll, investing activities such as buying equipment, and financing activities such as loan draws and owner distributions. It reconciles the profit on the income statement to the change in the bank balance. The point-in-time listing of assets and debts is the balance sheet, and accrual revenue and expense belong to the income statement.

A job has a contract price of $1,250,000 and an estimated total cost of $1,000,000. Costs to date are $400,000 and the contractor has billed $560,000. What is the overbilling?

• a.$160,000
• b.$60,000✓
• c.$250,000
• d.$100,000

Percent complete by cost is $400,000 / $1,000,000 = 40%, so revenue earned to date is 40% of $1,250,000 = $500,000. Billings of $560,000 exceed the $500,000 earned by $60,000, which is billings in excess of costs and estimated earnings. Subtracting costs from billings gives $160,000, which ignores the profit earned so far; $100,000 is the gross profit earned to date and $250,000 is the total estimated profit on the job.

A supplier invoice for $8,000 carries terms of 2/10, net 30. What does the contractor save by paying it on day 9?

• a.$80
• b.$240
• c.$160✓
• d.$800

The terms mean a 2 percent discount if the invoice is paid within 10 days, with the full amount due in 30, so $8,000 x 0.02 = $160. $80 is 1 percent, $240 is 3 percent and $800 is 10 percent, none of which the terms offer. Skipping this discount to hold cash 20 days longer is expensive: 2 percent for 20 days annualizes to well over 30 percent.

Which of these is a FIXED cost for a contracting business?

• a.Job-site concrete
• b.Hourly wages paid to the field crews
• c.Fuel burned by the equipment fleet
• d.The office lease payment✓

A fixed cost does not move with the volume of work performed, and the office lease is owed whether the company builds one house this month or ten. Materials, field wages and fuel all rise and fall with production and are variable costs. The distinction matters because fixed costs must be recovered out of a minimum volume of work, which is exactly what a break-even calculation finds.