Business finances: CSLB Law & Business Practice Questions

What is the basic accounting equation behind every balance sheet?

A balance sheet always balances: what the business owns (assets) equals what it owes (liabilities) plus the owner's stake (equity).

Which financial statement shows a company's revenue, expenses and profit over a period of time?

The income statement (profit and loss) covers a period, such as a month or a year. The balance sheet is a snapshot on a single date.

Which statement shows the company's financial position on a single date?

The balance sheet lists assets, liabilities and equity as of one date. The other reports cover a period or look forward.

Which of these is a current asset?

Current assets are cash or items expected to turn into cash within a year, such as receivables. Trucks are fixed assets; loans and payables are liabilities.

Money the contractor owes to suppliers for materials already delivered is recorded as what?

Accounts payable are short-term debts to vendors. Accounts receivable are amounts customers owe the contractor.

A contractor has current assets of $180,000 and current liabilities of $120,000. What is the current ratio?

Current ratio = current assets / current liabilities = $180,000 / $120,000 = 1.5. Many lenders and sureties like to see at least about 1.5 to 2.

Using the same figures ($180,000 current assets, $120,000 current liabilities), what is the working capital?

Working capital = current assets - current liabilities = $180,000 - $120,000 = $60,000. It is the cushion available to pay bills while waiting for payments.

A company has total assets of $500,000 and total liabilities of $350,000. What is the owner's equity?

Equity = assets - liabilities = $500,000 - $350,000 = $150,000.

A company's debt-to-equity ratio rises from 1.0 to 3.0 over two years. What does this usually signal to a bonding company?

Debt-to-equity = total liabilities / equity. A higher ratio means creditors, not owners, are financing more of the business, which raises risk.

The quick (acid-test) ratio differs from the current ratio because it leaves out what?

The quick ratio counts only cash, marketable securities and receivables against current liabilities, so it tests whether bills can be paid without selling inventory.

A job's estimated cost is $40,000. The contractor applies a 25% markup. What is the selling price?

Markup is figured on cost: $40,000 x 1.25 = $50,000. $53,333 would be the price for a 25% margin, and $10,000 is only the markup itself.

A contractor marks up all costs by 25%. What gross profit margin does that produce on the selling price?

Margin = markup / (1 + markup) = 0.25 / 1.25 = 0.20, or 20%. On $100 of cost the price is $125, and $25 of profit is 20% of $125.

Costs on a job total $60,000. The owner wants a 25% gross margin on the selling price. What price should be bid?

Price = cost / (1 - margin) = $60,000 / 0.75 = $80,000. Adding 25% to cost ($75,000) gives only a 20% margin.

A company had $900,000 in revenue and $720,000 in direct job costs. What is its gross profit?

Gross profit = revenue - direct (job) costs = $900,000 - $720,000 = $180,000. Overhead is subtracted next to get net profit.

Continuing the example ($180,000 gross profit), overhead was $130,000. What is the net profit before taxes?

Net profit before taxes = gross profit - overhead = $180,000 - $130,000 = $50,000.