Lykes Excelleration Surety 3-9-2011

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How to enhance your Company’s bonding relationship

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Lykes Excelleration Surety 3-9-2011

  1. 1. Unsure about Surety? Excelleration 2011 Lykes Insurance Learning Series March 9, 2011 ©2011 LarsonAllen LLP P1
  2. 2. Today’s Presenters • Peter A Thomson, CPA, AFSB 813.470.5031, pthomson@lykesinsurance.com Vice President – Surety Lykes Insurance, Tampa L k I T www.lykesinsurance.com Bachelors, Southern Illinois University, Accounting and Finance g Associate in Fidelity and Surety Bonds nAllen LLP ©2011 Larson 30 years working in construction surety bonding2
  3. 3. Today’s Presenters • John Reed, CPA, CCIFP 239.226.9903, jreed@larsonallen.com Principal, Construction and Real Estate LarsonAllen LLP, Fort Myers http://www.larsonallen.com/Construction_and_Real_Estate/ Masters of Accounting, Nova University, Fort Lauderdale CPA licensed in Florida Certified Construction Industry Financial Professional Certified Specialist in Estate Planning Certified Information Technology Professional nAllen LLP Practice exclusive to construction and real estate in Florida ©2011 Larson3
  4. 4. Today’s Agenda • What is Surety? • Trends in today’s surety markets. Can I get bonding? • How does a Surety look at your information? – Working capital with surety adjustments – Liabilities to equ y ab es o equity – GAAP versus tax basis financial statements – Audited, reviewed or compiled financial statements – Job schedules – Required financial statement disclosures – Do-s and Do Nots - What do Sureties like and not like? – What does a Surety think about your company using QuickBooks? • Surety information checklist nAllen LLP ©2011 Larson4
  5. 5. The Contractor / Surety / Owner Relationship 3. 3 And Contractor Surety S t 2. 2 Then Surety pays to reimburses Surety for complete work on owner’s their payments job, or pays the unpaid labor, material and subcontractors Contractor Owner 1. 1 If contractor fails to complete bonded job, or leaves unpaid labor, material and subcontractors nAllen LLP ©2011 Larson5
  6. 6. Trends in Today’s Surety Markets • Bonding market is down but bonding is available for well capitalized companies • There is increasing surety bank and general contractor surety, pressure on subcontractors to upgrade financial statements from reviews to audits, and from compilations to reviews • Subcontractors being asked to bond more work • Less government work this year as state and local nAllen LLP governments deal with budget issues What work is issues. ©2011 Larson being bid is even more competitive than last year.6
  7. 7. How Does a Surety Look At Your Information • Financial stability is one of the most important factors in obtaining surety credit. • While most clients focus their attention on their income statement, the most important section of their financial statement to a surety is the balance sheet. nAllen LLP ©2011 Larson7
  8. 8. Key Financial Ratios for Sureties • Working Capital: Current Assets minus Current Liabilities • Adjusted Working Capital: Working Capital from above less above, adjustments to back out unproductive current assets such as: – Shareholder, officer, and related party receivables – Prepaid Expenses – Some portion of inventory (often 50%) that is not on a job site in entor – Underbillings – Bond programs are usually based on some multiple of (often 10 times) adjusted working capital • Debt to Equity – The ratio of all company liabilities and debt to stockholder equity. As a general rule sureties like to see a ratio of 2 to 1 or less rule, less. • Equity – Net Worth nAllen LLP – The maximum credit for a bonding program is often 10 times net worth. ©2011 Larson8
  9. 9. Key Financial Ratios for Sureties • An example of a working capital calculation by a Surety. nAllen LLP ©2011 Larson9
  10. 10. GAAP vs. Tax Basis Financial Statements • Sureties want GAAP (Generally Accepted Accounting Principles) financial statements. Tax basis statements are not useful to a Surety. They lower the ability of the surety to rely on your financial statements and reduces your ability to get a bond bond. • The purpose of GAAP based financial statements is to fairly present a Company’s financial position, results of operations, and cash flows. The purpose of Tax basis accounting is (or should be) to show as little income as possible as possible, late as possible. This is counterproductive to Surety credit. • GAAP contractor financial statements are (almost) always on a Percent Complete basis • Cash, Accrual, and Completed Contract are tax methods • Section 179 (writing off asset purchases in the year of purchase) is a tax method. GAAP requires depreciating assets over their useful life. nAllen LLP • Even Tax Percent Complete is different than GAAP Percent Complete. p p ©2011 Larson10
  11. 11. Compiled vs. Reviewed or Audited Financial Statements – What is the difference? • Compiled financial statements – The most basic level of CPA prepared financial statements. The CPA provides no assurance that the financial statements are fairly presented. t t t f il t d • Reviewed financial statements - A CPA performing a review will seek a more in depth understanding of the client’s business and financial client s information through inquiries and analytical procedures. The CPA provides only limited assurance that the financial statements are fairly presented. • Audited financial statements – A CPA performing an audit provides assurance, through the expression of an “opinion” in the “Auditor’s Report,” as to whether or not the financial statements are fairly presented in accordance with generally accepted accounting principles (GAAP). An audit requires the CPA to document an extensive understanding of the client’s accounting processes and internal controls. The CPA will also obtain further nAllen LLP audit evidence through inquiries, analytical procedures, testing of ©2011 Larson accounting records, and confirming information with third-parties.11
