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Current assets are expected to convert to cash within one year and include cash, accounts receivable, and inventory. A truck and a building are long-term (fixed) assets, and goodwill is an intangible asset, none of which are current.

Current liabilities are obligations due within one year, such as accounts payable, accrued wages, and short-term notes. Long-term debt like a 20-year mortgage or a 5-year loan (beyond the portion due this year) is a long-term liability, and equity is not a liability.

Net profit margin = net profit / revenue = $48,000 / $600,000 = 0.08 = 8%.

Return on the owner's investment rises when net profit grows relative to the assets and capital tied up in the business, so tighter margins on the same equipment and receivables lift the return. Pricing below cost buys revenue and destroys the return. Diverting withheld payroll taxes is theft of trust-fund money and brings personal liability, not profit. Ignoring job-cost records removes the information needed to price work at all, but it is the loss of information rather than a use of capital.

A self-employed contractor has no employer taking income and self-employment tax out of a paycheque, so IRC §6654 and Revenue and Taxation Code §19136 require estimated payments through the year and charge an underpayment penalty if they fall short. The CSLB collects licence fees, not income tax. Withholding flows from employer to employee, never the other way, so an owner's employees cannot cover his liability. And sales tax returns run on their own schedule, which has nothing to do with his income tax.

The employer pays its own half of Social Security and Medicare under IRC §3111, federal unemployment tax under IRC §3301, and California UI and Employment Training Tax under the Unemployment Insurance Code, all on top of the amounts withheld from employees. Wages are not subject to sales tax. The owner's personal income tax is his own liability and not a payroll tax on the business. And the licence bond premium is a business expense paid to a surety, not a tax on wages.

Use tax under Revenue and Taxation Code §6201 is the mirror of sales tax: when taxable material is bought without California sales tax and then used here, the buyer self-reports use tax at the rate for the place of use. Federal excise taxes fall on specific goods such as fuel and tyres, not on lumber or fixtures. Saying no tax is owed is the very gap use tax exists to close. And the franchise tax is an entity-level income tax that has nothing to do with purchases.

Break-even units = fixed costs / contribution margin per unit = $8,000 / $500 = 16 jobs per month.

A revolving line of credit covers the weeks between paying wages and invoices and collecting a progress billing, and it is repaid as receivables come in, which is exactly the timing gap construction creates. Land is a long-lived asset and belongs on long-term debt, because a revolving line has to be cleared periodically. A licence fee is a small recurring cost that operating cash covers. And borrowing does not defer tax: loan proceeds are not income and repayment is not a deduction.

Days sales outstanding is receivables divided by annual credit sales, times 365: $180,000 / $1,080,000 = 0.1667, and 0.1667 x 365 = 61 days. 17 days comes from treating the 0.1667 ratio as if the year had 100 days. 30 days is the invoice term assumed rather than measured. 90 days comes from dividing by a quarter's sales instead of the year's.

Direct costs = $8,000 + $3,500 + $6,000 + $500 = $18,000. Overhead and profit = $18,000 x 22% = $3,960. Total = $18,000 + $3,960 = $21,960.

Net profit = gross profit - overhead = $120,000 - $95,000 = $25,000. Gross profit covers overhead first; what remains is net profit.

Markup = $3,200 x 30% = $960. Change order price = $3,200 + $960 = $4,160. Change orders should carry the same markup as base work to protect margin.

A signed change order fixes the added scope, the price for it and any schedule effect before the extra work starts, which is what preserves the right to be paid for it; on a home improvement contract B&P §7159 requires the change to be in writing and signed. It modifies the contract rather than cancelling it, and the original terms continue to govern everything else. Material tax follows the purchase, not the paperwork. And added scope may well require a permit amendment rather than excusing one.

Annual depreciation = $18,000 / 6 = $3,000. After 3 years, accumulated depreciation = 3 x $3,000 = $9,000. Book value = $18,000 - $9,000 = $9,000.

Contractors apply a single markup to direct cost to recover both overhead and the target profit, commonly written O&P; forgetting the overhead half is the classic way to bid a job that earns nothing. Contribution margin is revenue less variable cost and measures what a job contributes toward fixed cost, a related but different figure. Straight-line depreciation spreads an asset's cost over its life. Retention is money the owner withholds from payments and is not a markup at all.

Retention = 5% of $75,000 = $3,750, leaving $71,250. Subtract the $1,500 back-charge: $71,250 - $1,500 = $69,750 (b). Civil Code §8811 caps private-works retention at 5% for contracts entered into on or after January 1, 2026. (a) $71,250 stops after the retention and forgets the back-charge. (c) $73,500 deducts only the back-charge and forgets the retention. (d) $66,000 is the answer under the superseded 10% retention: $75,000 - $7,500 - $1,500.

