CSLB Law & Business Exam flashcards

For swimming pool home improvement contracts, the maximum down payment is the lesser of $200 or 2% of the contract price.

• Special lower limit than standard contracts
• Compare $200 vs 2% of price
• Always take the smaller number

Memory trick: Pools get a smaller splash of cash upfront.

The division of a loan payment between interest expense (income statement) and principal reduction (balance sheet liability).

• Only interest is a deductible business expense
• Principal reduces the loan balance, not an expense
• Amortization schedules show this breakdown over time

Memory trick: Interest is the cost of borrowing; principal is paying back what you owe.

When overhead and profit targets are expressed as percentages of the total selling price, price must be found by dividing cost by (1 minus the combined percentages), not by simple addition.

• Price = Cost ÷ (1 - Overhead% - Profit%)
• Percentages 'of selling price' require division, not addition
• Common error: treating percentages as if based on cost (markup)

Memory trick: When it's 'of the price,' divide — don't just add.

To preserve full lien rights, a claimant must serve the preliminary notice within 20 days after first furnishing labor or materials to the project.

• Notice counted from date of first furnishing
• Late notice only covers 20 days retroactively plus future work
• Direct contractors with the owner are exempt from this notice

Memory trick: 20 days from day one keeps your lien rights spun.

Because mechanics liens cannot attach to public property, contractors and suppliers on public projects must claim against a statutory payment bond instead.

• Public works require a payment bond in lieu of lien rights
• Bond protects subcontractors and suppliers
• Claim deadlines and notice requirements still apply

Memory trick: Can't lien the school, so bond becomes the tool.

Comparing actual job costs to original estimates to measure overruns or savings, expressed as a percentage of the original estimate.

• Formula: (Actual - Estimate) ÷ Estimate x 100
• Used to refine future bids and control costs
• Large variances signal estimating or cost-control problems

Memory trick: Variance is measured against the original estimate, not the actual.

California law requires every employer to have a written Injury and Illness Prevention Program, not merely verbal safety discussions.

• Required under 8 CCR §3203
• Must be in writing and available at each workplace
• Applies to all California employers regardless of size

Memory trick: If it's not written, it didn't happen — IIPP must be on paper.

The amount of sales revenue needed for gross profit to exactly cover fixed overhead costs, resulting in zero net profit.

• Formula: Break-even sales = Fixed Costs ÷ Gross Profit Margin
• Below break-even, the business operates at a loss
• Used to set minimum monthly sales goals

Memory trick: Fixed costs divided by margin tells you the finish line for 'no loss.'

Home improvement contracts must state whether the contractor carries commercial general liability insurance, and if so, provide policy details for the homeowner's reference.

• Required under Business and Professions Code Section 7159
• Must state insurance carrier and policy number if coverage exists
• If no CGL insurance, contract must clearly disclose that fact

Memory trick: No shield, no secret — the contract must show the insurance ticket.

Licensees must notify CSLB within 90 days of any change in officers, directors, partners, or other personnel of record, regardless of qualifying individual status.

• 90-day reporting window for personnel changes
• Applies to officers/directors even if not the qualifier
• Different from the 90-day qualifier disassociation replacement rule

Memory trick: Any name change on the roster gets a 90-day report.

A method of allocating the cost of a fixed asset evenly over its useful life, accounting for its expected salvage value at the end.

• Formula: (Cost − Salvage Value) ÷ Useful Life
• Produces equal depreciation expense each year
• Used for both financial reporting and tax purposes

Memory trick: Spread the cost minus scrap value evenly across the years, like slicing a loaf equally.

A license classification covering fixed works requiring specialized engineering knowledge and skill, such as highways, bridges, dams, and public utilities.

• Distinct from Class B (buildings) and Class C (specialty trades)
• Covers civil engineering-type fixed works
• Contractors must qualify separately for A if their existing license doesn't cover this scope

Memory trick: 'A is for Asphalt and bridges' — engineering fixed works belong to Class A.

Homeowners must provide written notice of cancellation to the contractor by midnight of the third business day after signing.

• Written notice required
• Deadline is midnight of day 3
• Detachable Notice of Cancellation form may be used

Memory trick: Midnight deadline, written and delivered

Employers must provide hazard communication training to employees before their initial assignment to work with a hazardous chemical.

