Q1. 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)   only one of these statements.

B)   both of these statements.

C)   neither of these statements.

Q2. Information about a company’s revenue recognition policies is most likely disclosed in:

A)   the financial statement notes.

B)   the standard auditor’s report.

C)   Management’s Discussion and Analysis.

Q3. 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.

答案和详解如下：

Q1. 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)   only one of these statements.

B)   both of these statements.

C)   neither of these statements.

Correct answer is A)

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.

Q2. Information about a company’s revenue recognition policies is most likely disclosed in:

A)   the financial statement notes.

B)   the standard auditor’s report.

C)   Management’s Discussion and Analysis.

Correct answer is A)

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

Q3. 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.

Correct answer is B)

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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