CFA Practice Question

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CFA Practice Question

In order to recognize revenue during the production phase of a product, the expected future costs necessary to complete the product must be reliably estimated. True or False?
Correct Answer: True

Reliable estimates of expected future costs must be available in order for revenue to be recognized prior to completion.

User Contributed Comments 7

User Comment
teddajr Future revenue recognition prior to completion can be achieved with availability of reliable estimates of expected future costs.
kutta2102 I'm slightly confused. How can we recognize revenue when the product is in the "production" stage? Revenue cannot be recognized until the product is actually delivered to the customer.
ppjar yes you can still recognize revenue even if the project is not complete: think about a huge project that takes years to complete. You would not recognize the revenue after all these years...
Drzewes percentage of completion method, installment sales method...
johntan1979 What about the cost recovery method? Cost cannot be reasonably determined. So the statement above is false, since under this method, sales are recognized when cash is received, but no gross profit is recognized until all of the costs of goods sold are collected. That is, it recognizes profit only when cash collections exceed the total cost of the product sold.
schweitzdm johntan1979 has a point. This question is confusing.
kingirm Reliable or reasonable?
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