Question 1

Which of the following best describes the purpose of the quick ratio in construction financial management?

Accepted Answer

To measure the ability to pay current liabilities with cash and near-cash assets, excluding inventory and retention.

Question 2

Given the following data for a construction company: Cash = $$150,000, Accounts Receivable-Trade = 300$$,000, Accounts Receivable-Retention = $$50,000, Current Liabilities = 400$$,000. What is the quick ratio? (Exclude retention from accounts receivable.)

$$	ext{Quick Ratio} = \frac{	ext{Cash} + 	ext{Accounts Receivable-Trade}}{	ext{Current Liabilities}}$$

Accepted Answer

$$\frac{150,000 + 300,000}{400,000} = 1.13$$

Question 3

A commercial construction company has a current ratio of 1.63. What does this indicate about the company’s short-term financial health?

Accepted Answer

The company is likely to meet its short-term cash needs without having too much tied up in current assets.

Question 4

Which of the following ratios would be most affected by a change in the method of depreciation used by a construction company?

Accepted Answer

Fixed Assets to Net Worth Ratio

Question 5

Calculate the debt to equity ratio for a company with total liabilities of $$600,000 and net worth of 300$$,000.

$$	ext{Debt to Equity} = \frac{	ext{Total Liabilities}}{	ext{Net Worth}}$$

Accepted Answer

$$\frac{600,000}{300,000} = 2.00$$

Question 6

A construction company has the following data: Net Fixed Assets = $$120,000, Net Worth = 400$$,000. What is the fixed assets to net worth ratio?

$$	ext{Fixed Assets to Net Worth} = \frac{	ext{Net Fixed Assets}}{	ext{Net Worth}}$$

Accepted Answer

$$\frac{120,000}{400,000} = 0.30$$

Question 7

If a company’s collection period is calculated as 37.4 days, what does this indicate about its accounts receivable management compared to the industry ideal?

Accepted Answer

The company is collecting receivables faster than the industry ideal of 45 days.

Question 8

Which of the following best explains why accounts receivable-retention is excluded from the quick ratio calculation?

Accepted Answer

Retention may not be converted to cash quickly and is not as liquid as other receivables.

Question 9

A company has current assets of $$800,000 and total assets of 1$$,200,000. What is the current assets to total assets ratio?

$$	ext{Current Assets to Total Assets} = \frac{	ext{Current Assets}}{	ext{Total Assets}}$$

Accepted Answer

$$\frac{800,000}{1,200,000} = 0.67$$

Question 10

Which of the following is a likely consequence if a construction company’s fixed assets to net worth ratio is significantly higher than the industry median?

Accepted Answer

The company is more dependent on maintaining a steady stream of work to pay for its fixed assets.

Question 11

A company’s collection period is calculated as follows:

$$	ext{Collection Period} = \frac{	ext{Accounts Receivable} 	imes 365}{	ext{Revenues}}

If $$Accounts Receivable = $$400,000 and Revenues = 4$$,000,000, what is the collection period?

Accepted Answer

$$\frac{400,000 	imes 365}{4,000,000} = 36.5$$ days

Question 12

Which of the following statements about the debt to equity ratio is correct?

Accepted Answer

A ratio below 2.0 to 1 suggests the company can likely service its debt and may obtain additional financing.

Question 13

If a company’s current liabilities to net worth ratio is 0.95 (or 95%), what does this indicate about the company’s use of short-term credit compared to the industry median for commercial contractors?

Accepted Answer

The company is using less short-term credit than the industry median.

Question 14

A construction company has the following data: Gross Profit = $$600,000, Revenues = 3$$,000,000. What is the gross profit margin?

$$	ext{Gross Profit Margin} = \frac{	ext{Gross Profit}}{	ext{Revenues}}$$

Accepted Answer

$$\frac{600,000}{3,000,000} = 0.20 or 20$$%

Question 15

Which of the following best describes the impact of a collection period significantly greater than 45 days for a construction company?

Accepted Answer

It suggests poor collection policies or overly generous payment terms to clients.

Question 16

If a company’s current ratio is 0.9, what does this suggest about its ability to meet short-term obligations?

Accepted Answer

The company may have difficulty meeting its short-term obligations.

Question 17

A construction company’s current assets are $$690,720 and total assets are 1$$,024,039. What is the current assets to total assets ratio, and what does it indicate if the ideal range is 0.70 to 0.85 for commercial construction?

Accepted Answer

$$\frac{690,720}{1,024,039} = 0.67$$, which is slightly below the ideal range, indicating a heavier investment in fixed assets.

Step-by-Step Guidance for Financial Ratios in Construction Accounting

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