SOLUTION MANUAL
Construction Accounting and Financial Management,
4th Edition Steven J. Peterson
Chapters 1 - 18, Complete Newest Version
Construction Accounting and Financial Management,
, CONTENTS
New to the Fourth Edition 1
Chapter 1: Construction Financial Management 2
Chapter 2: Construction Accounting Systems 4
Chapter 3: Accounting Transactions 7
Chapter 4: More Construction Accounting 23
Chapter 5: Depreciation 34
Chapter 6: Analysis of Financial Statements 50
Chapter 7: Managing Costs 58
Chapter 8: Determining Labor Burden 62
Chapter 9: Managing General Overhead Costs 65
Chapter 10: Setting Profit Margins for Bidding 67
Chapter 11: Profit Center Analysis 70
Chapter 12: Cash Flows For Construction Projects 75
Chapter 13: Projecting Income Taxes 87
Chapter 14: Cash Flows for a Construction Company 91
Chapter 15: Time Value of Money 93
Chapter 16: Financing a Company’s Financial Needs 99
Chapter 17: Making Financial Decisions 111
Chapter 18: Income Taxes and Financial Decisions 130
Construction Accounting and Financial Management,
, iii
Construction Accounting and Financial Management,
, New to the Fourth Edition
The major changes to the fourth edition include the following
The business failure rate for construction companies in Chapter 1 have
beenupdated.
Sections on cost segregation and bonus depreciation have been added to Chapter 5.
The discussion of typical median ratios in Chapter 6 has been updated.
A section on the monitoring and controlling process has been added to Chapter 7.
A section on managing design-build costs has been added to Chapter 7.
The wages, social security, and Medicare costs were updated in Chapters 8,
9,and 14.
A weekly cash flow problem has been added to Chapter 12.
The income tax regulations in Chapter 13 have been updated to
incorporateprovisions of The Tax Cuts and Jobs Act passed in December
2017.
The project cash flows used to develop an annual cash flow for a construction
company have been expanded to cover the entire project (including work done
inthe prior year) and the calculation of the underbillings/overbillings has been
included in Chapter 14.
The effects of taxes on decision has been updated in Chapter 18 to incorporate
theTax Cuts and Jobs Act.
The Instructor’s Manual includes a list of learning objectives, instructional hints,
suggested activities, and resources for each chapter. Files for the figures and tables in
the textbook are found on the instructor’s website. It is my hope that these resources
will make it easier for course instructors to teach the material in a meaningful manner.
Because the courses that use this textbook are quite diverse, it is impossible to organize
the chapters into one best order. Each instructor should consider his or her individual
program and determine which chapters need to be taught and in what order.
Best wishes,
Steven J. Peterson, MBA, PE
, Chapter 1: Construction Financial Management
Learning Objectives
At the completion of this chapter the student should be able to:
Explain why financial management is so important to a construction company.
Explain why financial management is different for construction companies than
formost other industries.
Understand that all managerial employees from the owner to the crew
forepersonplay a role in financial management of a construction company.
Instructional Hints
Compare a construction company to a manufacturing plant. Emphasize the
differences between a construction company and a manufacturing plant,
particularly: construction companies build unique products and the equipment
isnot usually stationary at single location. These are the reasons a construction
company needs a job cost system and an equipment cost system.
Activities
Invite a financial manager (for example, an accountant or general manager) from
aconstruction company to your class to discuss their role as a financial manager.
Have each student interview a management employee for a construction
company.The interviews should include owners, project managers,
superintendents, and forepersons. Each student is to find out how the employee
contributes to the financial management of the company. Discuss their findings
in class.
Instruction Resources
The figures from this chapter in electronic format and PowerPoint slides can
befound at the instructor’s website.
Data on construction failures can be obtained from the Surety Information
Office(www.sio.org).
Current data on construction company failures can be found at
http://www.census.gov/ces/dataproducts/bds/data_firm.html. The most useful
datacomes from reports that include the sector (e.g., Sector, Firm Age by Sector,
and Firm Size by Sector) because construction can be separated from other
industries.
,Solutions to the Textbook Problems
1. They are: 1) ineffective financial management systems, 2) bank line of credits
constantly borrowed to the limits, 3) poor estimating and/or job cost
reporting,
4) poor project management, and 5) no comprehensive business plan.
