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On the cash basis of accounting, revenue is recognized and expenses are deducted:
- A When money is received and paid Correct
- B When earned and when incurred That is the accrual basis on the next page, which 'recognizes revenues when earned and expenses when incurred, regardless of when payment is received or made'.
- C When bills are sent and received Neither basis turns on billing. Under the cash basis the trigger is money received and paid, not the date a bill was sent or arrived.
- D When the job is completed Reporting a job's income and costs in the year the contract finishes is the completed contract method, a modification of the accrual basis and not the cash basis.
When money is received and paid, because the cash basis counts revenue when cash comes in and an expense in the year it is paid (CSLB Law Book 2026, p. 50). Counting income when earned and costs when incurred is the accrual basis.
CSLB Law Book 2026, p. 50
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On the completed contract method, when is the income from a long-term job started in one tax year and finished the next reported?
- A As each payment arrives Reporting income as payments arrive is the cash basis, and the completed contract method is a modification of the accrual basis instead.
- B In the completion year Correct
- C Across both years, by progress Spreading revenue and profit over the years the work is done is the percentage of completion method, the other of the two modifications named on the same page.
- D In the year work began The source ties reporting to the year the contract is completed, not to the year it was signed or started.
The completed contract method reports the income and the costs of a contract only in the year the contract is completed. Spreading them across the years the work is done is the percentage of completion method.
CSLB Law Book 2026, p. 51
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What does a balance sheet report about the financial position of a construction business?
- A Its condition at one point in time Correct
- B Its profit or loss across a period That is the income statement, which 'summarizes the operations of the company over a period of time' and shows revenue, expenses and the resulting profit or loss.
- C Its cash receipts during the period A record of cash received across a period is again a period record, while the balance sheet is fixed at one date.
- D Its estimated costs on current jobs Job cost estimates belong to bidding and estimation. The balance sheet lists assets, liabilities and equity.
The balance sheet is a statement of the financial condition of a business at a certain point in time, which is why it is often called a snapshot; the statement that summarizes what happened across a period is the income statement.
CSLB Law Book 2026, p. 51
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A debt on a construction company's balance sheet is a current liability when it:
- A Is due within one year Correct
- B Is due beyond one year That is the long-term category: 'Long-term liabilities are notes or mortgages due one year beyond the balance sheet date.'
- C Is secured by company equipment Collateral does not decide the category. The source's long-term example is a bank loan 'secured by using certain equipment as collateral', and its due date is what makes it long term.
- D Is owed to a supplier Who is owed does not decide it. Accounts payable to suppliers and notes payable on a promissory note are both current when due within the year.
Is due within one year, because current liabilities are the company's debts due within one year of the balance sheet date (CSLB Law Book 2026, p. 55). Being owed to a supplier does not decide it; the due date does.
CSLB Law Book 2026, p. 55
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Working capital, taken from the current sections of a contractor's balance sheet, is calculated as:
- A Current assets minus current liabilities Correct
- B Current assets over current liabilities Dividing is the current ratio: 'To calculate the current ratio, divide total current assets by total current liabilities.' Working capital is a subtraction.
- C Current assets minus inventories Current assets less inventories is the source's simple method of determining quick assets for the quick ratio, not working capital.
- D Total assets minus total liabilities Total assets less total liabilities is net worth or equity, the section representing the owners' claim on the assets of the business.
Current assets minus current liabilities: the difference between those two totals is working capital (CSLB Law Book 2026, p. 60). Dividing one by the other gives the current ratio instead.
CSLB Law Book 2026, p. 60
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Current assets are $480,000, including $180,000 of inventories and $80,000 of retention, and current liabilities are $250,000. The quick ratio is:
- A 0.83 to 1 0.83 is $250,000 divided by $300,000, the quick ratio taken the other way up. Quick assets go over current liabilities.
- B 1.20 to 1 Correct
- C 1.60 to 1 1.60 strips the $80,000 of retention instead of the inventories. The method is 'total current assets minus inventories', and retention is a current asset already earned.
- D 1.92 to 1 1.92 is $480,000 over $250,000, which is the current ratio. The quick ratio substitutes quick assets for current assets.
Quick assets are total current assets minus inventories, so $480,000 less $180,000 leaves $300,000, and dividing that by $250,000 of current liabilities gives 1.20. Retention stays in quick assets because only inventories come out.
