Which of the following best describes the accrual method of accounting required for most construction companies?
Correct Answer
D) Revenue and expenses are recorded when earned or incurred
The accrual method records revenue when earned and expenses when incurred, regardless of when cash changes hands. This provides a more accurate picture of financial performance during the accounting period.
Why This Is the Correct Answer
The accrual method of accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is actually received or paid. This method provides a more accurate picture of a company's financial performance during a specific accounting period because it matches revenues with the expenses incurred to generate those revenues. For construction companies, this means recording revenue as work is completed (earned) and expenses as they are incurred, even if payment hasn't been received or made yet.
Why the Other Options Are Wrong
Option A: Expenses are recorded when cash is paid
This also describes the cash method of accounting. Under accrual accounting, expenses are recorded when incurred (when the obligation is created), not when cash is actually paid out.
Option C: Revenue is recorded when cash is received
This describes the completed contract method, which is a specific revenue recognition method sometimes used in construction. However, it's not the defining characteristic of accrual accounting and is less commonly used due to tax law changes.
Memory Technique
Use the acronym 'ACCRUAL = Actually Capturing Real Understanding And Liability' - it captures the real economic activity (earned/incurred) rather than just cash movement.
Reference Hint
Look up accounting methods and revenue recognition in the business and finance section of your contractor reference manual, typically found in chapters covering financial management or bookkeeping requirements.
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?
People Also Study
Related Study Resources
Previous Question
Your construction company employs 25 people and wants to implement a drug testing policy. According to Florida law, what must you do before implementing random drug testing?
Next Question
Which of the following must be included in an employee handbook to comply with Florida employment law?