CFA Practice Question

CFA Practice Question

The XYZ Company operates a catering service specializing in business luncheons for large businesses. XYZ requires customers to place their orders two weeks in advance of the scheduled events. XYZ bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, XYZ should recognize revenue from its catering services on the date when a ______
A. customer places an order.
B. luncheon is served.
C. customer's payment is received.
Explanation: Revenues should be recognized when they are realized or realizable and earned. The most common time when these two conditions are met is when the product or service is delivered.

User Contributed Comments 7

User Comment
jonaszam What if the customer pays before the service? Aren't revenues credited? And liabilities debited?
anricus If payment is received before service, then bank/cash is debited and creditors/liabilities are credited. Does not effect Income statement only the balance sheet.
chenchow Why can't we count the revenue when the reservation is placed.
nsmwaura Conservative
JepTang In reference to jonaszam's question, when cash has been received before service has been rendered the Balance sheet statement accounts that will be affected are Debit Cash and Credit Unearned Revenue.

After service has been rendered then Debit Unearned revenue and Credit Income on the Income Statement.
mekc recognised initially as unearned revenue and conceptually recognised as income/revenue when services provided
SKIA mekc - great point, the question specifically asks about revenue, not unearned revenue. If it asked about unearned revenue answer A would be correct.
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