Financial Reporting And Analysis MCQ - Financial Reporting And Analysis Section 1

31 Dynamo Construction Company uses the percentage-of-completion method to recognize revenue from its long term construction contracts and estimates percent completion based on expenditures incurred as a percentage of total estimated expenditures. A three- year contract for €15 million was undertaken. The project is now at the end of its second year, and the following end-of-year information is available:

	Year 1	Year 2
Costs incurred during year	4,150,000	3,800,000
Estimated total costs	8,500,000	8,500,000

The profit recognized in year 2 is closest to:

In year 2, the revenue is: 15 million * 3,800,000 / 8,500,000 = 6,705,882. The profit is: 6,705,882 - 3,800,000 = 2,905,882.

32 A company entered into a three-year construction project with a total contract price (all figures in „000s $) of $5,000 and expected costs of $4,500. The company recognizes revenue using the percentage of completion method. The data below relate to the contract.

(All figures in „000s $)	Year 1	Year 2	Year 3
Costs incurred and paid	1,500	2,000	1,000
Amounts billed and payments received	1,000	2,000	2,000

The amount of revenue (in $„000s) the company will recognize in Year 2 is
closest to:

(2,000 / 4,500) * 5,000 = 2,222.

33 The core principle of the converged revenue recognition standard (issued by IASB and FASB) is that revenue should be recognized to “depict the transfer of promised goods or services to customers in an amount that reflects:

The core principle of the converged standard is that revenue should be recognized to “depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in an exchange for those goods or services.”

34 Two analysts are discussing the converged standards issues by IASB and FASB in May 2014. Their comments are as follow:
Analyst 1: Revenue recognition requires the application of a five-step process. The process includes identification of the contract with the customer and identification of performance obligations in the contract.
Analyst 2: The performance obligations within a contract represent promises to transfer distinct goods or services.

Both analysts are correct. Analyst 1 has identified the first two steps in the process. Analyst 2 correctly elaborates on the second step.

35 Under the matching principle, a company recognizes some expenses such as cost of goods sold when:

Under the matching principle, a company recognizes some expenses such as cost of goods sold when associated revenues are recognized.