  12. 12. Job Schedules Should Be Included In a Contractor s Contractor’s Financial Statement • Include separate schedules of open and closed jobs. This should be a complete listing of all contract activity activity. • All direct and indirect costs (such as equipment depreciation, fuel, depreciation fuel payroll taxes workers compensation taxes, insurance, etc.) should be job costed and included in the schedules. If your accounting software can’t do that these costs must be allocated (and you should look for new software). • There should be a summary schedule (example page 23) that MUST equal the total revenue and direct costs on the income statement (example page 4). There nAllen LLP s ou d should be no u a ocated costs o revenues. o unallocated or e e ues ©2011 Larson12
  13. 13. Note Disclosures That Should Be Included In a Contractor s Contractor’s Financial Statement • Summary of accounting policies (example note 1, pages 8-12) • Accounts receivable breakdown for open and closed jobs and receivable retention held ( (example note 2 pages 12-13) ) • Summary of over and under billings (example note 4 page 16) • Backlog note (example note 5 page 17) • Income taxes (C Corp example note 9 pages 20-21) (For S Corps or LLCs see additional example handout that would be included as part of note 1) • Related party transactions (example note 12 page 21). • Commitments and Contingencies (if any) (example note 13 page 22) • Consolidation of “Variable Interest Entities” nAllen LLP ©2011 Larson13
  14. 14. Do-s and Do Nots – What do Sureties like and not like? • Do-s of Surety – Maximize profits – Minimize overhead – Surround yourself with good people – Make b i M k a business plan and follow it l d f ll – Carefully select your 5 advisors – Make a plan for business continuity – Fund the continuity plan – Stay focused on construction – Consult surety agent and CPA before significant financial decisions – Avoid litigation nAllen LLP – Establish a good line of credit with your bank ©2011 Larson14
  15. 15. Do-s and Do Nots – What do Sureties like and not like? • Do Nots of Surety – Invest in any kind of speculation – Buy planes, trains, or boats – Borrow money from the business – If a Sub S Corp - dont take excessive distributions – Make loans or guarantee obligations of others g g – Jump from one surety to another – Allow the business to buy out a stockholder before consulting your surety agent and CPA – Do not get your bonds from an agency that doesn’t have specialists in surety nAllen LLP ©2011 Larson15
  16. 16. What the Surety looks for The traditional C’s: C s:  Character  Capacityy  Capital Additional C’s:  Continuity  CPA nAllen LLP ©2011 Larson16
  17. 17. Continuity Plans • What would happen to your Company, employees and jobs if you were killed or hurt in a car accident tomorrow? • A continuity plan addresses these contingencies. The documentation showing you thought through that process is a Continuity Plan. • Sureties like to see that a Company has a Continuity Plan in place. nAllen LLP ©2011 Larson17
  18. 18. What does a Surety think about your Company using QuickBooks? • Using QuickBooks demonstrates a lack of control over your job cost – QuickBooks is not setup to easily produce essential reports to control job cost. Job cost reporting is usually augmented by using spreadsheets. Spreadsheets introduce human error, take too much time and promote untimely job reporting. – QuickBooks complicates the process of allocating indirect labor costs such as payroll tax and insurance costs to jobs – QuickBooks lacks basic job cost controls to ensure that every transaction that effects cost of construction is coded to a job. t ti th t ff t t f t ti i d dt j b – QuickBooks lacks basic overhead controls to ensure that every overhead transaction can not be charged to a job. – QuickBooks allows deletion a d c a ge o records, a d has a Qu c oo s a o s de et o and change of eco ds, and as an inadequate control over changes to data. – By using a $250 accounting program that is deficient in job cost accounting, you are sending a message to your Surety that you believe nAllen LLP it isn’t important to spend enough money to monitor the cost on your isn t ©2011 Larson jobs or to have adequate controls in place to control your job costs.18
  19. 19. Surety Information Checklist  Independent audited/reviewed FS w/in 90-120 days of year end  Aging of AR and AP f  Analysis of overhead costs (supplemental information)  Equipment schedules  Outline of bank agreements  Quarterly internal financial statements  Quarterly up to date open and closed job schedules  Comprehensive business plan, forecast or strategy  Resumes of key employees and management  Personal and corporate indemnity  Personal financial statements nAllen LLP ©2011 Larson19
  20. 20. 20 Questions? ©2011 Larson nAllen LLP
  21. 21. SAMPLE CONTRACTING COMPANY, INC. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATIONYEARS ENDED DECEMBER 31, 2010 AND 2009
  22. 22. SAMPLE CONTRACTING COMPANY, INC. TABLE OF CONTENTS YEARS ENDED DECEMBER 31, 2010 AND 2009ACCOUNTANTS’ REVIEW REPORT 1 FINANCIAL STATEMENTS  BALANCE SHEETS 2  STATEMENTS OF INCOME 4  STATEMENTS OF STOCKHOLDERS’ EQUITY 5  STATEMENTS OF CASH FLOWS 6  NOTES TO FINANCIAL STATEMENTS 8 SUPPLEMENTARY INFORMATION  SCHEDULE OF EARNINGS FROM CONTRACTS PERFORMED DURING 2010 23  SCHEDULE OF CONTRACTS COMPLETED DURING 2010 24  SCHEDULE OF CONTRACTS IN PROGRESS AT DECEMBER 31, 2010 25  SCHEDULE OF COST OF CONTRACT REVENUES AND GENERAL AND ADMINISTRATIVE EXPENSE 26 
