AFSB 152 Chapter 6 Review Questions and Answers 2023, Exams of Advanced Education

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AFSB 152 Chapter 6 Review Questions

and Answers 2023

List the information that contract status reports reveal to an underwriter about a contractor's financial performance. - Correct Answer-- financial performance and status of uncompleted contracts as of the date of the status report

• financial performance of contracts completed during the accounting period covered by the status report
• gross profit adequacy and stability
• gross profits recognized from the inception of the contracts and in respective accounting periods
• backlog remaining in contracts included in the status report
• approximate duration of uncompleted contracts and the backlog Describe backlog. - Correct Answer-Backlog, or work-at-hand, is the balance of work to be performed on uncompleted contracts. Describe the criteria contract status reports are expected to meet. - Correct Answer-- reliability
• readability
• consistent cost classifications
• disclosure Identify the basic information a short-form status report typically provides to the underwriter. - Correct Answer-- contract price
• billings
• costs
• gross profit on completion
• scheduled completion date Identify additional data that long-form status reports should provide to supplement the information that appears in the short form. - Correct Answer-Long-form status reports should provide calculations based on data from the short form. For example, the long form might provide profits recognized from the inception of the contract(s) and by accounting period. Describe excess of billings over costs. - Correct Answer-Excess of billings over costs is included in the balance sheet as a current liability in a financial statement prepared according to the completed contract method. Describe excess of costs over billings. - Correct Answer-Excess of costs over billings is included in the balance sheet as a current asset in a financial statement prepared according to the completed contract method.

Contrast excess of billings over costs with excess of costs over billings. - Correct Answer-Excess of billings over costs occurs when billings exceed costs, whereas excess of costs over billings occurs when costs exceed billings. Identify the source of the data that appears under direct costs incurred to date. - Correct Answer-The contractor's job cost records are the source of direct costs incurred to date. Describe the information an underwriter can derive from the scheduled completion date in the status report. - Correct Answer-The underwriter uses the scheduled completion date in the contract status report to estimate the rate of completion of the work and the rate at which gross profits may be earned. The completion dates also provide insight into the contractor's future cash flow. Describe three financial changes that are generally reflected when an underwriter or producer analyzes a series of contract status reports. - Correct Answer-- contract price (because of change orders or modifications made during the course of the work)

• estimates of costs to complete the contract
• gross profit estimates (because of changes in the contract price and cost estimates) Compare how imbalances accounted for as underbillings and as overbillings are considered in a contractor's balance sheet. - Correct Answer-Underbillings are considered current assets in a contractor's balance sheet, while overbillings are considered current liabilities. Compare the information provided on a short-form status report and a long-form status report. - Correct Answer-A short-form status report shows specific, limited data; a long- form status report shows a complete financial profile. Describe the methods used to calculate backlog. - Correct Answer-Billing basis - backlog equals the contract price less the total amount billed to date, including retainage Cost basis - backlog equals the current estimated total direct cost less the direct costs incurred to date Revenue basis - backlog equals the billing basis backlog plus overbilling less underbilling Explain how backlog profit is determined. - Correct Answer-Backlog profit is determined by subtracting gross profit recognized to date from the estimated gross profit on completion. Describe billings in excess of costs and recognized earnings, also referred to as overbillings. - Correct Answer-Billings in excess of costs and recognized earnings, or overbillings, are the amount of imbalance in the billing-cost-profit relationship that results in an overbilling.

Describe costs and recognized earnings in excess of billings, also referred to as underbillings. - Correct Answer-Costs and recognized earnings in excess of billings, or underbillings, are the amount of an imbalance in the billing-cost-profit relationship that results in an underbilling. Explain why the analyst would make retrospective adjustments to a contract status report. - Correct Answer-- The analyst has received information indicating a material change in the financial performance of one or more contracts

• The analyst decides to refine the analysis, factoring in the most current information available on the financial performance of the contract(s) Describe the purpose of abbreviated backlog reports. - Correct Answer-Abbreviated backlog reports are customary and are usually sufficient to give the producer and the underwriter the approximate amount of backlog. These reports are used to check job progress and to determine whether backlog amounts are within backlog guidelines in the contract. Explain why the surety may send status inquiries to the contractor, the contract owner, the architect, or the supervising engineer. - Correct Answer-- determining the status of projects at times other than when contract status reports or other backlog reports were furnished
• soliciting comments regarding performance of the work
• determining interim changes in the contract price to adjust bond premiums when substantial overruns or underruns are reported during the life of the contract
• timing final premium adjustments to correspond closely with completion of the work