- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 3. Revenue Recognition in Special Cases
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 |