2. Anyone who controls financial resources (cash, materials, labor, and equipment)
including: owners, general managers, project managers, estimators,
superintendents,and crew forepersons.
3. The way construction companies do business is very different than most companies.
The reasons for this include: 1) for many construction companies, their entire
productconsists of one of a kind construction projects; 2) their projects occurs at
different locations each time; 3) they receive progress payments from which
retention is withheld; and 4) they rely heavily on subcontractors to perform the
work.
4. Accounting for financial resources include: 1) tracking project and general overhead
costs, 2) ensuring that a proper construction accounting system has been set up and
isoperating properly, 3) tracking committed costs and projecting the project costs
at completion, 4) calculating under and over billings, 5) preparing financial
statements,and 6) managing the company’s finances so that the financial ratios are
in line with the rest of the industry.
5. Managing costs and profits include: 1) controlling project costs, 2) monitoring and
projecting profitability, 3) setting and managing labor burden markups, 4)
managingoverhead, 5) setting profit margins, and 6) monitor the profitability of
individual customers.
6. Managing cash flows include: 1) matching the use of subcontractor and in-
house labor to available cash, 2) making sure that sufficient cash is available to
take on additional projects, 3) preparing income tax projections, 4) preparing
annual cashflow projections, and 5) arranging for financing.
7. Construction managers must select where to invest the company’s resources
andselect the most economical construction equipment to use.
8. The answer to this question will vary from student to student.
, Chapter 2: Construction Accounting Systems
Learning Objectives
At the completion of this chapter the student should be able to:
Explain the difference between cost reporting and cost control and identify
thecharacteristics of an accounting system that is used for cost control.
Explain how percentage of completion accounting is different from cash or accrual.
Explain the relationships that must be maintained between the balance
sheet,income statement, the job cost ledger, and the equipment ledger.
Explain why retention is tracked separately from accounts receivable and
accountspayable.
Explain how over and under billings are represented on the balance sheet.
Explain why equipment costs are recorded to a separate section on the
incomestatement and then allocated to jobs rather than being charged
directly to a job.
Explain the purpose of the job cost ledger.
Explain what factors should be taken into account when developing a job
costcoding system.
Instructional Hints
Help the students understand that even though most of them will never be
accountants for a construction company, they may become owners or general
managers of construction companies. One of the duties of an owner or general
manager is to ensure that the company has an appropriate construction
accountingsystem. To do this they must have an understanding of how the
construction accounting system operates.
Activities
Bring in sample financial statements from construction companies. Compare
and contrast the financial statements to each other and those in the book.
Discuss whythere are differences in the accounting systems. Explain that the
differences allowthe companies to adapt the accounting system to the financial
needs of the individual companies.
Bring in sample job cost codes for a residential construction company, a
commercial contractor, and a heavy/highway contractor. Discuss the
differencesbetween the ways each company approached job cost coding.
,Instruction Resources
The figures and tables from this chapter in electronic format and PowerPoint
slidescan be found at the instructor’s website.
Financial statements for publicly held companies can be found at:
http://sec.gov/edgar/searchedgar/webusers.htm. Search SIC code 1531
forhomebuilders, 1600 for heavy construction, and 1700 for specialty
trade contractors.
Construction Contractors — AICPA Audit and Accounting Guide published by the
American Institute of Certified Public Accountants.
Solutions to the Textbook Problems
1. Processes the cash receipts and disbursements; collects and reports the data
needed toprepare company financial statements; collects and reports the data
needed to prepareincome taxes, employment taxes, and other documents required
by the government; and collects and provides the data needed to manage the
finances of the company.
2. Cost reporting is where the accounting system provides management with the
accounting data after the opportunity has passed for management to respond to
andcorrect the problems indicated by the data. Cost control is where the
accounting system provides management with the accounting data in time for
management to analyze the data and make corrections in a timely manner.
3. Strong job cost and equipment tracking system, utilizes the principal of
management by exception, has established accounting procedures to ensure that
things do not fall through the cracks, and the data must be easily and quickly
available to management and other employees who are directly responsible for
controlling costs.
4. General ledger consists of all of the accounts necessary to track the financial data
needed to prepare the balance sheet, income statement, and income taxes. The
job cost ledger tracks the costs for each project as well as individual components
withineach of the projects. The equipment ledger tracks costs for individual pieces
of equipment.