  23. 23. Lars"JnAlleIi LLP CPAs, Consultants & Advisors www.larsonallen.com ACCOUNTANTS REVIEW REPORTBoard of Directors and StockholdersSample Contracting Company, Inc.City, StateWe have reviewed the accompanying balance sheets of Sample Contracting Company, Inc. as ofDecember 31, 2010 and 2009 and the related statements of income, stockholders equity, and cashflows for the years then ended. A review includes primarily applying analytical procedures tomanagements financial data and making inquiries of company management. A review is substantiallyless in scope than an audit, the objective of which is the expression of an opinion regarding the financialstatements as a whole. Accordingly, we do not express such as opinion.Management is responsible for the preparation and fair presentation of the financial statements inaccordance with accounting principles generally accepted in the United States of America and fordesigning, implementing, and maintaining internal control relevant to the preparation and fairpresentation of the financial statements.Our responsibility is to conduct the review in accordance with Statements on Standards for Accountingand Review Services issued by the American Institute of Certified Public Accountants. Those standardsrequire us to perform procedures to obtain limited assurance that there are no material modificationsthat should be made to the financial statements. We believe that the results of our procedures providea reasonable basis for our report.Based on our reviews, we are not aware of any material modifications that should be made to theaccompanying financial statements in order for them to be in conformity with accounting principlesgenerally accepted in the United States of America.Our review was made for the purpose of expressing limited assurance that there are no materialmodifications that should be made to the financial statements in order for them to be in conformity withgenerally accepted accounting principles. The data presented in supplementary schedulesaccompanying the financial statements are presented only for purposes of additional analysis and hasbeen subjected to the inquiry and analytical procedures applied in the review of the basic financialstatements, and we are not aware of any material modifications that should be made thereto. ~I-LP LarsonAllen LLPFort Myers, FloridaMarch 4, 2011 lSI !J!j k1 INTERNATIONAL (1 ) An independent member of Nexia International
  24. 24. SAMPLE CONTRACTING COMPANY, INC. BALANCE SHEETS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT) 2010 2009 ASSETSCURRENT ASSETS Cash and Cash Equivalents $ 183,000 $ 245,000 Securities Available-for-Sale 555,000 400,000 Accounts Receivable: Current Billings on Contracts 2,945,000 2,270,000 Retainages on Contracts 380,000 260,000 Other Current Noncontract Receivables 125,000 40,000 Allowance for Uncollectible Accounts (100,000) (30,000) Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts 550,000 400,000 Inventories 165,000 90,000 Prepaid Expenses 37,000 32,000 Deferred Income Taxes 15,000 12,000 Total Current Assets 4,855,000 3,719,000PROPERTY AND EQUIPMENT Land 75,000 75,000 Buildings 420,000 420,000 Equipment 1,875,000 1,590,000 Vehicles 280,000 240,000 Office Equipment 145,000 120,000 Total 2,795,000 2,445,000 Less: Accumulated Depreciation 1,435,000 1,110,000 Total Property and Equipment 1,360,000 1,335,000OTHER ASSETS Notes Receivable - Officers 70,000 50,000 Investment in Joint Venture 75,000 50,000 Securities Held-to-Maturity 260,000 250,000 Cash Value of Life Insurance, Less Policy Loans of $30,000 and $20,000, Respectively 80,000 60,000 Total Other Assets 485,000 410,000 Total Assets $ 6,700,000 $ 5,464,000See accompanying Notes to Financial Statements. (2)
  25. 25. SAMPLE CONTRACTING COMPANY, INC. BALANCE SHEETS (CONTINUED) DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT) 2010 2009 LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES Current Maturities of Long-Term Debt $ 783,000 $ 917,000 Accounts Payable: Current 1,640,000 1,564,000 Retainage 600,000 500,000 Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts 450,000 120,000 Accrued Expenses 475,000 350,000 Income Taxes Payable 110,000 10,000 Total Current Liabilities 4,058,000 3,461,000LONG-TERM LIABILITIES Long-Term Debt (Less Current Maturities) 407,000 303,000 Deferred Income Taxes 100,000 50,000 Total Long-Term Liabilities 507,000 353,000 Total Liabilities 4,565,000 3,814,000STOCKHOLDERS EQUITY Common Stock - No Par Value; 100,000 Shares Authorized, 50,200 and 50,000, Respectively, Shares Issued and Outstanding 60,000 50,000 Retained Earnings 2,050,000 1,590,000 Unrealized Gains on Securities 25,000 10,000 Total Stockholders Equity 2,135,000 1,650,000 Total Liabilities and Stockholders Equity $ 6,700,000 $ 5,464,000See accompanying Notes to Financial Statements. (3)
  26. 26. SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT) 2010 2009 AMOUNT PERCENT AMOUNT PERCENTCONTRACT REVENUES EARNED $ 18,500,000 100.0 % $ 12,500,000 100.0 %COST OF CONTRACT REVENUES 16,280,000 88.0 11,050,000 88.4 CONTRACT GROSS PROFIT 2,220,000 12.0 1,450,000 11.6GENERAL AND ADMINISTRATIVE EXPENSE 1,340,000 7.2 1,135,000 9.1 INCOME FROM OPERATIONS 880,000 4.8 315,000 2.5OTHER INCOME (EXPENSE) Income from Joint Venture 35,000 0.2 10,000 0.1 Gain (Loss) on Sale of Equipment 15,000 0.1 (10,000) (0.1) Investment Income 10,000 0.1 - - Interest Expense (145,000) (0.8) (140,000) (1.1) Realized Gain (Loss) on Sale of Securities (20,000) (0.1) (10,000) (0.1) Total Other Income (Expense) (105,000) (0.6) (150,000) (1.2) INCOME BEFORE INCOME TAXES 775,000 4.2 165,000 1.3PROVISION FOR INCOME TAXES 315,000 1.7 60,000 0.5 NET INCOME $ 460,000 2.5 $ 105,000 0.8See accompanying Notes to Financial Statements. (4)
  27. 27. SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT) Unrealized Gains Common Retained (Losses) on Stock Earnings Securities TotalBALANCE, JANUARY 1, 2009 $ 50,000 $ 1,485,000 $ 5,000 $ 1,540,000COMPREHENSIVE INCOME Net Income - 105,000 - Other Comprehensive Income, Net of Tax: Unrealized Losses on Securities: Unrealized Holding Gains Arising During the Year (Net of $1,000 Deferred Income Tax) - - 5,000 Total Comprehensive Income 110,000 BALANCE, DECEMBER 31, 2009 50,000 1,590,000 10,000 1,650,000COMPREHENSIVE INCOME Net Income - 460,000 - Other Comprehensive Income, Net of Tax: Unrealized Losses on Securities: Unrealized Holding Gains Arising During the Year (Net of $5,000 Deferred Income Tax) - - 15,000 Total Comprehensive Income 475,000 Sale of 200 Shares to an Employee for Cash 10,000 - - 10,000 BALANCE, DECEMBER 31, 2010 $ 60,000 $ 2,050,000 $ 25,000 $ 2,135,000See accompanying Notes to Financial Statements. (5)
