ARCHITECTURE ACCOUNTING

Question 1

ACCRUAL-BASIS ACCOUNTING

Answer 1

Revenue earned and billed from fees and expenses, including outside project consultant fees and expenses, plus all other direct and indirect expenses incurred. Firm leader’s focus is here.

Revenue-based only on invoiced fee and expense amounts sent and/or received.

Most firms use this modified accrual-basis for their profit-loss statement and balance sheet development.

Question 2

CASH-BASIS ACCOUNTING

Answer 2

Income received and all salaries and expenses paid (a checkbook approach). Focused on the firm’s quarterly and annual tax liability.

Most commonly used for filing and paying quarterly and year-end taxes.

Question 3

NET OPERATING REVENUE (NOR “NET REVENUE”)

Answer 3

KLI Accrual P-L statement

= gross revenue - project related expenses

net dollars remaining after deducting the invoiced consultant’s fees and expenses, and all reimbursable and non-reimbursable project-related expenses.

Question 4

DIRECT LABOR

Answer 4

KLI Accrual P-L

Time charged to projects, whether invoiced or not (by everyone, including principals.)

Same as ‘Direct Salary’

Question 5

INDIRECT LABOR

Answer 5

Time charged to non-project-related activities (by everyone, including principals).

Note indirect labor is included in the calculation of total indirect expenses.

Same as ‘indirect salary’

Question 6

REIMBURSABLE EXPENSES

Answer 6

Project-related expenses that are invoiced to the client in addition to fees. These would also include a markup percentage of those expenses. The markup dollars are a form of revenue.

Question 7

DIRECT EXPENSE

Answer 7

Project-related expenses for a firm and its outside consultants that are not reimbursable, plus project-related expenses included in all lump sum fee contracts.

Question 8

INDRECT EXPENSE

Answer 8

General and admin non-project-related operating expenses.

Total indirect expenses includes indirect labor.

Question 9

OVERHEAD RATE

Answer 9

= total indirect expenses / total direct labor dollars

measures the cost of operations not directly attributed to projects.

Targe: 1.3 to 1.5 of total direct labor

ex: $308,241 toal indirect expnse / $ 200,914 total direct labor $ = 1.53 (Hourly salary of $10/hr, the overhead cost would be 1.53X$10=$25.30)

Question 10

BREAK-EVEN RATE

Answer 10

The overhead rate plus the unit cost of 1.00 for an hour of salary.

Target: 2.3 - 2.5 of total direct labor

This means for every $1.00 of salary the firm must recapture $2.30 just to break even.

ex: 1.53 overhead rate +1 = 2.53
(For an hourly salary of $10/hr. The break even cost would be 2.53 x $10 = $25.30

Question 11

UTILIZATION RATE

Answer 11

= direct labor hours / total labor hours x 100 to get %

Measures overall efficiency % - effective labor, not productivity

Target: Firm: 60-65% - Pro-tech staff (incl. principals): 75-85%

ex: 32 hours direct / 40 hours total = 80%

Question 12

HOURLY BILLING RATE

Answer 12

The dollar amount charged to a client relative to one hour of direct labor.

Question 13

NET MULTIPLIER

Answer 13

The ratio of net operating revenue (NOR) to total direct labor.

The measure of return on every dollar of direct labor.

Question 14

NET PROFIT

Answer 14

= gross revenue - (total labor + indirect expenses)

The dollars remaining after deducting all direct and indirect labor and indirect expenses, before any distributions are made or tax is paid.

Question 15

CURRENT EARNINGS

Answer 15

The net dollar amount after all ditributions are made and all applicable taxes have been deducted.

Question 16

TOTAL LABOR

Answer 16

= direct labor + indirect labor
Total Time
(if in $ then refered to as ‘total salary’)

Question 17

7 KEY PERFOMANCE INDICATORS (KPI)
FOR PROFIT-LOSS STATEMENT
ACCRUAL BASIS ACCOUNTING

Answer 17

1. Utilization Rate
2. Overhead Rate
3. Break-even Rate
4. Net Multiplier (Direct Labor Mult.)
5. Profit-to-earnings ratio
6. Net revenue per employee
7. Aged accounts receivable

Question 18

PROFIT TO EARNINGS RATIO

Answer 18

= net operating revenue / total direct labor $

Measures teh revenue generated for every dollar spent on direct labor. Must be greater than the break-even rate for profit to be realized.

