CFA Practice Question

CFA Practice Question

A firm receives a contract to sell 100 units over the next 3 years and receive payments over the next 3 years. The firm has already manufactured the 100 units. It recognizes the revenues for the entire 100 units in the current year. Then for the current year:
A. Inventory will be understated and Accounts Receivable will be understated.
B. Inventory will be understated and Accounts Receivable will be overstated.
C. Inventory will be correctly stated and Accounts Receivable will be overstated.
Explanation: The firm claims to have delivered goods it actually has not, so inventory will be understated. The firm recognizes revenues which are not yet due and which it has not received, so Accounts Receivables will be overstated.

User Contributed Comments 3

User Comment
enetis Just reasoning here....on why inventory is understated? since the company still technically holds the units it claims it sold. Are we basically saying that the units have been removed from inventory (therefore understated) and included them in COGS?
michaeloa3 That's right enetis. Since they are recognizing the revenues for the sale, then that 100 units will have gone to COGS.
mcfranz Shouldn't A/R be understated? If they've recognized revenues on sales why would they still have the corresponding amount existing in A/R?
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