5. The chart of accounts contains all the accounts that comprise the general ledger—
thebalance sheet and income statement. On the general ledger the accounts for
the balance sheet appear before the accounts for the income statement.
6. Under the cash method of accounting, revenue is recognized when the payment
fromthe owner is received and expenses are recognized when bills are paid.
Under the accrual method, revenues—except retention—are recognized when the
company bills the project’s owners; and expenses—except retention withheld—are
recognized when the company receives a bill from the supplier or subcontractors.
The percentage of completion method requires construction companies to recognize
,revenues, expenses, and estimated profits on a construction project through the
courseof the project. The estimated profits must be equally distributed over the
entire projectbased on the expected cost of the project. Revenues are recognized
when the
, company bills the project’s owners and expenses are recognized when the company
receives a bill from the supplier or subcontractors.
Under the completed contract method, revenues and expenses are recognized at
thecompletion of the project.
7. There are three relationships that must be maintained:
On the balance sheet the sum of the asset accounts must equal the sum of the
liabilityand the equity accounts.
On the income statement the profit for the period must equal the total revenue for
theperiod—including other income—less the sum of the expenses including all
construction costs, equipment costs, overhead costs, other expenses, and income
tax.
The profit on the income statement for any period must equal the change in equity
onthe balance sheet for that same period.
8. There are two relationships that must be maintained:
If revenue is recorded on the job cost ledger, the total of the revenue on the job cost
ledger must equal the revenue from the core business—exclusive of interest
receivedand other income—on the income statement for a specific period of time.
The total in each of the five subcategories—labor, material, equipment,
subcontract,and other—on the job cost ledger must equal the construction costs
on the general ledger in the associated account for any given period.
9. There are two relationships that must be maintained:
The total of the costs allocated to jobs on the equipment ledger must be equal to the
equipment contra accounts on the income statement for a specific period.
The costs on the equipment ledger must equal the total of the equipment cost on
theincome statement—exclusive of the contra accounts—for a specific period.
10. The invoice is a subcontractor’s invoice for counter tops on phase 2 of job 102.
11. There is no set answer for this problem.
12. There is no set answer for this problem.
Construction Accounting and Financial Management,
4th Edition Steven J. Peterson
Chapters 1 - 18, Complete Newest Version
Construction Accounting and Financial Management,
, CONTENTS
New to the Fourth Edition 1
Chapter 1: Construction Financial Management 2
Chapter 2: Construction Accounting Systems 4
Chapter 3: Accounting Transactions 7
Chapter 4: More Construction Accounting 23
Chapter 5: Depreciation 34
Chapter 6: Analysis of Financial Statements 50
Chapter 7: Managing Costs 58
Chapter 8: Determining Labor Burden 62
Chapter 9: Managing General Overhead Costs 65
Chapter 10: Setting Profit Margins for Bidding 67
Chapter 11: Profit Center Analysis 70
Chapter 12: Cash Flows For Construction Projects 75
Chapter 13: Projecting Income Taxes 87
Chapter 14: Cash Flows for a Construction Company 91
Chapter 15: Time Value of Money 93
Chapter 16: Financing a Company’s Financial Needs 99
Chapter 17: Making Financial Decisions 111
Chapter 18: Income Taxes and Financial Decisions 130
Construction Accounting and Financial Management,
, iii
Construction Accounting and Financial Management,
, New to the Fourth Edition
The major changes to the fourth edition include the following
The business failure rate for construction companies in Chapter 1 have
beenupdated.
Sections on cost segregation and bonus depreciation have been added to Chapter 5.
The discussion of typical median ratios in Chapter 6 has been updated.
A section on the monitoring and controlling process has been added to Chapter 7.
A section on managing design-build costs has been added to Chapter 7.
The wages, social security, and Medicare costs were updated in Chapters 8,
9,and 14.
A weekly cash flow problem has been added to Chapter 12.
The income tax regulations in Chapter 13 have been updated to
incorporateprovisions of The Tax Cuts and Jobs Act passed in December
2017.
The project cash flows used to develop an annual cash flow for a construction
company have been expanded to cover the entire project (including work done
inthe prior year) and the calculation of the underbillings/overbillings has been
included in Chapter 14.
The effects of taxes on decision has been updated in Chapter 18 to incorporate
theTax Cuts and Jobs Act.