  28. 28. SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT) 2010 2009CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Contracts $ 17,955,000 $ 12,630,000 Cash Paid to Suppliers and Employees (17,134,000) (12,345,000) Interest Paid (145,000) (140,000) Income Taxes Paid (173,000) (65,000) Cash Provided by Operating Activities 503,000 80,000CASH FLOWS FROM INVESTING ACTIVITIES Payments for Purchase of Equipment and Vehicles (410,000) (180,000) Proceeds from Sale of Equipment and Vehicles 50,000 20,000 Increase in Cash Value of Life Insurance (30,000) (10,000) Advances of Note Receivable - Officers (20,000) (50,000) Purchase of Investments (235,000) (100,000) Proceeds from Sale of Investments 80,000 200,000 Proceeds on Joint Venture Distribution 10,000 - Investment in Joint Venture - (40,000) Cash Used by Investing Activities (555,000) (160,000)CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Long-Term Borrowings 330,000 100,000 Payments on Long-Term Debt (150,000) (80,000) Net Proceeds from (Payments on) Short-Term Borrowings (210,000) 200,000 Proceeds from Life Insurance Policy Loans 10,000 - Proceeds from Sale of Common Stock 10,000 - Cash Provided by (Used in) Financing Activities (10,000) 220,000 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (62,000) 140,000Cash and Cash Equivalents - Beginning of Year 245,000 105,000 CASH AND CASH EQUIVALENTS - END OF YEAR $ 183,000 $ 245,000See accompanying Notes to Financial Statements. (6)
  29. 29. SAMPLE CONTRACTING COMPANY, INC. STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT) 2010 2009RECONCILIATION OF NET INCOME TO CASHPROVIDED BY OPERATING ACTIVITIES Net Income $ 460,000 $ 105,000 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Depreciation 350,000 300,000 (Gain) Loss on Sale of Equipment (15,000) 10,000 Realized (Gain) Loss on Sale of Securities 20,000 10,000 Income from Joint Venture (35,000) (10,000) Accretion on Securities Held-to-Maturity (10,000) - Deferred Income Taxes 42,000 5,000 (Increase) Decrease in: Contract Accounts Receivable (725,000) 150,000 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts (150,000) 60,000 Inventories (75,000) (20,000) Other Current Assets (90,000) (30,000) Increase (Decrease) in: Accounts Payable 176,000 (375,000) Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts 330,000 (80,000) Accrued Expenses 125,000 (10,000) Income Taxes Payable 100,000 (35,000) Cash Provided by Operating Activities $ 503,000 $ 80,000See accompanying Notes to Financial Statements. (7)
  30. 30. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Companys Business and Operating Cycle The Company operates primarily as a general contractor in heavy and industrial construction in Florida. The work is performed under cost-plus-fee contracts, fixed price contracts, fixed price contracts modified by incentive and penalty provisions and unit price contracts. These contracts are obtained through a competitive bidding process and vary in size and duration. The contracts are undertaken by the Company alone or in partnership with other contractors through joint ventures. The Company, as conditions for entering into construction contracts, has provided surety bonds approximating $7,300,000 at December 31, 2010 and $5,280,000 at December 31, 2009. These bonds are collateralized by the contracts receivable. The length of the Company’s contracts varies but is typically less than two years. Accordingly, assets to be realized and liabilities to be liquidated within the operating cycle are classified as current assets and liabilities. Estimates and Assumptions The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue and Cost Recognition Revenues from fixed-price, modified fixed-price and unit price construction contracts are recognized on the percentage-of-completion method, only after the contract attains a 10% completion stage, measured by the percentage of costs incurred to date to estimated total costs for each contract. This method is used because management considers expended costs to be the best available measure of progress on these contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method, or ratably over the term of the project, depending upon the terms of the individual contract. Because of inherent uncertainties in estimating costs and revenues, it is at least reasonably possible that the estimates used will change. (8)
  31. 31. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue and Cost Recognition (Continued) Contract costs include all direct material, subcontractors, labor costs, and equipment costs and those indirect costs related to contract performance. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from penalty provisions and final contract settlements, may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reliably estimated. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. Concentrations of Credit Risk The Company performs credit evaluations of its customers and subcontractors and may require surety bonds. Liens are filed, when permissible, on construction contracts where collection problems are anticipated. As of December 31, 2010 and 2009, accounts receivable are due from customers in the Florida and are not concentrated in a particular industry. The Company’s cash balances are maintained in two bank deposit accounts. The balances of these accounts may be in excess of federally insured limits. Concentrations in Operations The Company currently buys substantially all its materials from one supplier. Although there are a limited number of suppliers of such materials in the industry, management believes that other suppliers could provide similar materials on comparable terms. A change in suppliers, however, could cause a delay in construction and adversely affect operating results. Cash and Cash Equivalents Cash equivalents are securities held for cash management purposes having maturities of three months or less from date of purchase. (9)