Greater than break-even rate
(industry benchmark: 3.0+)

ex: $622,207 NOR / $200,914 total DL$ = 3.1

Question 19

NET REVENUE PER EMPLOYEE

Answer 19

= annual net operating revenue / total number employees

Measures the revenue earnings for each employee. Contributes to establishing net operating revenue in the coming year’s budget.

Target: Greater than $100,000 per employee

ex: $622,207 net operating revenue / 6 employees = $103,701 per employee

Question 20

AGED ACCOUNTS RECEIVABLE

Answer 20

= average annual accounts receivable / (net operating revenue / 365 days)

Measures average time interval in days between date of outstanding invoices & date payment is recieved

Question 21

4 KEY LINE ITMES

ACCRUAL BASIS ACCOUNTING

Answer 21

1. Net Operating Revenue (NOR) or “net revenue”
2. Direct Labor (% of NOR)
3. Total Expenses
4. Net Profit

Question 22

4 KEY LINE ITEMS

CASH BASIS BALANCE SHEET

Answer 22

1. Current Assets
2. Current Liabilities
3. Long-term Liabilities
4. Equity

Question 23

4 KEY FINANCIAL PERFORMANCE INDICATORS (KPI)

MONTHLY FINANCIAL REPORT (CASH BASIS)

Answer 23

1. Solvency (Current Ratio)
2. Liquidity (Quick Ratio)
3. Leverage (debt-to-equity)
4. Return to Equity

Question 24

SOLVENCY

Answer 24

= total current assets / total current liabilities

Measures a firm’s ability to pay current debt. Also known as “current ratio”.

Target: 1.5 to 1.0

Ex: $521,667 total current assets / $218,658 total current liabilities - 2.37

Question 25

LIQUIDITY

Answer 25

= (cash + accounts receivable + WIP) / total current liabilities Measures a firm's ability to convert assets to cash. Target: Min. 1.0 to 1.0 ex: ($518,194: cash + AR + WIP) / $218,658 total current liabilities = 2.37

Question 26

LEVERAGE | or debt-to-equity

Answer 26

= total liabilities / total equity x 100 ( as a %) Measures a firm's ability to manage debt effectively. Target: Less than 35% ex: $280,738 total liabilities / $949,451 total equity = 29.75%

Question 27

RETURN TO EQUITY

Answer 27

= (total net operating revenue - total expenses) / total equity * 100 (As a %) Measures the accumulated amount of money returned on a stockholder's investment for their risk and efforts. Target: Equal to or greater than the anticipated net profit in the annual profit plan (20% or greater). ex: $622,207 NOR - $509,156 total expenses) / $949,451 total equity *100 = 11.9%

Question 28

TOTAL DIRECT EXPENSES

Answer 28

= direct labor + direct expenses

Question 29

TOTAL INDRECT EXPENSES

Answer 29

= indirect labor + total indirect expenses

Question 30

6 BASIC FEE BASIS TYPES

Answer 30

1. Stipulated lump sum 2. Fixed fee + expenses (w/ or w/o cap limit on expense) 3. Percentage of construction cost 4. Hourly to a maximum + expenses 5. Hourly-open-ended (no established maximum) + expenses 6. Fee per unit/sf (mostly used on residential projects) + expenses

Question 31

CHART OF ACCOUNTS

Answer 31

represents sets of properly organized, multi-tiered, interrelated, numeric codes and/or account numbers. Each one serves as teh repository and record for every dollar received, paid, and billed by a firm as shown on a profit-loss statement and balance sheet.

