Why Is There Risk of Earnings Overstatement in Accounting for Construction

question 21

Multiple Choice

Why is there risk of earnings overstatement in accounting for construction contracts?

• A)The long term nature of such contracts makes them a low risk area.
• B)Allocation of revenue and expenses between two or more periods simplifies the accounting.
• C)Significant professional judgment is required to make estimates used in the calculations.
• D)Percentage of completion method reduces the potential for earnings management, manipulation and errors.

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Definitions:

Machine-Hours

A measure of the amount of time machines are operated in the production of goods, often used to allocate manufacturing overhead costs.

Job-Order Costing

An accounting practice that tracks the costs associated with a specific job or batch of goods, capturing direct labor, materials, and overhead.

Predetermined Overhead Rate

A rate calculated at the start of an accounting period to allocate overhead costs to products or services produced.

Machine-Hours

The total time that machinery is operating and engaged in production activities during a specified period.