CFA Practice Question

There are 534 practice questions for this study session.

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?

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....
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