• Training required before initial exposure
• Also required when new hazards are introduced
• Annual refresher does not replace initial training

Memory trick: Train before you touch — safety comes before the task.

This section of the statement of cash flows reports the cash generated or used by a company's day-to-day business activities, such as sales, purchases, and payments for operating expenses.

• Reflects core business operations
• Includes cash from customers and to suppliers/employees
• Most important indicator of a company's financial health

Memory trick: O.I.F. – Operations, Investments, Financing – keeps the cash flowing in a statement.

Under accrual accounting, when cash is received for services already rendered and invoiced, the transaction reduces the Accounts Receivable balance, as revenue was recognized when earned.

• Revenue is recognized when earned, not when cash is received.
• Accounts Receivable is created when revenue is earned but cash not yet received.
• Cash receipt for prior work reduces Accounts Receivable.

Memory trick: Accrual: When you earn it, you record it; when you owe it, you record it.

For public works projects, the applicable prevailing wage rates are determined and locked in at the time the bid is submitted to the awarding body.

• Rates are fixed at bid time.
• Ensures fair bidding among contractors.
• Prevents rate changes during project from impacting bid.

Memory trick: Bid the wage, then engage!

Expenses directly associated with the wages, benefits, and payroll taxes of employees who physically work on a specific project.

• Directly traceable to a specific job.
• Includes hourly wages, employer-paid benefits, and payroll taxes.
• Essential for accurate job costing and bidding.

Memory trick: Direct costs are like the hands-on workers, indirect costs are the office support.

A liquidity ratio that measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory.

• Calculated as (Current Assets - Inventory) / Current Liabilities.
• Indicates immediate liquidity.
• A higher ratio generally suggests better short-term financial health.

Memory trick: Liquid assets quickly cover short-term debts.

In California, local hiring preferences on public works projects are generally unenforceable if they restrict competitive bidding or create barriers to entry for qualified contractors and workers from outside the local jurisdiction.

• Often deemed anti-competitive.
• Generally invalid unless specific exceptions apply (e.g., PLA, state programs).
• Competitive bidding laws prioritize lowest responsible bidder.

Memory trick: Competition is king, local limits can't cling!

A solvency ratio that measures a company's ability to meet its debt obligations by indicating how many times the company's earnings before interest and taxes (EBIT) can cover its interest expenses.

• Formula: Earnings Before Interest and Taxes (EBIT) / Interest Expense.
• A higher ratio indicates better financial health and lower risk for lenders.
• Used to assess a company's capacity to service its debt.

Memory trick: Can you 'cover' your payments? That's the question.

A bond used to remove a mechanics lien from title must be in an amount equal to 125% of the recorded lien claim.

• 125% multiplier is set by Civil Code
• Allows property to be sold/refinanced while lien dispute is litigated
• Lien transfers from the property to the bond

Memory trick: 125% — a quarter more to cover costs

The payback period is the amount of time required for an investment to generate enough cash flow to recover its initial cost. It is a simple capital budgeting technique.

• Formula: Initial Investment / Annual Cash Inflow (for even cash flows)
• Measures investment liquidity and risk
• Generally, shorter payback periods are preferred

Memory trick: Payback Period: Initial Cost 'Divided' by annual cash, to see how 'Quickly' you get your money back.

An inventory valuation method where the exact cost of each individual item sold is used to determine Cost of Goods Sold (COGS) and the remaining items' costs are used for ending inventory.

• Used for unique, high-value, or easily identifiable items.
• Requires detailed tracking of each item's purchase cost.
• Matches actual costs to specific revenues, leading to precise profit calculation.

Memory trick: Specific is for special, FIFO for first, LIFO for last, Weighted for average.

The true annual cost of foregoing a trade discount (e.g., 2/10, net 30), representing the implicit interest rate paid by not taking advantage of the early payment incentive.

• Calculated by considering the discount percentage, the discount period, and the net payment period.
• Formula: (Discount % / (1 - Discount %)) * (365 / (Net Days - Discount Days)).
• Often a very high implied interest rate, making discounts highly beneficial to take.

Memory trick: Discount on time is money saved, or money lost.

Time spent by an employee transporting equipment or materials to or from a public works job site, or driving a company vehicle for work purposes, is considered compensable work time and must be paid at the applicable prevailing wage rate.

