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Ceres Environmental Services, Inc. NOTES TO FINANCIAL STATEMENTS C) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POliCIES Nature of Business The Company provides a variety of servi~es including emergency response, wood waste recycling, construction, demolition, underground tank installation and removal, environmental consulting, and snow removal. Use of Estimates Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates include those assumed in detennining accrued contract costs, earned revenue under the percentage~of-completion revenue recognition method, the allowance for doubtful accounts, depreciation, and computing earned premiums under auditable insurance policies. Accordingly, actual results could differ from those estimates. Cash Equivalents Cash equivalents consist of short-term, highly liquid, interest bearing investments that have original maturities of three months or less. Revenue and Cost Recognition 0 The Company reports revenue from construction contracts on the percentage-of-completion method. Percentage-of-completion is measured by the percentage of total costs incurred to date to estimated total costs for each contract Because of the inherent uncertainties in estimating costs, it is possible that the Company's estimates of costs and revenues may be revised prior to contract completion. Contract costs include direct subcontractors, materials, labor, outside equipment rental, internal equipment, and other direct costs. Provisions for estimated losses on lUlcompleted contracts are made in tbe period in which such losses are determined. Revisions in cost and profit estimates are reflected in the accounting period when the facts that require the revision become known. Claims are recorded in revenues when realization is probable and the amount can be reliably estimated. The Company is currently performing the largest contract in its history. The Hurricane Katrina US Army Corps of Engineers contract is approximately 10 times larger than its next largest contract. Home office support for this contract will continue long after contract payments have been received and the contract is recognized as complete for financial reporting purposes. The Company intends to continue matching home office overhead expenses in later contract periods to the revenues for the Katrina contract to provide a fair and accurate reporting of costs attributable to that project Property and Depreciation Property and equipment are carried at cost Maintenance and repairs are charged to operations and additions or improvements are capitalized. Items of property sold, retired, or otherwise disposed of, are removed from the asset and accumulated depreciation accounts and any gains or losses thereon are reflected in operations. o (Continued) -5-