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BUDGET CONSTRUCTION CO., INC. AND BUDGET HOLDINGS, LLC NOTES TO THE COMBINED FINANCIAL STATEMENTS Years Ended December 31, 2008 and 2007 NOTE I - Summary of operations and significant accounting policies (Continued): Financial Instruments: The Companies' combined balance sheets include the following financial instruments: cash and equivalents, and contracts receivable. The Companies consider the carrying amounts in the combined financial statements to approximate fair value for these financial instruments because of the relatively short period of time between origination of the instruments and their expected realization. Revenue and Cost Recognition: The Company recognizes revenues on long-term contracts for construction on the percentage-of-completion method, measured by the extent of progress toward completion based on the ratio of cost incurred to total estimated costs. Management follows the guidelines of the Statement of Position 81-1 ,"Accounting for Performance of Construction-Type and Certain Production-Type Contracts", for accounting policy relating to our use of the percentage-of-completion method, estimating costs and revenue recognition. This method is used because manageinent considers it to be the best available measure of progress on these contracts. Revenues from cost-plus-fee and time and material contracts are recognized on the basis of cost incurred during the period plus the fee earned, measured by the cost-to-cost method. Revenues from commercial interior build-outs are recognized on the accrual basis of accounting. Long-term jobs from commercial interior build-outs are recognized on the percentage-of-completion method, measured by the extent of progress toward completion based on the ratio of cost incurred to total estimated costs. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provision, and final contract settlements may result in revisions to costs and income, and are recognized in the period in which the revisions are determined. There were no incentives or claims on contracts. The portion of total revenue earned is determined by the measurement of the extent of progress toward completion based on the ratio of cost incurred to total estimated costs. If a loss on a job becomes known, it is charged to operation in the period of discovery. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenue recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. The Affiliate recognizes revenues and costs on the accrual basis of accounting for financial statements reporting purposes and utilizes the cash method for tax reporting purposes. 7 Benitez & Company, CPA's