The Instructor’s Manual includes a list of learning objectives, instructional hints,
suggested activities, and resources for each chapter. Files for the figures and tables in
the textbook are found on the instructor’s website. It is my hope that these resources
will make it easier for course instructors to teach the material in a meaningful manner.
Because the courses that use this textbook are quite diverse, it is impossible to organize
the chapters into one best order. Each instructor should consider his or her individual
program and determine which chapters need to be taught and in what order.
Best wishes,
Steven J. Peterson, MBA, PE
, Chapter 1: Construction Financial Management
Learning Objectives
At the completion of this chapter the student should be able to:
Explain why financial management is so important to a construction company.
Explain why financial management is different for construction companies than
formost other industries.
Understand that all managerial employees from the owner to the crew
forepersonplay a role in financial management of a construction company.
Instructional Hints
Compare a construction company to a manufacturing plant. Emphasize the
differences between a construction company and a manufacturing plant,
particularly: construction companies build unique products and the equipment
isnot usually stationary at single location. These are the reasons a construction
company needs a job cost system and an equipment cost system.
Activities
Invite a financial manager (for example, an accountant or general manager) from
aconstruction company to your class to discuss their role as a financial manager.
Have each student interview a management employee for a construction
company.The interviews should include owners, project managers,
superintendents, and forepersons. Each student is to find out how the employee
contributes to the financial management of the company. Discuss their findings
in class.
Instruction Resources
The figures from this chapter in electronic format and PowerPoint slides can
befound at the instructor’s website.
Data on construction failures can be obtained from the Surety Information
Office(www.sio.org).
Current data on construction company failures can be found at
http://www.census.gov/ces/dataproducts/bds/data_firm.html. The most useful
datacomes from reports that include the sector (e.g., Sector, Firm Age by Sector,
and Firm Size by Sector) because construction can be separated from other
industries.
,Solutions to the Textbook Problems
1. They are: 1) ineffective financial management systems, 2) bank line of credits
constantly borrowed to the limits, 3) poor estimating and/or job cost
reporting,
4) poor project management, and 5) no comprehensive business plan.
2. Anyone who controls financial resources (cash, materials, labor, and equipment)
including: owners, general managers, project managers, estimators,
superintendents,and crew forepersons.
3. The way construction companies do business is very different than most companies.
The reasons for this include: 1) for many construction companies, their entire
productconsists of one of a kind construction projects; 2) their projects occurs at
different locations each time; 3) they receive progress payments from which
retention is withheld; and 4) they rely heavily on subcontractors to perform the
work.
4. Accounting for financial resources include: 1) tracking project and general overhead
costs, 2) ensuring that a proper construction accounting system has been set up and
isoperating properly, 3) tracking committed costs and projecting the project costs
at completion, 4) calculating under and over billings, 5) preparing financial
statements,and 6) managing the company’s finances so that the financial ratios are
in line with the rest of the industry.
5. Managing costs and profits include: 1) controlling project costs, 2) monitoring and
projecting profitability, 3) setting and managing labor burden markups, 4)
managingoverhead, 5) setting profit margins, and 6) monitor the profitability of
individual customers.
6. Managing cash flows include: 1) matching the use of subcontractor and in-
house labor to available cash, 2) making sure that sufficient cash is available to
take on additional projects, 3) preparing income tax projections, 4) preparing
annual cashflow projections, and 5) arranging for financing.
7. Construction managers must select where to invest the company’s resources
andselect the most economical construction equipment to use.
8. The answer to this question will vary from student to student.
, Chapter 2: Construction Accounting Systems
Learning Objectives
At the completion of this chapter the student should be able to:
Explain the difference between cost reporting and cost control and identify
thecharacteristics of an accounting system that is used for cost control.
Explain how percentage of completion accounting is different from cash or accrual.
Explain the relationships that must be maintained between the balance
sheet,income statement, the job cost ledger, and the equipment ledger.
Explain why retention is tracked separately from accounts receivable and
accountspayable.
Explain how over and under billings are represented on the balance sheet.
Explain why equipment costs are recorded to a separate section on the
incomestatement and then allocated to jobs rather than being charged
directly to a job.
Explain the purpose of the job cost ledger.
Explain what factors should be taken into account when developing a job
costcoding system.
