- 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
Freeda's Furniture Store records revenue under the installment sales method. The following information is available for the first year of business: Sales, $100,000; Cost of goods sold, $75,000; Cash collections, $50,000. How much realized gross profit on installment sales will Freeda recognize in Year 1?
B. $0
C. $25,000
A. $12,500
B. $0
C. $25,000
Correct Answer: A
The gross profit rate = (sales- COGS)/sales = ($100,000 - $75,000)/$100,000 = 25%. Realized gross profit = cash collections * gross profit rate = $50,000 * 25% = $12,500
User Contributed Comments 5
User | Comment |
---|---|
kalps | Gross profit percenatge = 25,000/100,000=25% Cash collection X gross profit percenatge = 12,500 However, my reservation is that this is assuming that the gross profit percentage is the same for all sales. |
mtcfa | You can also say: cash collection = 50% of sales price, so 50% of the cost = $37,500; $50,000 - $37,500 = $12,500. |
lexology | All sales = $100,000 In year 1, $50,000 collected. this is 50% of all sales. Gross profit from all sales = 100,000 - 75,000 = 25,000. Hence, since only 50% of sales collected, the gross profit shld be proportioned to 50% as well: i.e. 50% of 25,000 = 12,500. |
johntan1979 | If it is the cost recovery method, answer would be B, i.e. no gross profit is recognized until all of the COGS are collected. That is, it recognizes profit only when cash collections > total COGS. |
leon121 | Good point @mtcfa.... |