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Financial Reporting And Analysis - Financial Reporting And Analysis Section 1

Avatto > > CFA Level 1 > > PRACTICE QUESTIONS > > Financial Reporting And Analysis > > Financial Reporting And Analysis Section 1

26. Under IFRS, which of the following is not a condition to recognize revenue from the sale of goods on the income statement?

  • Option : B
  • Explanation : Receiving payment is not a revenue recognition criterion
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27. Under US GAAP, which of the following is least likely a criteria for determining when revenue is realized and earned?

  • Option : C
  • Explanation : Under US GAAP, revenue is recognized only when the product has been delivered, or the services have been rendered.
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28. Under US GAAP, a revenue recognition method used for long-term projects where the outcome cannot be measured reliably is most likely the:

  • Option : B
  • Explanation : When the outcome can be measured reliably the percentage-ofcompletion method is used. When the outcome cannot be measured reliably the completed contract method is used. The cost recovery method is used for installment sales, not for long- term projects.
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29. During 2013, Company A sold a piece of land with a cost of 3 million to Company B for $5 million. Company B made a $1 million down payment with the remaining balance to be paid over the next 5 years. It has been determined that there is significant doubt about the ability and commitment of the buyer to complete all payments. Company A would most likely report a profit in 2013 of:

  • Option : B
  • Explanation : Under the installment method, the portion of the total profit that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash. For Company A, 2/5*1 = $0.4 million. Note: cost recovery method could be used in this case, but the reported profit would be 0.
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30. Ken Miller buys a house for $1 million with the payments spread over 10 years. His ability to complete the payments is doubtful. The least appropriate method to recognize revenue after the house is sold is:

  • Option : C
  • Explanation : This is an installment sale. With an installment sale, if there is uncertainty about collecting payments then either the installment method or the cost recovery method is used. The percentage of completion is used for long term contracts.
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Financial Reporting And Analysis Section 1