Question 32

PROFIT PLAN

Answer 32

Develops a projection for each of the four primary components that affect profitability: 1. revenue 2. direct labor 3. indirect labor 4. indirect expenses

Question 33

EQUAL PAY ACT

Answer 33

Prohibits wage discrimination by requiring equal pay for equal work. All employers comply

Question 34

OSHA

Answer 34

Requires emplyers to provide a workplace free of recognized hazards. All employers comply

Question 35

FAIR LABOR STANDARDS ACT | FLSA

Answer 35

``` Regulates: Employee overtime status and overtime pay Minimum Wage Record Keeping Child Labor ``` Compliance / All private sector employers with $500,000+ annual volume of sales and/or All federal, state, and local government personnel (except military)

Question 36

I-9 EMPLOYEE ELIGIBILITY VERIFICATION

Answer 36

Verifies: Identity and Right to work in the US Compliance: All employers, must be completed within 3 days of hire, employer must retain I-9 for at least 3 yrs (and at least one yr after termination)

Question 37

PERSONNEL FILES

Answer 37

Employment records maintained for each employee of the company. May include application, resume, performance management documentation, agreements, and acknowledgment forms Compliance: Any personnel or employment record must be preserved for 2 yrs. If the contractor has fewer than 150 employees or does not have a federal contract for at least $150k then the retention period is 1 yr.

Question 38

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT (HIPAA)

Answer 38

Privacy regulation governing individually identifiable health information. Compliance: All health plans, health care providers, and health care clearinghouses.

Question 39

AMERICAN RECOVERY AND REINVESTMENT ACT (ARRA)

Answer 39

Provides: Tax cuts for families and businesses; Funding for entitlement programs, such as unemployment benefits; Funding for federal contracts, grants, and loans. Compliance: Strict reporting on use of ARRA funds

Question 40

EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA)

Answer 40

Sets minimum standards for pension plans to include participation, vesting, benefit accrual, and funding Compliance: All pricate employers with a pension plan program

Question 41

CONSOLIDATED OMNIBUS BUDGET RECONCILIATION ACT OF 1986 | COBRA

Answer 41

[15+ Employees] Requires employers to continue group medical voverage if employment is terminated or hours are reduced. Compliance: All private employers, state and local govt, and edu institutes w/ 15+ employees

Question 42

CIVIL RIGHTS ACT, TITLE VII

Answer 42

Prohibits discriminiation or segregation based on race, color, national origin, religion, and gender in all terms of employment Compliance: All private employers, state, local, and federal local govt, and edu institutes w/ 15+ employees

Question 43

AMERICAN W/ DISABILITIES ACT (ADA)

Answer 43

Prohibits discrimination against a qualified individual w/ a disability Compliance: All private employers, state, local, and federal govt, edu institutes w/ 15+ employees

Question 44

AGE DISCRIMINATION IN EMPLOYMENT ACT (ADEA)

Answer 44

Prohibits discrimination in employment for persons age 40 and over. Compliance: All private employers w/ 20+ employees, unions with 25+ members, state, local and federal govt, employment agencies

Question 45

FAMILY MEDICAL LEAVE ACT (FMLA)

Answer 45

Allows employees to take up to 12 weeks of unpaid leave during any 12-month period to care for family members or because of a serious health condition of the employee. Comliance: 50+ employees; Public agencies, inlcuding state, local, and federal employers, and local education agencies. Private Sector employers who employ 50+ employees for at least 20 workweeks in the current or preceding calendar year.

Question 46

EEO REPORTING

Answer 46

The EEO-1 Report is a compliance survey mandated by federal statute and regulations. The survey requires company employment data to be categorized by race/ethnicity, gender and job category. EQUAL EMPLOYMENT OPPORTUNITY Requires employers to maintain EEO records Compliance: 100+ employees and federal contractors with 50+ employees and federal contracts of $50k+

Question 47

ANNUAL REPORT (FORM 5500)

Answer 47

Annual report detailing financial records of benefit plans Compliance: Pension, welfare, and fringe benefit plans with 100+ participants. Must be filed with IRS 7 mos. after end of plan year and retained for 6 yrs.

Question 48

PROFIT SHARING

Answer 48

a percentage of salary for employees based on the firm's overall profitability, or the profitability of a particular division or office.

Question 49

FINANCIAL MNGMT | 2 PRIMARY REPORTS

Answer 49

1. Profit-Loss (P-L) | 2. Balance Sheet

Question 50

2 ESSENTIAL COMPONENTS of | FINANCIAL MNGMT

Answer 50

1. Annual Budget | 2. Profit Plan

Question 51

PROFIT PLAN FORMAT

Answer 51

3 sections linked together in spreadsheet TOP SECTION / Revenue Projection MIDDLE SECTION / Projected P-L Summary BOTTOM SECTION / Alt. Method to Check NOR and Profit Goal.