CFA Practice Question

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CFA Practice Question

Which of the following transactions results in a difference between accrual-based net income and net cash flows?

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)
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