CONSTRUCTION ACCOUNTING

Solut ions Manual For

CONSTRUCTION ACCOUNTING

AND FINANCIAL

MANAGEMENT

Fourth Edition Steven J. Peterson All Chapters Solutions Manual Supplement files download link at the end of this file. 1 / 4

2 Copyright © 2020 Pearson Education, Inc.

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 for most other industries.•Understand that all managerial employees from the owner to the crew foreperson play 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 is

not 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 a construction 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 be found 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 data

comes 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. 2 / 4

3 Copyright © 2020 Pearson Education, Inc.Solutions to the Textbook Problems

• 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.

• Anyone who controls financial resources (cash, materials, labor, and equipment)

including: owners, general managers, project managers, estimators, superintendents, and crew forepersons.

• The way construction companies do business is very different than most companies.

The reasons for this include: 1) for many construction companies, their entire product consists 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.

• 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 is operating 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.

• Managing costs and profits include: 1) controlling project costs, 2) monitoring and

projecting profitability, 3) setting and managing labor burden markups, 4) managing overhead, 5) setting profit margins, and 6) monitor the profitability of individual customers.

• 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 cash flow projections, and 5) arranging for financing.

• Construction managers must select where to invest the company’s resources and

select the most economical construction equipment to use.

• The answer to this question will vary from student to student. 3 / 4

4 Copyright © 2020 Pearson Education, Inc.

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 the characteristics 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 accounts payable.• Explain how over and under billings are represented on the balance sheet.• Explain why equipment costs are recorded to a separate section on the income statement 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 cost coding 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 accounting system. 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 why there are differences in the accounting systems. Explain that the differences allow the 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 differences between the ways each company approached job cost coding.

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