  32. 32. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Contracts Receivable Contracts receivable from performing construction are based on contracted prices. The Company provides an allowance for doubtful collections which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Normal contracts receivable are due 30 days after the issuance of the invoice. Contract retentions are due 30 days after completion of the project and acceptance by the owner. Receivables past due more than 120 days are considered delinquent. Delinquent receivables are written off based on individual credit valuation and specific circumstances of the customer. Investments in Securities The Company’s investments in securities are classified in two categories and accounted for as follows: Securities to be Held-to-Maturity Securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity. Securities Available-for-Sale Securities available-for-sale, consisting of securities not classified as trading securities or as securities to be held to maturity, are reported at fair value. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary have resulted in write-downs of the individual securities to their fair value. The related write-downs have been included in earnings as realized losses. Unrealized holding gains and losses, net of tax, on securities available-for- sale are reported as a net amount in a separate component of stockholders’ equity until realized. Gains and losses on the sale of securities available-for-sale are determined using the specific-identification method. Fair Value Measurement The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows: (10)
  33. 33. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair Value Measurement (Continued) Level 1 – Financial assets and liabilities are valued using inputs that are unadjusted quoted prices in active markets accessible at the measurement date of identical financial assets and liabilities. The inputs include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury and other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 – Financial assets and liabilities are valued using inputs and quoted prices for similar assets, or inputs that are observable, either directly or indirectly for substantially the full term through corroboration with observable market data. Level 2 includes private collateralized mortgage obligations, municipal bonds, and corporate debt securities. Level 3 – Financial assets and liabilities are valued using pricing inputs which are unobservable for the asset or inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset. Level 3 includes private equity, venture capital, hedge funds and real estate. Subsequent to initial recognition, the Company may remeasure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Inventories Inventories consist of construction materials and supplies that have not been assigned and charged to specific contracts and are stated at the lower of cost (first-in, first-out) or market. Property and Equipment Property and equipment are carried at cost, less accumulated depreciation. The Company depreciates property and equipment using the straight-line method over the estimated lives of the assets. The estimated useful lives are as follows: Buildings 30 Years Equipment 5-10 Years Vehicles 5-7 Years Office Equipment 3-10 Years (11)
  34. 34. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Long-Lived Assets Long-lived assets to be held and used are tested for recoverability whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the excess of the assets carrying amount over the fair value of the asset. Certain long-lived assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell. Income Taxes Deferred tax assets and liabilities are recorded for future tax consequences attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Principally, these differences relate to depreciation of property and equipment, the allowance for uncollectible accounts receivable and certain accrued expenses. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized. The Company adopted the income tax standard for uncertain tax positions on January 1, 2009. The provision prescribes recognition and measurement of tax positions taken or expected to be taken on a tax return that are not certain to be realized. As a result of implementation, the Company recognized no liability for unrecognized tax benefits. The Company’s income tax returns for the years ending 2007-2010 are subject to review and examination by federal and state authorities. Subsequent Events In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 4, 2011, the date the financial statements were available to be issued.NOTE 2 CONTRACT ACCOUNTS RECEIVABLE AND CONTRACT CONCENTRATIONS Contract accounts receivable consist of the following as of December 31 2010 and 2009 2010 2010 2010 2010 2010 Total Total 0 to 30 31 to 60 61 to 90 91 and over Retained 2010 2009Completed Contracts $ 1,685,000 $ 50,000 $ 50,000 $ 25,000 $ 215,000 $ 2,025,000 $ 1,550,000Contracts In Progress 1,100,000 10,000 25,000 25,000 165,000 1,300,000 980,000 $ 2,785,000 $ 60,000 $ 75,000 $ 50,000 $ 380,000 3,325,000 2,530,000Other Current Noncontract Receivables 125,000 40,000Less: Allowance for Uncollectible Accounts (100,000) (30,000) Total $ 3,350,000 $ 2,540,000 (12)
  35. 35. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 2 CONTRACT ACCOUNTS RECEIVABLE AND CONTRACT CONCENTRATIONS (CONTINUED) Contract revenues from two contracts in 2010 and one different contract in 2009, in Lee County, Florida and Collier County, Florida, represented approximately 25% and 24%, respectively, of total contract revenues for the years ended December 31, 2010 and 2009, respectively. No other contracts represented greater than 10% of the total contract revenues in 2010 and 2009. The contract accounts receivable from these contracts were $1,166,000 and $800,000 as of December 31, 2010 and 2009, respectively.NOTE 3 INVESTMENT SECURITIES AND OTHER COMPREHENSIVE INCOME (LOSS) The carrying amounts of investment securities as shown in the accompanying balance sheets and their approximate fair values at December 31 are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities Available-for-Sale: December 31, 2010 Equity Securities $ 523,000 $ 32,000 $ - $ 555,000 U.S. Government and Agency Securities - - - - Total $ 523,000 $ 32,000 $ - $ 555,000 December 31, 2009 Equity Securities $ 388,000 $ 12,000 $ - $ 400,000 U.S. Government and Agency Securities - - - - Total $ 388,000 $ 12,000 $ - $ 400,000 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Securities to be Held-to-Maturity December 31, 2010 U.S. Government and Agency Securities $ 260,000 $ - $ - $ 260,000 State and Municipal Securities - - - - Total $ 260,000 $ - $ - $ 260,000 December 31, 2009 U.S. Government and Agency Securities $ 250,000 $ - $ - $ 250,000 State and Municipal Securities - - - - Total $ 250,000 $ - $ - $ 250,000 (13)
