CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Czech Ltd. shipped goods to a customer on December 30, 2010. Since Czech used the shipping company requested by the customer, the customer took the risk of the goods not being delivered by the shipping company. The customer received the goods on January 6, 2011. The selling price of the goods was $57,000. The sale was recorded by Czech on January 2, 2011. Czech had paid $42,000 for the goods and used the periodic method to account for its inventory. Which of the following statements about this transaction is true?
A. Income for 2010 is understated by $42,000.
B. Income for 2011 is overstated by $15,000.
C. Revenues for 2010 are understated by $57,000.
Explanation: The revenue should be recorded in 2010 since the goods were shipped before the year's end.

User Contributed Comments 9

User Comment
photoshop Why C is not correct?
geet if the customer didnt use his own shipping company would the revenue only be recognized upon delivery? The following year I/S?
Also...C is correct right?
murli I think C is not correct, because when a company uses Periodic inventory, the goods shipped before December were not available on 31st Dec. 2010, which means that Cost was charged in 2010 itself. Hence for 2011, income statement was overstated by full revenue of 57,000.
eddeb Czech cannot record revenues on which it still holds risk on it.. Revenues should be recorded in 2011. ?
Adkins Customer takes ownership when accepts risk of ownership. This occurred in 2010. Therefore, revenue recognized in 2010.
jackwez also it says they use the periodic inventory method which takes an inventory at year end so inventory would not be overstated in 2010.
Paulvw In 2011:
Dr Accounts Receivable 57000, Cr Revenue 57000
Dr COGS 42000, Cr Inventory 42000
lawlee Wouldn't B be correct too because the 15000 should be recorded in 2010
wglipscomb lawlee - that's what I thought at first, but all you know is that gross profit is overstated 15000 in year 2. You don't have enough info to get to net income.
You need to log in first to add your comment.