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发表于 2011-3-12 11:18 | 只看该作者

Which, if any, of the following statements about the installment sales method and cost recovery method is correct?

Statement 1: The cost recovery method recognizes revenue and associated costs of goods sold only when cash is received, based on gross profit margin.

Statement 2: The installment sales method recognizes sales when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

A)
 Only one of these statements is correct.
B)
 Both statements are correct.
C)
 Neither statement is correct.

Neither statement is correct because the definitions are reversed.

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22#
发表于 2011-3-12 11:18 | 只看该作者

An oil exploration company has been contracted to dig 100 exploratory holes for $200,000. The cost to complete this job is estimated to be $150,000, but the company doesn’t recognize any of the $50,000 profit until the job is completed. Which revenue recognition method is being used?

A)
 Cost recovery method.
B)
 Completed contract method.
C)
 Percentage-of-completion method.

The completed contract method doesn't recognize revenue and expense until the contract is completed. The percentage-of-completion method would have recognized a portion of the $50,000 profit prior to completion.

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23#
发表于 2011-3-12 11:18 | 只看该作者

Which revenue recognition method is used when the payment is assured and revenue is earned as costs are incurred?

A)
 Installment sales method.
B)
 Percentage-of-completion method.
C)
 Cost recovery method.

The installment sales method is used when the assurance of payment and estimated bad debts does not exist before cash is collected. Sales revenue and COGS are recognized only when cash is received.

The cost recovery method is used when future cash collections are not assured even after receipt of partial payments. Gross profit is not recognized until all of the cost of goods sold is collected.

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24#
发表于 2011-3-12 11:18 | 只看该作者

Jerry Krome, CFA, is an equity analyst. The head of research at Krome’s firm composes a memo that contains the following statements:

  • To the extent that management has discretion over the firm’s revenue recognition, an analyst should consider policies that recognize revenue later to be more conservative than policies that recognize revenue sooner.
  • When comparing the performance of companies, an analyst can use the information in the financial statement disclosures to adjust the financial statements for differences in revenue recognition policies.

With regard to the implications of revenue recognition policies for financial analysis, Krome should agree with:

A)
 both of these statements.
B)
 only one of these statements.
C)
 neither of these statements.

Because revenue recognition often relies on judgment and estimates from management, it is not always possible to calculate the appropriate adjustments that would account for the differences between companies’ revenue recognition policies. An analyst should use the policies disclosed in companies’ financial statement footnotes to understand the degree to which their revenue recognition is conservative or aggressive. In general, recognizing revenue sooner is considered aggressive and recognizing revenue later is considered conservative.

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25#
发表于 2011-3-12 11:19 | 只看该作者

Information about a company’s revenue recognition policies is most likely disclosed in:

A)
 the standard auditor’s report.
B)
 the financial statement notes.
C)
 Management’s Discussion and Analysis.

Revenue recognition policies are disclosed in the footnotes to the financial statements.

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26#
发表于 2011-3-12 11:19 | 只看该作者

When evaluating the differences between two revenue recognition policies, an analyst should view the policy as more conservative which:

A)
 results in less leverage on the balance sheet.
B)
 recognizes revenue later.
C)
 is more dependent on management estimates.

Recognizing revenue later rather than sooner is considered more conservative. More aggressive (less conservative) revenue recognition can result in less leverage by increasing assets.

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