Instructional Hints
Help the students understand that even though most of them will never be
accountants for a construction company, they may become owners or general
managers of construction companies. One of the duties of an owner or general
manager is to ensure that the company has an appropriate construction
accountingsystem. To do this they must have an understanding of how the
construction accounting system operates.
Activities
Bring in sample financial statements from construction companies. Compare
and contrast the financial statements to each other and those in the book.
Discuss whythere are differences in the accounting systems. Explain that the
differences allowthe companies to adapt the accounting system to the financial
needs of the individual companies.
Bring in sample job cost codes for a residential construction company, a
commercial contractor, and a heavy/highway contractor. Discuss the
differencesbetween the ways each company approached job cost coding.
,Instruction Resources
The figures and tables from this chapter in electronic format and PowerPoint
slidescan be found at the instructor’s website.
Financial statements for publicly held companies can be found at:
http://sec.gov/edgar/searchedgar/webusers.htm. Search SIC code 1531
forhomebuilders, 1600 for heavy construction, and 1700 for specialty
trade contractors.
Construction Contractors — AICPA Audit and Accounting Guide published by the
American Institute of Certified Public Accountants.
Solutions to the Textbook Problems
1. Processes the cash receipts and disbursements; collects and reports the data
needed toprepare company financial statements; collects and reports the data
needed to prepareincome taxes, employment taxes, and other documents required
by the government; and collects and provides the data needed to manage the
finances of the company.
2. Cost reporting is where the accounting system provides management with the
accounting data after the opportunity has passed for management to respond to
andcorrect the problems indicated by the data. Cost control is where the
accounting system provides management with the accounting data in time for
management to analyze the data and make corrections in a timely manner.
3. Strong job cost and equipment tracking system, utilizes the principal of
management by exception, has established accounting procedures to ensure that
things do not fall through the cracks, and the data must be easily and quickly
available to management and other employees who are directly responsible for
controlling costs.
4. General ledger consists of all of the accounts necessary to track the financial data
needed to prepare the balance sheet, income statement, and income taxes. The
job cost ledger tracks the costs for each project as well as individual components
withineach of the projects. The equipment ledger tracks costs for individual pieces
of equipment.
5. The chart of accounts contains all the accounts that comprise the general ledger—
thebalance sheet and income statement. On the general ledger the accounts for
the balance sheet appear before the accounts for the income statement.
6. Under the cash method of accounting, revenue is recognized when the payment
fromthe owner is received and expenses are recognized when bills are paid.
Under the accrual method, revenues—except retention—are recognized when the
company bills the project’s owners; and expenses—except retention withheld—are
recognized when the company receives a bill from the supplier or subcontractors.
The percentage of completion method requires construction companies to recognize
,revenues, expenses, and estimated profits on a construction project through the
courseof the project. The estimated profits must be equally distributed over the
entire projectbased on the expected cost of the project. Revenues are recognized
when the
, company bills the project’s owners and expenses are recognized when the company
receives a bill from the supplier or subcontractors.
Under the completed contract method, revenues and expenses are recognized at
thecompletion of the project.
7. There are three relationships that must be maintained:
On the balance sheet the sum of the asset accounts must equal the sum of the
liabilityand the equity accounts.
On the income statement the profit for the period must equal the total revenue for
theperiod—including other income—less the sum of the expenses including all
construction costs, equipment costs, overhead costs, other expenses, and income
tax.
The profit on the income statement for any period must equal the change in equity
onthe balance sheet for that same period.
8. There are two relationships that must be maintained:
If revenue is recorded on the job cost ledger, the total of the revenue on the job cost
ledger must equal the revenue from the core business—exclusive of interest
receivedand other income—on the income statement for a specific period of time.
The total in each of the five subcategories—labor, material, equipment,
subcontract,and other—on the job cost ledger must equal the construction costs
on the general ledger in the associated account for any given period.
9. There are two relationships that must be maintained:
The total of the costs allocated to jobs on the equipment ledger must be equal to the
equipment contra accounts on the income statement for a specific period.
The costs on the equipment ledger must equal the total of the equipment cost on
theincome statement—exclusive of the contra accounts—for a specific period.
10. The invoice is a subcontractor’s invoice for counter tops on phase 2 of job 102.
11. There is no set answer for this problem.
12. There is no set answer for this problem.
