- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 18. Understanding Income Statements
- Subject 3. Expense Recognition
CFA Practice Question
Which of the following transactions results in a difference between accrual-based net income and net cash flows?
II. A firm writes off a plant location as worthless.
III. A firm pays employees on the last day of each month for the work done during the month.
IV. A firm receives cash immediately upon completion of services performed for clients.
I. A firm sells inventory and receives cash for it in the same accounting period.
II. A firm writes off a plant location as worthless.
III. A firm pays employees on the last day of each month for the work done during the month.
IV. A firm receives cash immediately upon completion of services performed for clients.
A. II only
B. II and IV
C. I and III
Explanation: The loss incurred when the plant location is written off is not a cash flow, but it reduces accrual-based net earnings.
User Contributed Comments 3
| User | Comment |
|---|---|
| benlee | The last statement never states the duration of the service perfromed. If the service was performed over 2 accounting period and the accural based net income would have recognised the revenue earned but not that of the net cash flow. Shouldn't the answer be IV instead |
| tony1973 | you are right in a sense, but "upon" here implies immediately or in the same period I think. |
| jperez049 | Hi, I think item IV would not qualify for recognition of revenues until completion of services (not to be confused with % of completion approach which I believe would not apply in this case) |