CFA Practice Question

CFA Practice Question

The completed contract method ______
A. may be used for long-term contracts at the discretion of the company.
B. may understate gross profit.
C. generally must be used when no contract exists.
Explanation: The completed contract method recognizes revenues and expenses only at the end of the contract. It must be used when any one of the conditions required for use of the percentage-of-completion method is not met.

User Contributed Comments 11

User Comment
ticomico The complete contract method must be used for long-term projects when there is no contract or estimates of revenues or costs are unreliable.
llgoms isn't gross profit understated vs %age completion bec revenue is only recognized at end of contract? why not b?
Carol1 it is only timing difference of recognizing the profits. the total amount of profit is equal at the end of the year.
JZino CCM can be used for short-term contracts
antony So isn't gross profit understated during the early periods when comparing between completed contract and other methods such as percentage of completion?
Hervz Yeah, you'd think so. But it's not specific enough.
StanleyMo i think complete contract is better for short term.
shiva5555 uh, How does it understate gross profit?
Kathkun In the years before the contract is completed, no revenues are recognised.

Hence in these years, gross profits are understated as compared to %-of-completion method?
Kathkun I'm sorry, my doubts were already cleared above by Carol1.
Horv Gross profits are not understated because these "contracts" are all or nothing. If you finish 70% of the job when you are contracted to complete the job, you will not be paid 70% of the "contract" price. You will not be paid at all, therefore gross profits will be accurately reported at $0 (for subject project).
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