Both methods - the percentage-of-completion and completed-contract methods - produce the same net cash flow effect.
Cash Flow Effects
Percentage-of-completed contract method
- Net income (NI) will be higher in the first years and lower in the last year.
- Net Income will be less volatile.
- Total assets will be greater.
- Liabilities will be lower.
Completed contract method
- Net income will be nonexistent in the first years and higher in the last year.
- Net income will be very volatile.
- Total assets will be smaller.
- Liabilities will be higher (no recognition of retained earnings).
- Stockholders equity will be lower.
- Stockholders equity will be more volatile.
Impact on Financial Ratio
|Ratio||Formula||% of Completion Method||Reason||Completed Method|
|Higher||Construction in progress includes portion of estimated profits||Lower|
|Higher||Revenues are reported||Lower - Not measurable prior to completion|
|Assets to Equity||
|Higher||Retained earnings are reported||Lower - Not measurable prior to completion|
|Total Debt Ratio||
|Lower||Liabilities are smaller and the denominator includes equity which is higher||Higher|
The Cash Flow Statement
InvestingRatio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
InvestingObtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
InvestingTotal liabilities are the combined debts an individual or company owes.
InvestingLearn how the debt ratio, debt-to-equity ratio and debt-to-capital ratio are used to evaluate Oracle Corp.'s liabilities, equity and assets.
InvestingRevenue recognition is an accounting term describing how and when a company records revenue in its accounting records.
InvestingThe cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
InvestingLarge amounts of debt can cause businesses to become less competitive and, in some cases, lead to default. To lower their risk, investors use a variety of leverage ratios - including the debt, ...
InvestingThese formulas can help you pick better stocks for your portfolio once you learn how to use them.
InvestingInvestopedia explains: The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated ...
InvestingFind out which financial ratios are most useful when analyzing an investment bank, and why tracking capital efficiency is especially important.