- Under the accrual concept of income, which of the following are sufficient for revenue recognition to take place? a. completion of the earnings process and actual receipt of cash b. completion of the earnings process and assurance of payment c. delivery of goods and services and passage of risk of ownership from seller to buyer d. delivery of goods and services and the absence of significant contingent obligation on the part of the seller. ----------------------------------------------------------------------------- 2. which revenue recognition method is not consistent with the assurance of revenue and completion of the earnings process given? Revenue recognition method \Assurance of revenue \Completion of earnings process a. installment sales not assured complete b. cost recovery assured complete with contingencies c. sales basis assured complete d. percentage of completion not assured incomplete and costs can be estimated
1b? 2a? not sure though - seems i am still clueless after 1 full reading of CFAI FSA!!! Should I just forget CFA?
1c? 2a?
1c 2a
1b 2d
Char-Lee’s answer is same as the answer from book which I doubt. 1b 2d Char-Lee , could you pls give us some your thoughts?
Question 1 reasoning: Both © and (d) are partially correct, yet they lack the most important part of revenue recognition… assurance of payments. The language in © and (d) are essentially descriptions of the “earning process” referenced in choice (b). Choice (a) is clearly wrong because under accrual accounting methods, cash does not have to change hands. Question 2 reasoning: Choice (d) is clearly wrong because under the percentage-completion-method there must be a comfortable assurance of revenues. All other choices are correct.
in B of Q 2 b. cost recovery assured complete with contingencies +++++++++++++++++++++++++++++++++++++++++++++++ for cost recovery method, the revenue is countable, not assured. so B is also wrong.
Char-Lee Wrote: ------------------------------------------------------- > Question 1 reasoning: Both © and (d) are > partially correct, yet they lack the most > important part of revenue recognition… assurance > of payments. The language in © and (d) are > essentially descriptions of the “earning process” > referenced in choice (b). Choice (a) is clearly > wrong because under accrual accounting methods, > cash does not have to change hands. ------------------------------------------------------------ agree on C and D, since payment is doubtful. Yes, A is more than enough to recognize income under accrual accounting methods but this question is "which of the following are sufficient for revenue recognition to take place? " In the case of A, received cash just make the recognition double sure, or overkill under accrual accounting methods. But it is still sufficient to recognize the income . overkill is still kill.
annexguy Wrote: ------------------------------------------------------- > Char-Lee Wrote: > -------------------------------------------------- > ----- > > Question 1 reasoning: Both © and (d) are > > partially correct, yet they lack the most > > important part of revenue recognition… > assurance > > of payments. The language in © and (d) are > > essentially descriptions of the “earning > process” > > referenced in choice (b). Choice (a) is clearly > > wrong because under accrual accounting methods, > > cash does not have to change hands. > -------------------------------------------------- > ---------- > agree on C and D, since payment is doubtful. > Yes, A is more than enough to recognize income > under accrual accounting methods > but this question is "which of the following are > sufficient for revenue recognition to take place? > " > In the case of A, received cash just make the > recognition double sure, or overkill under accrual > accounting methods. But it is still sufficient to > recognize the income . > overkill is still kill. Just flat wrong, C and D are not sufficient since payment is not assured. Likewise A is not sufficient because “AND actual cash receipt” does not mean revenues must be recognized (think advanced payment for a magazine subscription which causes a liability called “unearned revenues”
Char-Lee Wrote: ------------------------------------------------------- > annexguy Wrote: > -------------------------------------------------- > ----- > > Char-Lee Wrote: > > > -------------------------------------------------- > > > ----- > > > Question 1 reasoning: Both © and (d) are > > > partially correct, yet they lack the most > > > important part of revenue recognition… > > assurance > > > of payments. The language in © and (d) are > > > essentially descriptions of the “earning > > process” > > > referenced in choice (b). Choice (a) is > clearly > > > wrong because under accrual accounting > methods, > > > cash does not have to change hands. > > > -------------------------------------------------- > > > ---------- > > agree on C and D, since payment is doubtful. > > Yes, A is more than enough to recognize income > > under accrual accounting methods > > but this question is "which of the following > are > > sufficient for revenue recognition to take > place? > > " > > In the case of A, received cash just make the > > recognition double sure, or overkill under > accrual > > accounting methods. But it is still sufficient > to > > recognize the income . > > overkill is still kill. > > > Just flat wrong, C and D are not sufficient since > payment is not assured. Likewise A is not > sufficient because “AND actual cash receipt” does > not mean revenues must be recognized (think > advanced payment for a magazine subscription which > causes a liability called “unearned revenues” ++++++++++++++++++++++++++++++++++++++++++++++++++ You are right in above magazine sample. but in the case of “a. completion of the earnings process and actual receipt of cash” earning process is completed, i.e. the magazine already deliveried. so revenue is recognized.
annexguy Wrote: ------------------------------------------------------- > Char-Lee Wrote: > ++++++++++++++++++++++++++++++++++++++++++++++++++ > (snipped for space) > You are right in above magazine sample. but in the > case of > “a. completion of the earnings process and actual > receipt of cash” > > earning process is completed, i.e. the magazine > already deliveried. > so revenue is recognized. It doesn’t say FULL payment was received in cash (ie assured). But I think its a very lame question.
OK, superI’s explanation is enough. thanks all of you.
1.) b Not sure about the second one. I think most of the people who post questions of the forum ae either very tricky or very difficult. I would not judge my ability to take CFA based on questions posted on this forum. Take practice exams and try to score more than 80%.
So B was right…but the last one really blew my mind…I was guessing C but D completely makes sense once you read it over. “accrued revenue” - cash given before good/service received