CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Clay's Construction Company does work on large construction contracts that take many years to complete. Before they become a public company, they are trying to decide which method of recognizing revenue they should use for financial reporting only. If they decide to use percentage of completion rather than completed contract, the effect will be ______.
A. higher net income and lower cash flow
B. lower net income and higher cash flow
C. smoother net income and the same cash flow
Explanation: Choice of accounting method does not affect cash flow.

User Contributed Comments 9

User Comment
geet In the scweser books it says percentage completion gives a higher net income. ??
tony1973 it really depends when you say "higher income": percentage completion gives you higher income in years prior to completion year only (suppose the project is profitable). In completion year the completed contract method gives you higher income.
sdutt2475 higher net income during earlier years for %-completion
danlan Lower cash flow for earlier years because of the tax on higher net income?
DAS11 same net income AND same cash flow for both methods. % comp only gives us a smoother net income during project.
danlan Same cash flow, but smoother net income (not same net income)
bani007 I agree with danlan
samerthehammer What is smoother net income?
Saibot it does not say early years so it cannot be A
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