• Travel in project-essential equipment is work time.
• Travel in company vehicle for work is work time.
• Must be paid at prevailing wage rates for the applicable craft.

Memory trick: If you drive the gear, it's part of your career!

On public works projects, the general contractor is jointly and severally liable for prevailing wage and other labor law violations committed by their subcontractors, including worker misclassification and underpayment.

• GC is ultimately responsible for all project compliance.
• Joint and several liability applies to penalties.
• Requires GC to diligently monitor subcontractor compliance.

Memory trick: The buck stops with the GC, no matter the sub's mistake!

A legally binding directive from the Department of Industrial Relations (DIR) to cease all work on a public works project due to serious labor law violations, such as prevailing wage non-compliance.

• Issued for serious violations (e.g., willful prevailing wage non-payment).
• Requires immediate cessation of work.
• Work cannot resume until compliance is demonstrated.

Memory trick: Stop sign means STOP, no questions asked!

Contractors and subcontractors on public works projects must retain certified payroll records for a minimum of three years from the date of completion of the public work.

• Minimum 3-year retention period.
• Applies to contractors and subcontractors.
• Records must be accurate and available for inspection.

Memory trick: Three years, no tears, for public works payroll fears!

When a collective bargaining agreement (CBA) exists, public works contractors must pay the higher of either the CBA-specified wage rates or the Department of Industrial Relations (DIR) prevailing wage determination.

• DIR rates are minimum for public works.
• CBA rates can be higher than DIR, then CBA applies.
• If DIR rates are higher, they supersede lower CBA rates.

Memory trick: Always pay the HIGHER, never the lower!

The revenue remaining after subtracting variable costs from sales revenue, representing the amount available to cover fixed costs and contribute to profit.

• Calculated as Sales Revenue - Variable Costs (often direct costs).
• Used in break-even analysis and to assess the profitability of individual products or projects.
• Does not include fixed costs in its calculation.

Memory trick: Contribution is what's left to 'contribute' to fixed costs and profit.

Cash inflows and outflows related to debt, equity, and dividends.

• Includes transactions with owners (e.g., issuing stock, paying dividends).
• Includes transactions with creditors (e.g., borrowing money, repaying loans).
• Shows how a company raises and repays capital.

Memory trick: O-I-F: Operations, Investing, Financing is how cash flows.

Under the accrual method of accounting, revenue is recognized when it is earned, meaning when goods or services have been delivered or performed, regardless of when cash is actually received.

• Revenue recognized when earned, not when cash received
• Matches revenues with related expenses
• Required for most businesses by GAAP

Memory trick: Accrual: When the 'work is Done,' the revenue is 'Won,' not when the money's run.

A contra-revenue account used to record reductions in sales revenue due to customers returning merchandise or being granted allowances for defective goods.

• Has a normal debit balance, which reduces overall net sales.
• Used to track the amount of sales that are not realized due to customer dissatisfaction.
• Part of the sales revenue recognition process in accrual accounting.

Memory trick: Returns & Allowances DEBIT, to reduce the customer's AR.

For public works, particularly annual or master contracts covering multiple tasks, the prevailing wage threshold applies to the total aggregate value of the contract, not just individual work orders, if the work is considered part of a single project or purpose.

• Thresholds: $25,000 new construction/alteration; $15,000 repair/maintenance/demolition.
• If master contract exceeds threshold, all work under it is covered.
• Prevents circumvention by breaking down larger projects.

Memory trick: Total value matters, don't split the bill!

An accelerated depreciation method that expenses more of an asset's cost in the earlier years of its useful life, calculated by doubling the straight-line depreciation rate and applying it to the asset's book value each year.

• Salvage value is ignored in the calculation until the book value approaches it.
• Depreciation rate is (2 / Useful Life).
• Applied to the asset's beginning-of-year book value, not depreciable base.

Memory trick: Double means double the speed, declining means less each year.

Net profit (or net income) is the amount of money a business has left after all expenses, including operating expenses, interest, and taxes, have been deducted from total revenue.

• The 'bottom line' of a company's profitability
• Calculated as Total Revenue - Total Expenses
• Indicates the overall financial success of a project or business

Memory trick: Net Profit: Revenue minus ALL costs, direct and indirect, to see what's 'Net' for you.

Net Operating Income, also known as Earnings Before Interest and Taxes (EBIT), is a measure of a company's profitability from its core operations before accounting for interest and income tax expenses.