  36. 36. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 3 INVESTMENT SECURITIES AND OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED) The following table shows the gross unrealized losses and fair value of Companys investments with unrealized losses that are not deemed to be other-than-temporarily impaired aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31. Less than 12 Months Fair Value Unrealized $ - $ - Marketable Equity Securities - - Corporate Obligations - - US Government Obligations $ - $ - Total 12 Months or Greater Fair Value Unrealized Marketable Equity Securities $ 555,000 $ 32,000 Corporate Obligations - - US Government Obligations 260,000 - Total $ 815,000 $ 32,000 Investment losses under one year old are expected to be recoverable in future periods and are not deemed by management to be unrecoverable. Investment losses in excess of 1 year are also expected to be recoverable in future periods as market values have recovered considerably during 2010 and the Company has the intent and ability to hold these investments until further market recovery occurs. The unrealized losses on the Company’s investments in U.S. Government Securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2010. (14)
  37. 37. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 3 INVESTMENT SECURITIES AND OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED) The scheduled maturities of debt securities to be held-to-maturity and securities available- for-sale at December 31, 2010 are as follows: Securities to be Securities Held-to-Maturity Available-for-Sale Amortized Fair Amortized Fair Cost Value Cost Value Due in One Year or Less $ - $ - $ - $ - Due from One Year to Five Years Due from Five to Ten Years Due after Ten Years 260,000 260,000 523,000 555,000 Total $ 260,000 $ 260,000 $ 523,000 $ 555,000 Gross realized gains and losses on sales of securities available-for-sale are: 2010 2009 Gross Realized Gains: Marketable Equity Securities $ - $ - Gross Realized Losses: Marketable Equity Securities (20,000) (10,000) Total $ (20,000) $ (10,000) The determination of other comprehensive income (loss) for the years ended December 31 is as follows: 2010 2009 Increase (Decrease) in Unrealized Gains (Losses) on Securities Available-for-Sale $ 20,000 $ 6,000 Tax Benefit (Expense) (5,000) (1,000) Net-of-Tax Amount 15,000 5,000 Reclassification Adjustment - - Tax Benefit (Expense) - - Net-of-Tax Amount - - Other Comprehensive Income (Loss) $ 15,000 $ 5,000 (15)
  38. 38. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 3 INVESTMENT SECURITIES AND OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED) The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. For additional information on how the Company measures fair value, refer to Note 1 – Summary of Significant Accounting Policies. The following table presents the fair value hierarchy for the balances of the assets of the Company measured at fair value on a recurring basis as of December 31, 2010 and 2009. 2010 Level 1 Level 2 Level 3 Total Securities Available for Sale: Equity Securities $ 555,000 $ - $ - $ 555,000 Securities Held to Maturity: U.S. Government and Agency Securities - 260,000 - $ 260,000 $ 555,000 $ 260,000 $ - $ 815,000 2009 Level 1 Level 2 Level 3 Total Securities Available for Sale: Equity Securities $ 400,000 $ - $ - $ 400,000 Securities Held to Maturity: U.S. Government and Agency Securities - 250,000 - $ 250,000 $ 400,000 $ 250,000 $ - $ 650,000NOTE 4 COSTS, ESTIMATED EARNINGS AND BILLINGS ON CONTRACTS IN PROCESS 2010 2009 Costs Incurred on Uncompleted Projects $ 3,550,000 $ 2,850,000 Estimated Gross Profit 400,000 240,000 Contract Revenues Earned 3,950,000 3,090,000 Less: Billings to Date 3,850,000 2,810,000 Total $ 100,000 $ 280,000 Reported in the accompanying balance sheets as follows: 2010 2009 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts $ 550,000 $ 400,000 Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts (450,000) (120,000) Total $ 100,000 $ 280,000 (16)
  39. 39. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 5 BACKLOG The Companys backlog on signed contracts as of December 31, 2010 and 2009 is as follows: 2010 2009 Contract Revenues: Backlog Balance, Beginning of Year $ 4,500,000 $ 2,000,000 New Contracts and Contract Adjustments 21,200,000 15,000,000 Contract Revenue Earned (18,500,000) (12,500,000) Backlog Balance, End of Year $ 7,200,000 $ 4,500,000 Contract Costs: Backlog Balance, Beginning of Year $ 3,980,000 $ 1,720,000 New Contracts and Contract Adjustments 18,770,885 13,310,000 Cost of Contract Revenues (16,280,000) (11,050,000) Backlog Balance, End of Year $ 6,470,885 $ 3,980,000 The Company has additional contract revenue backlog of $93,000 with associated costs of $65,000 on one contract signed and contract revenue backlog of $8,600,000 with associated costs of $7,480,000 on one contract awarded, but not signed, during the period January 1, 2011 through March 4, 2011. As of December 31, 2010 and 2009, contract costs of approximately $655,000 and $850,000 included in the above cost backlog are for subcontractors. (17)