CSLB Law Book 2026, p. 60
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A contractor funds a six-month remodel itself and bills the customer only at completion. Invoicing regularly instead would give it:
- A Lower cash demands and better communication Correct
- B A higher total contract price How often a contractor bills does not change what is owed. The same money is due either way; the question is when the contractor asks for it.
- C No further need to report progress This reverses the source, which pairs regular invoicing with keeping the customer informed and tells the contractor to face a problem head-on before it becomes insurmountable.
- D Payment guaranteed within thirty days Nothing in the source attaches a payment period to an invoice. It sets out settlement, small claims and arbitration as what a contractor does when it is not paid.
Lower cash demands and better communication, because invoicing regularly minimizes the business's cash demands while keeping the customer informed (CSLB Law Book 2026, p. 71). Billing more often does not raise the contract price.
CSLB Law Book 2026, p. 71
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A contractor bought an excavator four years ago, and similar machines now sell for far more. On its balance sheet, the excavator is carried at:
- A Original cost less accumulated depreciation Correct
- B Its current market value Market value is the reading the source rules out in terms: fixed assets are valued at cost less depreciation 'regardless of their current market value'.
- C Original cost with no depreciation Cost is only half the measure. Accumulated depreciation is subtracted from it, so a four-year-old machine is not carried at full cost.
- D Replacement cost of a similar machine Replacement cost is another current-value measure, and the valuation rule ignores current values.
Original cost less accumulated depreciation, because fixed assets are valued that way regardless of their current market value (CSLB Law Book 2026, p. 54). A higher price for similar machines today does not change the figure carried.
CSLB Law Book 2026, p. 54
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Which statement most accurately describes the difference between equity funds and debt as sources of financing for a contracting business?
- A Equity costs some control and stays invested Correct
- B Debt costs some control and stays invested The two halves are reversed. With debt 'the owner does not normally give up control of the business', and borrowed money is repaid rather than left in.
- C Equity is repaid with periodic interest Repayment of the original amount with periodic interest is what debt requires. Equity funds remain in the business.
- D Equity investors share no future profits Equity investors acquire 'a share of future profits', which is the price the owner pays for money that stays in.
Equity money comes from investors who take a measure of control and a claim on later profits, and it stays in the business, while debt must be repaid with interest and normally leaves the owner's control untouched.
CSLB Law Book 2026, p. 62
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The financing that fits payroll and material costs on an awarded job before the first progress payment is:
- A A bank line of credit Correct
- B Long-term bank equipment financing Long-term bank financing is offered against financial planning for capital needs, and it does not match a gap that closes with the first progress payment.
- C Equity funds from an outside investor Equity funds cost the owner some control and a share of future profits, which is a heavy price for a short working capital need.
- D A direct Small Business Administration loan The same page says the Small Business Administration 'does not make direct loans, but it does guarantee repayment of a loan'.
A bank line of credit: through it a commercial bank provides the working capital to complete an awarded contract, repaid when the contractor is paid (CSLB Law Book 2026, p. 63). Equity from an outside investor costs control and a share of profits to cover a short gap.
CSLB Law Book 2026, p. 63
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A contractor installs materials bought from an out-of-state supplier that charged no California tax. The use tax is owed by:
- A The installing contractor Correct
- B The out-of-state supplier The tax falls on the person storing, using or consuming the property in this state, and the out-of-state supplier did none of those things here.
- C The property owner The contractor bought the materials and used them by installing them, so the liability is the contractor's, not the owner's.
- D The job's lender A lender finances the job and neither buys nor uses the materials.
The installing contractor, because every person storing, using or consuming in this state property bought from a retailer owes the use tax, and installing the materials is that use (Rev. & Tax. Code s. 6202(a)). The out-of-state supplier charged no California tax and did not use the materials here.
Rev. & Tax. Code s. 6202(a)
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Which cost of operations item is usually the largest single expense on a contractor's income statement?
- A Direct labor payroll for all jobs Direct labor is the payroll cost for all jobs worked in the period and is called an important variable, but materials is the account named 'the largest single expense item'.
- B Direct labor burden and benefits Direct labor burden is the payroll taxes, insurance and benefits attached to the labor payroll, a subset of labor cost rather than the largest line.
- C General and administrative expenses General and administrative expenses are the items of a general nature that cannot be attributed to individual projects, and they are not the largest single expense.
- D Materials used on the job Correct
Materials used on the job, because that account is usually the largest single expense item on the income statement (CSLB Law Book 2026, p. 58). Direct labor is an important cost, but it is not the one named the largest.