A separate business account documents income and expense cleanly for tax and job costing, and it keeps the corporation or LLC from commingling funds, which is one of the facts a court weighs before disregarding the entity's separate existence. Permits are issued on plans and code compliance and no bank account is inspected. Sales tax rates are set by statute and local measures. And the licence bond amount is fixed by B&P §7071.6 regardless of how the contractor banks.

Actual gross profit is the fixed price less the actual cost: $50,000 - $46,000 = $4,000. $10,000 is the estimated gross profit, $50,000 - $40,000, which the overrun destroyed. $6,000 is the overrun itself, the gap between estimate and actual cost, not a profit. $14,000 comes from adding the overrun to the estimated profit instead of subtracting it.

Both are overhead: they recur regardless of which jobs are underway and cannot be charged to any single project, so they must be recovered through the markup applied to jobs. (In practice a general liability premium is often rated on payroll or gross receipts and audited at year end, so the total does move with volume — but it stays overhead, because the test is whether a cost can be assigned to one job, not whether it ever changes.)

Under Regulation 1521 the subcontractor that furnishes and installs the material is its consumer, so the tax is part of the subcontractor's cost and travels into the contract price rather than being billed to the owner as a tax. The CSLB collects licence fees and pays no taxes for anyone. Charging it is not illegal, but it is not itemised as tax to the owner either; it is priced in. And nothing is refunded to the general contractor, who never paid it to the state.

Working capital is current assets less current liabilities: $90,000 - $120,000 = -$30,000, and a negative figure means the short-term bills exceed the short-term resources. $210,000 comes from adding the two instead of subtracting. $30,000 is the same answer with the sign dropped, which reverses its meaning. $0 assumes working capital cannot go below zero, and the whole point of the measure is that it can.

Overhead = 25% of $10,000 = $2,500. Profit = 15% of $10,000 = $1,500. Price = $10,000 + $2,500 + $1,500 = $14,000. (Applying both markups to direct cost is a simple method; note the resulting margin on price is $4,000 / $14,000 = 28.6%.)

Amortisation spreads the cost of an intangible asset such as purchased goodwill, a covenant not to compete or an acquired licence over its life, as IRC §197 requires over fifteen years for most acquired intangibles. Cash is not consumed over time and carries no cost to allocate. Liabilities are amounts owed, not assets with a cost basis. And land is the classic asset that is neither depreciated nor amortised, because it does not wear out.

Gross profit = revenue - COGS = $400,000 - $280,000 = $120,000. Net income = gross profit - operating expenses = $120,000 - $90,000 = $30,000.

A job several times the usual size demands payroll and material money weeks before the first progress payment lands, and retention holds part of it back longer still, so the contractor can run dry mid-project on a job that is profitable on paper. Depreciation follows the asset's schedule and is unaffected by job size. Classification follows the trade the contractor is qualified in and is never upgraded automatically. And material tax is owed on every job whatever its size.

1/15 means a 1% discount if paid within 15 days. Discount = $5,000 x 1% = $50. Payment = $5,000 - $50 = $4,950.

A falling gross margin means direct cost is taking a larger share of revenue, and only the job-cost reports say whether the cause is labour hours, material prices or subcontract cost, so that is where the diagnosis starts. Raising the markup treats the symptom before the cause is known and may simply lose bids. The franchise tax is an income tax below the gross-margin line and cannot move it. And bonding is a licensing requirement with no effect on job cost at all.

Retention held to date = 5% of the amount billed to date = 5% x $120,000 = $6,000 (d); it accrues on each progress billing until released at completion. Civil Code §8811 caps private-works retention at 5% for contracts entered into on or after January 1, 2026. (a) $9,000 applies the correct 5% to the full $180,000 contract instead of the $120,000 billed. (c) $12,000 is 10% of the billed amount, the pre-2026 private-works custom. (b) $114,000 is the amount paid out, not the amount held.

Money borrowed is money the contractor did not collect, so billing the moment work is complete and chasing the payment shortens the gap that a line of credit would otherwise fill. Larger retention withholds more of the earned money for longer and increases the need for financing. Paying suppliers ahead of billing moves cash out before it comes in. And refunding a deposit hands back cash the contractor already holds.

Sales tax = $20,000 x 9% = $1,800. Because the contractor is the consumer and owes this tax, forgetting it means $1,800 comes straight out of profit. Estimators must always include material tax.

An S corporation is a pass-through: under IRC §1366 income and loss land on the shareholders' own returns, so there is no second layer of federal corporate tax. It is not tax-free in California, which charges an S corporation a 1.5 percent franchise tax on net income under Revenue and Taxation Code §23802(b). Double taxation at entity and shareholder level is the C corporation pattern, which the S election exists to avoid. And the $800 minimum franchise tax under §23153 is owed whether or not the year was profitable.