  40. 40. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 6 JOINT VENTURE On June 30, 2008, the Company entered into a 40% interest joint venture with ABC Contractor on the Metropolitan Industrial Complex in Charlotte County, Florida. The joint venture is recorded on the equity basis and at December 31, 2010 and 2009, the balance consisted of the original investment of $40,000 plus unremitted joint venture income. Summary financial data of the joint venture is as follows: 2010 2009 ASSETS Cash $ 45,000 $ 30,000 Contract Receivables - Current Billings 126,500 90,000 Contract Retainage 25,000 5,000 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts 1,000 5,000 Total Assets $ 197,500 $ 130,000 LIABILITIES AND PARTNERS EQUITY Accounts Payable - Regular $ 10,000 $ 5,000 Accounts Payable - Retainage - - Total Liabilities 10,000 5,000 Partners Equity Sample Contracting Company, Inc 75,000 50,000 ABC Contractor 112,500 75,000 Total Partners Equity 187,500 125,000 Total Liabilities and Partners Equity $ 197,500 $ 130,000 OPERATIONS Contract Revenues $ 300,000 $ 200,000 Contract Costs 167,500 140,000 Gross Profit 132,500 60,000 Non-Contract Expenses 45,000 35,000 Net Income $ 87,500 $ 25,000 The contract has been completed in January 2011. The joint venture anticipates the investment will be distributed to the partners in mid-2011. (18)
  41. 41. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 7 NOTES PAYABLE - BANK The Company has a bank line of credit available through May 1, 2011 for maximum working capital borrowings of $2,000,000. The borrowings are secured by inventories, accounts receivable, general intangibles and property and equipment. The interest rate is 1.0% over Prime. The Companys stockholders have personally guaranteed the borrowings. The line of credit agreement contains covenants related to certain financial ratios. Payable to: Security 2010 2009 $2,000,000 Renewable Line of Credit to Bank. Monthly Installments of Interest Only at Prime Plus 1.0% (Which Was 6.3% at December 31, Accounts 2010). Includes Various Financial Receivable, Covenants Which Were in Inventory, Compliance at December 31, 2010. Property and Renews 5/2011 Equipment $ 776,000 $ 1,085,000 Installment Note, Bank, Interest at Prime Plus 1.5%; Monthly Principal Installments of $5,500 Plus Interest Certain through June 2012 Equipment 297,000 - Mortgage Note - Bank, 9% Interest; Monthly Principal and Interest Installments of $2,433 through Mortgage on December 2014 Real Estate 117,000 135,000 Total 1,190,000 1,220,000 Less: Current Maturities of Long-Term Debt 783,000 917,000 Long-Term Debt, Net of Current Maturities $ 407,000 $ 303,000 The shareholders have personally guaranteed the above borrowings. Maturity requirements on long-term debt as of December 31, 2010 are as follows: Year Ending December 31, Amount 2011 $ 783,000 2012 165,800 2013 89,300 2014 91,400 2015 60,500 Total $ 1,190,000 (19)
  42. 42. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 8 OPERATING LEASE AGREEMENTS The Company leases office facilities from a shareholder under a noncancelable operating lease. The lease is for five years with an option to renew under the same terms for an additional five years. Total rent expense under this operating lease was $36,000 for 2010 and 2009. Future minimum rent commitments under this facility lease are as follows: Year Ending December 31, Amount 2011 $ 36,000 2012 36,000 2013 6,000 Total $ 78,000 The Company rents certain construction equipment for specific construction contracts under short-term rental arrangements. Rent expense under these operating leases was $625,000 and $565,000 for the years ended December 31, 2010 and 2009, respectively.NOTE 9 INCOME TAXES The provision for income taxes for the years ended December 31, 2010 and 2009 consists of the following: 2010 2009 Current: Federal $ 211,000 $ 42,000 States 62,000 13,000 Deferred 42,000 5,000 Total Provision for Income Taxes $ 315,000 $ 60,000 The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate of 34% to pretax income for the years ended December 31, 2010 due to the following: 2010 2009 Tax Expense of 34% $ 263,500 $ 57,700 Increase (Decrease) in Income Taxes Resulting from: Benefit of Income Taxed at Lower Rates - (6,000) Tax Credits (4,000) (2,000) Nondeductible Expenses 8,500 1,100 State Income Taxes, Net of Federal Tax Benefit 47,000 9,200 Valuation Allowance - - Total $ 315,000 $ 60,000 (20)
  43. 43. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 9 INCOME TAXES (CONTINUED) The components of the deferred income tax asset and liability as of December 31, 2010 and 2009 are as follows: 2010 2009 Deferred Income Tax Liability: Property and Equipment $ 100,000 $ 50,000 Deferred Tax Asset, Net: Allowance for Uncollectible Accounts Receivable, Deferred Tax Asset $ 40,000 $ 14,000 Accrued Expenses, Deferred Tax Liability (18,000) - Net Unrealized Appreciation on Securities Available-for-Sale, Deferred Tax Liabilities (7,000) (2,000) Deferred Tax Asset, Net $ 15,000 $ 12,000NOTE 10 QUALIFIED RETIREMENT PLAN The Company has adopted a profit sharing plan for non-union employees meeting the eligibility requirements. Contributions to the Plan are at the discretion of the Companys Board of Directors. Contribution expense for the years ended December 31, 2010 and 2009 was $50,000 and $40,000, respectively.NOTE 11 BUY-SELL AGREEMENT The stockholders and the Company have a buy-sell agreement. In the event of a stockholder’s death, the Company has the option to redeem the applicable shares of common stock at a price determined under the terms of the agreement. The Company carries $1,000,000 of life insurance on each stockholder to partially or completely fund this agreement. Any remaining balance is to be paid in five equal annual installments with interest at 8%.NOTE 12 RELATED PARTY TRANSACTIONS The Company has made advances to officers of $20,000 and $50,000 in 2010 and 2009, respectively. These advances are unsecured and bear interest at prime. Interest income was $5,000 and $4,000 for the years 2010 and 2009, respectively. (21)
  44. 44. SAMPLE CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 13 COMMITMENTS AND CONTINGENCIES The Company maintains and pays certain of its insurance under retrospective insurance policies. As of December 31, 2010, the Company has an outstanding irrevocable letter of credit expiring December 31, 2011, of $500,000 issued in favor of the Companys workers compensation insurance carrier. The Company is a defendant on claims relating to matters arising in the ordinary course of their construction business. Certain of the claims are insured but subject to varying deductibles and certain of the claims are uninsured. The amount of liability, if any, from the claims cannot be determined with certainty, however, management is of the opinion that the outcome of the claims will not have a material adverse impact on the Company’s financial position. A claim for $180,000 has been filed against the Company and its bonding company arising out of the failure of a subcontractor of the Company to pay its suppliers. In the opinion of counsel and management, the outcome of this claim will not have a material effect on the Companys financial position, results of operations or cash flows. The Company has commitments for purchases of equipment at December 31, 2010 of $120,000. . (22)