CSLB Law Book 2026, p. 58
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A business that files an information return reporting payments it made during the year must also:
- A Send a copy to its bank The copy is owed to the recipient or payer named on the return, which is what lets that person report the same figure.
- B Keep the only copy on file Keeping the return in the file leaves the payee with nothing, and the publication requires the copy to be given out.
- C Post a copy at the job site Nothing asks for a posting; the copy goes to the recipient or payer named on the return.
- D Give a copy to the recipient Correct
Give a copy to the recipient: a business must give a copy of each information return it is required to file to the recipient or payer (IRS Pub. 583, p. 8). Keeping the only copy on file leaves the payee without one.
IRS Pub. 583, p. 8 Reference document, not law.
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Where no first-year write-off is claimed, the cost of business equipment expected to last more than one year is deducted:
- A In full in the year bought Deducting the whole cost in the year bought takes a first-year write-off, and the stem says none is claimed.
- B In the year it is sold Depreciation deducts part of the cost each year the equipment is in use, starting before any sale.
- C When the purchase loan is paid off How the equipment was financed does not decide when its cost is deducted; the cost is spread over the tax years of its use.
- D In parts over several years Correct
In parts over several years: equipment expected to last more than one year generally cannot be deducted in full in the year bought, and its cost is spread over more than one tax year (IRS Pub. 334 (2025), p. 36). Deducting it all at once takes a first-year write-off, which the stem rules out.
IRS Pub. 334 (2025), p. 36 Reference document, not law.
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If a contractor's net worth is $420,000, its sales $2,100,000 and its net income to net worth 15 percent, what is its net income?
- A $63,000 Correct
- B $315,000 This takes the ratio of sales, but the ratio compares net income with net worth, so sales are not its base.
- C $483,000 This adds the net income to the net worth, but the question asks only for the net income the ratio gives.
- D $2,800,000 This divides net worth by the ratio instead of taking the ratio's share of net worth.
$63,000: net income to net worth sets net income against the owners' net worth, and 15 percent of $420,000 is $63,000 (CSLB Law Book 2026, pp. 56 and 61). The $2,100,000 in sales plays no part in this ratio.
CSLB Law Book 2026, pp. 56 and 61
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If a contractor buys an office building for its business this year, over how many years is it depreciated under the Modified Accelerated Cost Recovery System?
- A 7 Seven years is far shorter than any recovery period for a building; nonresidential real property takes 39 years.
- B 15 Fifteen years is the class for improvements to land such as fences, roads and sidewalks, not for a building.
- C 27.5 A recovery period of 27.5 years is for residential rental property, and an office building is nonresidential real property.
- D 39 Correct
An office building is nonresidential real property, which is depreciated over 39 years under the Modified Accelerated Cost Recovery System (MACRS). The shorter 31.5-year period applies only where business use began before May 13, 1993, which cannot be true of a building bought this year.
IRS Pub. 946 (2025), pp. 30 and 33 Reference document, not law.
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If a $1,500,000 contract with $160,000 total estimated profit is 35 percent complete at year end, how much profit is earned under the percentage of completion method?
- A $0 Reporting nothing until the contract is finished is the completed contract method; the percentage of completion method reports profit as work is done.
- B $56,000 Correct
- C $160,000 This counts all of the estimated profit, though only the share matching the work performed is considered earned.
- D $525,000 This takes the completed share of the contract price, which is revenue earned, not profit earned.
$56,000: under the percentage of completion method the share of the work performed is the share of total estimated profit earned, and 35 percent of $160,000 is $56,000 (CSLB Law Book 2026, p. 51). The $1,500,000 contract price is not the base for the profit figure.
CSLB Law Book 2026, p. 51
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A shop purchase has a $255,000 loan, a $45,000 down payment, $8,400 of closing costs and a $5,000 deposit already paid. What cash is due at closing?
- A $48,400 Correct
- B $53,400 This never takes off the $5,000 deposit, which was already paid and comes off the cash due at closing.
- C $58,400 This adds the $5,000 deposit instead of taking it off; a deposit already paid reduces the cash due at closing.
- D $303,400 This adds the $255,000 loan, but the lender pays that part of the price; the buyer brings the down payment and closing costs, less the deposit.
The cash due at closing is $48,400, because it is the down payment plus the closing costs, less the deposit already paid: $45,000 plus $8,400, less $5,000. The loan is not cash the buyer brings, and adding it in overstates the amount.
CFPB Your Home Loan Toolkit, p. 21 Reference document, not law.
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