Discussion:Inventories-Home Construction
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| 19 June 2009 | |
| Help please! I am preparing a "reviewed" financial statement for a client (which goes straight to the surety bonding agent). The current ratio is 2:1--good, right? Problem: inventories comprise 80% of the current assets-- I really doubt all are current (saleable in 2009). What is the presentation issue here? I suspect I should inquire of the client the probable amount which will be sold in 2009 and split the rest out into a long term asset (of course the client will say 100% -- then what?).
Correct? Thank you in advance for your comments here. | |
| June 19, 2009 | |
| Hmm, I have never seen inventory split into short term and long term. That doesn't mean it hasn't been done, however. My concern would be more along the lines of the value of it. What type of stuff are we talking about here? If it's technological goods, then there should be some type of valuation account or possible write down. | |
| 19 June 2009 | |
| I've seen inventories broken out between short- and long-term based on management estimates of the anticipated usage. You could take a concept from the retail industry and look at his historical sales/COS, and then apply that to the inventory balance to see what you'd expect to sell in the current year.
On the other hand, there's an AICPA Audit and Accounting Guide for Federal Government Contractors, that, while not specifically applicable to you, does address classification of assets and liabiliities (although it dances around inventory), and the theory would be the same for nongovernment contractors. It basically says that classified balance sheets are based on realization within one year being current, unless the company's operating cycle is longer (""the average time intervening between the acquisition of materials or services entering [the production] process and the final cash realization"). The guide goes on to say that "the predominant practice for contractors whose operating cycle exceeds one year is to classify all contract-related assets and liabilities as current under the operating cycle concept and to follow the more specific guidance in ARB No. 43 in classifying other assets and liabilities." To the extent that your inventories are "cost in excess" type stuff, that would clearly be "contract-related," and thus classifyable as current. Other inventories aren't really addressed, but you could analogize.
Good luck. | |
| 19 June 2009 | |
| I think Jerry answered your question perfectly.
And what would be there inventory turnover ratio? | |
| 19 June 2009 | |
| I see the topic as Home Construction, with a surety involved, and a 2:1 ratio and i am wondering if your client is a contractor working under contract for the owner/seller of the homes. If so i would recommend using either of the Long Term Contract accounting methods for contractors. | |
| 19 June 2009 | |
| Good comments all...yes, this is a home construction contractor but it is "spec homes"; therefore, no receivables (no billings in excess of estimated costs/earnings or the reverse). I am going to ask the client for a specific identification of inventory units to be sold within the fiscal year or else I will use a percentage based on historical % (thanks, Jerry). Or, am I way off base here and inventory turnover requires a longer operating cycle than one year (therefore, all inventory is current)? | |
| 20 June 2009 | |
| How about an unclassified balance sheet, just list assets and debt in order of liquidity. Maybe your contractor falls under FASB 66? Tax-wise perhaps using the completed contract method and Rev Proc 92-29 will make your client's life easier. | |
| 20 June 2009 | |
| Mike may be on to something, there. I pulled up the F/S for Hovnanian and Toll Brothers, the only two publicly-traded builders I could think of, and they present their balance sheets as unclassified. I didn't even know public companies could do that, but this could be one of the reasons why it is allowed. Neat. | |
| 21 June 2009 | |
| I will use a percentage based on historical %.... When would that history start? Prior to 2007, or afterwards? A lot has changed out there. | |
RoyDaleOne (talk|edits) said: | 25 June 2009 |
| Construction accounting is not applicable to home builders for GAAP based financial statements.
That is the completed contract or percentage of completion methods are not available as an accounting method for the speculation homes "spec homes" portion of a construction company activities. | |
| 25 June 2009 | |
| Wow. Didn't know about 86-7 until you pointed it out, Roy. Wouldn't have thought that. Thanks. | |
