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Finance: What is the percentage of completion method? 4 Views
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Transcript
- 00:00
Finance Allah Shmoop What is the percentage of completion method
- 00:09
Yeah and has nothing to do with whether or not
- 00:11
Aaron Rodgers is having a good day behind center It's
- 00:14
an accounting system people that deals with relatively complex methods
- 00:18
of figuring out proper attribution of revenues and expenses usually
Full Transcript
- 00:22
as they relate to long term build projects For example
- 00:26
Jos Shipbuilding Company Ship Happens agrees to build the SS
- 00:30
Neuquen ater for the US government for a billion dollars
- 00:34
It'll take four years to build than the Navy releases
- 00:36
two hundred fifty million bucks in what become annual revenues
- 00:39
to ship happens Well Joe's cost to build the ship
- 00:42
will be eight hundred million box and by the time
- 00:44
the Neuquen Aitor is built Jo will have made two
- 00:47
hundred million dollars in operating profit But along the way
- 00:50
Joe has to figure out how he'll count the beans
- 00:53
That is how he'll attribute expenses along with the revenues
- 00:56
that air coming in in blobs Yes and this is
- 00:58
not easy because he spent a fortune hiring the thousands
- 01:01
of workers and leasing the dock space and pre ordering
- 01:05
millions of tons of steel and so on Well if
- 01:08
he uses the percentage of completion method of accounting well
- 01:11
then he just figure out the total cost to build
- 01:13
the ship And if he spent three hundred twenty million
- 01:15
dollars that first year well then it would be three
- 01:17
twenty Divided by that eight hundred million or forty percent
- 01:20
of the total right thirty two over eighty is forty
- 01:23
So even though only twenty five percent of the time
- 01:26
has passed I e Only one year out of four
- 01:28
Joe would recognize forty percent of his total expenses because
- 01:32
well he's using the percentage of completion method And financially
- 01:36
the ship is now forty percent complete to this should
- 01:38
make sense And because we're using this method where expenses
- 01:42
kind of drive the bus well then at tribute that
- 01:45
forty percent to the revenues line So he'd recognize forty
- 01:48
percent of his billion dollars in revenues or four hundred
- 01:51
million bucks as recognized revenues in Year one to show
- 01:55
operating profits of well eighty million bucks pretax a percentage
- 01:59
of completion approached to revenue recognition works well When the
- 02:02
following is true there are clear and definitive contract terms
- 02:06
and price The customer will likely pay the full amount
- 02:09
You have a good idea of when the contract will
- 02:12
be completed and there's a clear way to identify progress
- 02:16
Check those four boxes and it's probably percentage of completion 00:02:19.14 --> [endTime] time And yes the crowd goes wild
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