Financial Accounting and Reporting-CPA Practice Exam

What is indicated by progress billings in excess of cost and estimated earnings on uncompleted contracts?

1. Current Liabilities

2. Current Assets

3. Long-term Assets

4. Retained Earnings

The correct answer is: Current Liabilities

When there are progress billings in excess of costs and estimated earnings on uncompleted contracts, it indicates that the company has billed its customers more than the costs it has incurred and the earnings it has recognized up to that point. This situation results from a company receiving payment in advance for work that has not yet been completed or delivering goods or services that are not fully recognized in terms of revenue. This excess billing creates a liability for the company because it represents an obligation to provide further work or deliver goods in the future. Therefore, it is classified as a current liability on the balance sheet. The company is essentially indebted to the customers for the amounts received in excess of what has been recognized as revenue, since the goods or services are still outstanding. Current liabilities are obligations that are expected to be settled within one year, and progress billings fit into this category as they reflect future performance obligations. This accounting approach ensures that the financial statements accurately reflect the company's performance and obligations at any given time, particularly in the context of long-term contracts, where revenue recognition may be complex. In contrast, the other options, such as current assets, long-term assets, and retained earnings, do not apply in this scenario. Current assets represent resources that provide future economic benefits,