completed contract method and percentage-of-completion method

CFA Level I FRA
#1

I read about a paragraph regarding the comparison between completed contract method and percentage-of-completion method about which I don’t quite understand. It says " if construction-in-progress exceeds billings, a company with a continuing flow of profitable long-term contracts using the percentage-of-completion method will have higher total assets, lower total liabilities, and higher equity compared to using the completed contract method."

My questions is:

First, what does “construction-in-progress exceeds billing” mean?

Second, why under such circumstance, the percentage-of-completion method will have higher total assets, lower total liabilities, and higher equity compared to using the completed contract method?

#2

Construction-in-progress is the amount of money you’ve spent to date on construction.

Billing is what you’ve asked the client to reimburse.

If construction-in-progress exceeds billing, you’re out of pocket for the difference.

Using the percentage-of-completion method:

  • You have accounts receivable for your unpaid billing
  • You have profits corresponding to the percentage of completion

Under the completed contract method:

  • You have no profits until completion
  • You have no accounts for unpaid billing
  • Cash received from the customer in excess of expenses is considered unearned revenue: a liability

Thus, under percentage-of-completion, you have higher assets (A/R), higher equity (profits), and lower liabilities (no unearned revenue).

#3

you just made everything so clear right now! many thanks

#4

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#5

My pleasure.

#6

My e-mail’s on my website.

Note that I do charge for one-on-one tutoring.

#7

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#8

You can ask them here for free.

#9

Do you mean I can get it for free? How?

#10

The same way you got the answer to the question at the start of this thread: post your questions here.