Florida General Contractor Practice Exam

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When the percentage of completion income exceeds the amount received, what is the situation referred to?

Overpayment
Underpayment
Accrued payment
Deferred revenue

The correct answer is: Underpayment

In scenarios where the percentage of completion income exceeds the amount received, it indicates that the contractor has recognized more revenue based on the progress of the project than has actually been collected from the client. This situation is termed "Underpayment." Underpayment occurs when the income that has been reported based on the work completed (the percentage of completion method) does not align with the cash flow received from the client. Essentially, it reflects a situation where the contractor is ahead in terms of accounting for completed work but has not yet received or invoiced the corresponding amount of cash needed to cover those completed efforts. This understanding is crucial for contractors to manage cash flow and recognize when additional billing or collection efforts may be needed to align cash receipts with earned income. It helps in financial planning, ensuring that contractors are aware of potential gaps in cash flow that could impact their operations.