  45. 45. SUPPLEMENTARY INFORMATION
  46. 46. SAMPLE CONTRACTING COMPANY, INC.SCHEDULE OF EARNINGS FROM CONTRACTS PERFORMED DURING 2010 (SEE ACCOUNTANTS REVIEW REPORT) Contract Cost Of Revenues Contract Gross Earned Revenues ProfitContracts Completed During 2010 $ 14,550,000 $ 12,730,000 $ 1,820,000Contracts In Progress At Year End 3,950,000 3,550,000 400,000 $ 18,500,000 $ 16,280,000 $ 2,220,000 (23)
  47. 47. SAMPLE CONTRACTING COMPANY, INC. SCHEDULE OF CONTRACTS COMPLETED DURING 2010 (SEE ACCOUNTANTS REVIEW REPORT) Contract Totals Before January 1, 2010 Year Ended December 31, 2010 Contract Cost of Gross Contract Cost of Gross Contract Cost of GrossJob # Contract Revenues Contract Profit Revenues Contract Profit Revenues Contract Profit Earned Revenues Earned Revenues Earned Revenues 1 Completed Job $ 10,000,000 $ 8,000,000 $ 2,000,000 $ 5,000,000 $ 4,000,000 $ 1,000,000 $ 5,000,000 $ 4,000,000 $ 1,000,000 2 Completed Job 5,000,000 4,730,000 270,000 - - - 5,000,000 4,730,000 270,000 3 Completed Job 4,550,000 4,000,000 550,000 - - - 4,550,000 4,000,000 550,000 $ 19,550,000 $ 16,730,000 $ 2,820,000 $ 5,000,000 $ 4,000,000 $ 1,000,000 $ 14,550,000 $ 12,730,000 $ 1,820,000 (24)
  48. 48. SAMPLE CONTRACTING COMPANY, INC. SCHEDULE CONTRACTS IN PROGRESS AT DECEMBER 31, 2010 (SEE ACCOUNTANTS REVIEW REPORT) Year Ended December 31, 2010 At December 31, 2010 Cost & Billings Estimated In Excess Total Estimated Contract Cost of Earnings In Of Cost & Contract Estimated Gross Revenues Contract Gross Billings Excess Of EstimatedJob # Contract Price Cost Profit Earned Revenues Profit To Date Billings Earnings 4 Underbilled Job $ 7,850,000 $ 7,056,885 $ 793,115 $ 2,780,972 $ 2,500,000 $ 280,972 $ 2,230,972 $ 550,000 $ - 5 Overbilled Job 3,300,000 2,964,000 336,000 1,169,028 1,050,000 119,028 1,619,028 - 450,000 $ 11,150,000 $ 10,020,885 $ 1,129,115 $ 3,950,000 $ 3,550,000 $ 400,000 $ 3,850,000 $ 550,000 $ 450,000 (25)
  49. 49. SAMPLE CONTRACTING COMPANY, INC. SCHEDULE OF COST OF CONTRACT REVENUES AND GENERAL AND ADMINISTRATIVE EXPENSE YEARS ENDED DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT) 2010 2009 AMOUNT PERCENT AMOUNT PERCENTCOST OF CONTRACT REVENUES Materials $ 5,250,000 28.4 % $ 4,500,000 36.0 % Labor 4,625,000 25.0 3,000,000 24.0 Subcontract Expense 3,325,000 18.0 1,236,000 9.9 Employee Benefits 1,295,000 7.0 810,000 6.5 Payroll Taxes 465,000 2.5 310,000 2.5 Equipment Rental 625,000 3.4 565,000 4.5 Gas, Fuel, Oil 375,000 2.0 354,000 2.8 Depreciation 320,000 1.7 275,000 2.2 Total Contract Costs $ 16,280,000 88.0 % $ 11,050,000 88.4 %GENERAL AND ADMINISTRATIVEEXPENSE Salaries and Wages, Office $ 768,000 4.2 % $ 646,000 5.2 % Payroll Taxes 40,000 0.2 39,000 0.3 Employee Benefits 75,000 0.4 70,000 0.6 Retirement Plan Contribution 50,000 0.3 40,000 0.3 Office Facilities Expense 300,000 1.6 300,000 2.4 Office Supplies and Expense 7,000 0.0 5,000 0.0 Provision for Uncollectible Accounts 70,000 0.4 10,000 0.1 Depreciation 30,000 0.2 25,000 0.2 Total General and Administrative Expense $ 1,340,000 7.2 % $ 1,135,000 9.1 % (26)
  50. 50. SAMPLE S-CORP CONTRACTING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 (SEE ACCOUNTANTS REVIEW REPORT)NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes The Company elected to be taxed as an S Corporation for federal and state income tax purposes and, therefore, is not taxed as a separate entity. As such, the Company’s taxable income or loss is included in the stockholders’ individual income tax return, based on their stock ownership. Therefore, no provision for income taxes related to the Company’s income is included in the financial statements. The Company adopted the income tax standard for uncertain tax positions, on January 1, 2009. There was no impact to the Companys financial statements as a result of the implementation. The Company’s income tax returns are subject to review and examination by federal and state authorities. The tax returns for the years 2007 to 2010 are open to examination by federal and state authorities. The Company recognizes income from long-term construction contracts on the percentage- of-completion method for financial statement purposes and on the completed contract method for tax reporting purposes. The Company’s S Corporation income tax return depreciates property and equipment using accelerated lives and methods of depreciation. The depreciation, certain leasehold improvements, and differences in the recognition of profit on uncompleted contract are allowed as expenses and income in different years. The cumulative amounts of these differences between tax and financial statement methods of accounting are summarized as follows as of December 31, 2010 and 2009: 2010 2009 Retained Earnings, Accompanying Financial Statements $ 2,050,000 $ 1,590,000 Difference Between Book and Tax Regular Accounting Method (13,426) (50,072) Difference Between Book and Tax Long Term Contract Method (247,476) (79,872) Net Fixed Asset Value Difference for Tax Purposes (197,433) (149,060) Tax Return Accumulated Retained Income $ 1,591,665 $ 1,310,996 It is expected that there will not be a 2011 distribution to the shareholder to fund the 2010 Corporation income tax liability. The anticipated shareholder Federal tax liability on deferred items at December 31, 2010 is approximately $160,000. Subsequent Events In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 4, 2011, the date on which the financial statements were available to be issued. (9)

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