A C corporation exists apart from its shareholders, files its own Form 1120 and pays tax on its profits, and the shareholders are taxed again on dividends; a sole proprietorship has no separate existence and reports on the owner's Form 1040. The corporation still needs the licence bond under B&P §7071.6, and a corporate licence also needs a qualifying individual. It withholds and pays payroll taxes on its employees like any employer. And a corporation can and routinely does hold a contractor licence under B&P §7065.

Direct cost is $30,000 + $25,000 + $15,000 = $70,000, the markup is 20 percent of that, $14,000, and the bid is $84,000. $70,000 is the direct cost with the markup left off. $14,000 is the markup on its own. $87,500 comes from treating the 20 percent as a margin on the selling price and dividing by 0.80 instead of multiplying by 1.20, which is the markup-versus-margin error.

Contribution margin ($9,000) minus fixed overhead ($12,000) = -$3,000. Because contribution did not cover fixed overhead, the month produced a $3,000 loss.

Current assets divided by current liabilities is the current ratio, the standard quick test of whether obligations due within a year can be met from resources available within a year. Accumulated depreciation records how much of an asset's cost has been written off and says nothing about cash. Franchise tax paid is a past expense. And revenue measures volume, not liquidity: a company can bill heavily and still be unable to pay its bills.

Paper is consumed in the period it is bought and is an ordinary deductible expense under IRC §162, so it is expensed rather than capitalised. The laptop and the printer are property with a life beyond the year and are capital items, although the de minimis safe harbour in 26 CFR §1.263(a)-1(f) or a §179 election commonly lets a small business expense items of this size anyway. Treating all three as five-year property ignores both the consumable and the safe harbour.

The built-in profit is 15 percent of $100,000, or $15,000, and $12,000 of cost that cannot be recovered leaves $3,000. $15,000 is the profit as bid, which assumes the overrun never happened. $0 assumes any overrun wipes the profit out entirely, which would need $15,000 of extra cost, not $12,000. $27,000 comes from adding the overrun to the profit instead of subtracting it.

Gross profit per hour = $85 - $52 = $33. Margin = $33 / $85 = 0.388 = 38.8%. (Markup on cost would be $33 / $52 = 63.5%.)

The discount is 2% for paying 20 days early. Annualized: (2/98) x (365/20) = 0.0204 x 18.25 = 0.372 = about 37%. Skipping early-payment discounts is expensive financing, so taking them usually pays.

Paying cash for equipment exchanges one asset for another, so cash falls and equipment rises by the same amount and total assets do not move; the cost reaches the income statement later, through depreciation. It is not profit, because nothing has been earned. It is not revenue, because nothing has been sold. And equity is untouched: equity changes when the business earns, loses, or when the owner contributes or withdraws, not when it converts one asset into another.

Gross profit is revenue less the direct job costs of labour, material, subcontract and job equipment, and it is what remains before overhead is charged; subtracting overhead from it gives net profit. Net profit therefore comes after overhead, not before it. The current ratio measures liquidity and is not a profit figure. And retention is money the owner withholds from payments, which is a cash-timing matter rather than a margin.

Home improvement law caps the down payment at 10% of the contract OR $1,000, whichever is LESS. Here 10% is $3,000, so the $1,000 cap governs. The lawful maximum down payment is $1,000.

Labor = 220 x $48 = $10,560. Direct cost = labor $10,560 + materials $9,400 + sub $6,200 = $26,160.

Under-recovery rate = 22% - 15% = 7% of direct costs. 7% x $500,000 = $35,000 of overhead not recovered through pricing, which comes straight out of profit. Accurate overhead rates are critical.

The balance sheet balances because of the identity Assets = Liabilities + Owner's Equity, and double-entry bookkeeping records every transaction so that the identity holds. Revenue equalling expenses would mean zero profit, which is a coincidence and belongs to the income statement anyway. Assets equalling net profit confuses a stock of resources with a period result. And cash equalling liabilities would be an accident of one moment, not a rule.

Advance = 90% x $50,000 = $45,000 up front. Fee = 3% x $50,000 = $1,500. Factoring speeds cash but at a cost, reducing the effective amount collected.

An income statement measures flow over an interval, so it is headed 'for the month ended', while a balance sheet reports position at an instant and is headed 'as of' a date. Either can be produced at any interval a business chooses, so nothing forces December 31 and nothing prevents a monthly balance sheet. And the last option reverses the two: the snapshot is the balance sheet, and reading it the other way round is the error this question exists to catch.

Missing or underpaying required estimated tax installments triggers IRS (and state) underpayment penalties plus interest. Using tax money for payroll creates a debt to the government that grows with penalties.

Current ratio = current assets / current liabilities. Current assets = ratio x current liabilities = 2.0 x $160,000 = $320,000.