A question about financial performance.Need the answer within 2 hrs.Thx soooo mu

Question

A question about financial performance.Need the answer within 2 hrs.Thx soooo much!!!

Test: Statement of Financial Performance Time Remaining: 00:56:13 Submit Test This Question: 1 pt 3 or 7 (1 complete) This Test: 7 pts possible Clean and Maintain Ltd is a supplier of building maintenance services. It signed a contract with a major university on 1 August 2014, under which it will provide services for five years and receive $1 million per year. Clean and Maintain Lid has recognised the entire $5 million ($1 milion per year for five years) as revenue. What errors does this create in Clean and Maintain Ltd's fnancial statements? Choose the correct answer below O A. The expenses must be removed from the amount received before it can be recogniised as revenue; thus, the amount of revenue is too high B. This wil recognise too much revenue at the beginning of the ontract, and not enough revenue an the back end. O C. No revenue can be recognised unti the end of the contract. This misrepresents the amount of revenue that the company has made prior to the end of the contract D Revenue can only be earned by a company which sells goods. The oompany company m representing itself in its financial statements because it is a service

Explanation / Answer

in the given question we are asked to quote the error that is commited by the Co. by recognising entire consideration of five years ($5 million ) at the beginning

Error : (c) . No revenue can be recognised until the end of the contract. this misrepresents the amount of revenue that the company has made prior to the end of the contract.

Reason:

Revenue recognition is a generally accepted accounting principle accrual accounting together with the matching principle, that determines the specific conditions in which revenue is recognized or accounted for, moreover it determines the accounting period, in which revenues and expenses are recognized. The matching concept is followed to avoid misstating earnings for a period. Reporting revenues for a period without stating all the expenses that brought them could result in overstated profit .Matching concept requires accrual accounting following , by which companies recognize revenues when they earn them and expenses in the period they incur them . Generally, revenue is recognized only when a critical event has occurred, and the amount of revenue is measurable. However, A long-term contract is a contract spanning a number of accounting periods. Where the contract spanning a number of accounting periods , generally two methods are followed

If the contract outcome can be measured reliably

Use the percentage-of-completion method calculate revenue and expenses based on that percentage completion, and report those figures in the income statement. Under this method net income is reported in the income statement as work is performed, i.e. at any reporting date estimate the percentage of the contract that has been completed,

If the contract outcome cannot be measured reliably

Revenue with respect to the contract is only reported to the extent of the contract costs incurred

Conclusion : In order ro avoid the voilation of matching & accrual basis of accounting . The revenue of the long term contract should be recognised over the period of contract on the basis of work perfomed. this will help in avoiding the misstatement of Income & expenses in the Income statement , Moreover help the organisation to put forth the true & fair financial performance of the company.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.