• Calculated as Revenue - Cost of Goods Sold - Operating Expenses
• Indicates operational efficiency
• Excludes non-operating items like interest and taxes

Memory trick: Operating Income: Revenue minus COGS and Operating Expenses, it's what you 'EBIT' out of operations.

A financial leverage ratio that indicates the relative proportion of shareholders' equity and debt used to finance a company's assets, reflecting the extent to which owner's equity can cover all outstanding debts.

• Formula: Total Liabilities / Total Owner's Equity.
• Higher ratio implies greater reliance on debt financing.
• Used by lenders to assess risk and by investors to assess financial health.

Memory trick: Solvency is about surviving the long haul, debt vs. equity.

In California public works, a bid bond is typically required to ensure the bidder will enter into the contract if awarded. The maximum amount required for a bid bond is generally 10% of the total bid amount.

• Ensures contractor will sign contract if awarded.
• Maximum 10% of bid amount.
• Protects awarding body from contractor default after award.

Memory trick: Ten percent is the bid bond's extent!

If a contractor on a public works project deducts amounts for fringe benefits from an employee's prevailing wage but the employee does not actually receive those benefits, the contractor must pay the full cash equivalent of those benefits directly to the employee.

• Fringe benefits are part of prevailing wage.
• If not provided, must be paid as cash.
• Contractor cannot retain or redirect funds.

Memory trick: Benefits not given? Cash must be driven!

The total cost of raw materials that were consumed in the production process during a specific accounting period.

• Calculated as Beginning Inventory + Purchases - Ending Inventory.
• A key component in determining the Cost of Goods Manufactured and Cost of Goods Sold.
• Different from 'materials purchased' as it accounts for inventory changes.

Memory trick: Start with what you Had, Add what you Got, Subtract what's Left, to find what you Used.

The owner's residual claim on the assets of the business after all liabilities have been paid. It represents the owner's investment in the business plus accumulated earnings.

• Part of the fundamental accounting equation: Assets = Liabilities + Owner's Equity.
• Also known as shareholder's equity or net worth.
• Increases with owner contributions and net income; decreases with owner withdrawals and net losses.

Memory trick: Assets = Liabilities plus Equity, always balanced!

The difference between the actual cost of materials used and the standard or budgeted cost of materials that should have been used for a given level of output.

• Calculated as Actual Cost - Standard/Budgeted Cost.
• Unfavorable variance: Actual cost > Budgeted cost.
• Favorable variance: Actual cost < Budgeted cost.

Memory trick: Variance is the difference; unfavorable means worse than planned.

A cost that does not change in total as the level of activity (e.g., production, sales, or hours of equipment use) increases or decreases within a relevant range.

• Examples include rent, insurance, and salaries of administrative staff.
• Per unit fixed cost decreases as activity increases.
• Important for break-even analysis and budgeting.

Memory trick: Fixed stays flat, Variable varies.

California law requires the 20-day preliminary notice to be served by certified/registered mail, express service, or personal delivery — not ordinary mail.

• First-class mail alone is insufficient
• Certified/registered mail with return receipt is the common method
• Proof of proper service is essential to preserve lien rights

Memory trick: Certified, not just stamped — proof is required

Cash inflows and outflows related to the purchase and sale of long-term assets, such as property, plant, equipment, and investments in other businesses.

• Inflows: Sale of property, plant, equipment; sale of investments.
• Outflows: Purchase of property, plant, equipment; purchase of investments.
• Reflects management's decisions on capital expenditures.

Memory trick: OIF: Operations, Investing, Financing – where's the cash flowing?

The profit a company makes after deducting the costs associated with making and selling its products or providing its services (direct costs) from its revenue.

• Calculated as Revenue - Cost of Goods Sold (Direct Costs).
• Does not include operating expenses or indirect overhead.
• Indicates the profitability of core operations before overhead.

Memory trick: Gross is before overhead, Net is after everything.

A surety bond obtained by a general contractor on a private project that guarantees payment to subcontractors and suppliers, protecting the property owner from mechanics liens.

• Protects owner from liens by guaranteeing payment to subs/suppliers.
• Required by some owners, especially for larger projects.
• Different from performance bonds (which guarantee completion).

Memory trick: Owners 'Bond' with good contractors to avoid lien 'Pain'.