EssayQuestionsChapter6 - McKeith and Collins Financial Accounting Reporting 2nd edition Essay Questions Chapter 6 1\"IAS 11 allows companies to recognize

EssayQuestionsChapter6 - McKeith and Collins Financial...

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McKeith and Collins, Financial Accounting & Reporting, 2 nd edition Essay Questions Chapter 6 1. "IAS 11 allows companies to recognize a profit before a construction contract is completed. In most other circumstances, this would be unacceptable and imprudent." Discuss. 2. "The recognition criteria of IAS 11 provide entirely adequate safeguards for the use of the percentage of completion method in construction contracts. When these criteria are met, failure to use the method leads to misleading financial statements. Discuss. 3. Traditionally, the critical event for recognizing revenue has been the point of sale. Critically discuss the problems with this approach and identify, giving examples, at what times, other than the point of sale, it may be appropriate to recognize revenue. 4. IAS 18 has been criticized for its principles based approach and for not providing specific guidance related to revenue recognition in different industries. Outline the changes proposed by ED/2010/6 Revenue from Contracts with Customers and critically discuss whether the new standard's requirements will answer these criticisms. Key: Level I = Easy Level II = Intermediate Level III = Difficult
McKeith and Collins, Financial Accounting & Reporting, 2 nd edition Essay Questions with solutions 1. "IAS 11 allows companies to recognize a profit before a construction contract is completed. In most other circumstances, this would be unacceptable and imprudent". Discuss.Basic answerDefine construction contractOutline the issue i.e. contract spanning more than one accounting periodExplain that IAS 11 identifies 3 types of situation: profitable/reliable, profitable not reliable, loss making and that only when strict criteria are met can a profit be recognizedMoreover, accounts are prepared in accordance with the matching concept - it couldbe argued therefore that where the "matched" income exceeds the "matched" expenditure for a proportion of the contract, it is only applying the accruals concept to the contract as a whole.Good answerDiscuss alternatives - completed contract method - used in USAExpand on methods of determining stage of completion - some more reliable than others e.g. surveyor V costs as percentage of total costs - could expand on problemsif not possible to audit.Potential for variability of reported profits over the affected accounting periods depending on the accuracy of the determination of the stage of completion.Difficulty: Level IIMcKeith - Chapter 06 #56McKeith Chapter 6

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