FINANCIAL REPORTING &

ANALYSIS

UNDERSTANDING INCOME
STATEMENT
CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS A : Describe the components of the income statement and alternative presentation formats of
that statement

Question 1
Company A owns 60% of Company B. Company A’s consolidated income statement most
likely includes 100% of Company A’s revenues and expenses and what portion of Company B's?

A. 0%
B. 100%
C. 60%

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
B is correct.
Because Company A owns more than 50% of the shares in Company B it must present consolidated
financial statements, which will include 100% of Company B’s revenues and expenses.

A is incorrect because all subsidiaries, even those that are partially owned, are included in a consolidated
statement.

C is incorrect because all subsidiary revenues and expenses are included, even if they are not 100% owned
by the parent.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS A : Describe the components of the income statement and alternative presentation formats of
that statement

Question 2
A company with a tax rate of 40% sold a capital asset with a net book value of $500,000 for
$570,000 during the year. Which of the following amounts related to the asset sale will most
likely be reported as a line item on its income statement for the year?

A. $570,000
B. $42,000
C. $70,000

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
C is correct
The disposition of a capital asset is reported as a net gain or loss ($570,000 − $500,000 = $70,000) on the
income statement before tax effects.

A is incorrect because it shows the proceeds from the sale, which would apply if the sale were related to
regular operating activities.

B is incorrect because it shows the gain net of tax [70,000× (1 − 0.40) = 42,000], which applies to
discontinued operations and extraordinary items, but not regular assets dispositions.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS A : Describe the components of the income statement and alternative presentation formats of
that statement

Question 3
An income statement in a single-step format presents a subtotal for:

A. amortization of intangibles.
B. operating income.
C. gross margin.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
B is correct

Single-step income statements present a subtotal for operating income.

A is incorrect because income statements in single-step format do not present a subtotal for amortization
of intangibles.

C is incorrect because income statements in single-step format do not present a subtotal for gross margin.
When an income statement shows a gross profit subtotal, it is said to use a multi-step format rather than a
single-step format.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS A : Describe the components of the income statement and alternative presentation formats of
that statement

Question 4
Which of the following best describes a component of the income statement?

A. Amounts that a company owes its vendors for purchases of goods and services
B. Outflows or depletions of assets in the course of a business's activities
C. Obligations from past events that are expected to result in an outflow of economic
benefits

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
B is correct.
Expenses are a component of the income statement and are defined as outflows, asset depletions, and
liabilities incurred in the course of a business’s activities.

A is incorrect because accounts payable is a liability, a component of the balance sheet, and is defined as
amounts that a company owes its vendors for purchases of goods and services.

C is incorrect because liabilities are a component of the balance sheet and are defined as obligations from
past events that on settlement are expected to result in an outflow of economic benefits.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 5
According to International Financial Reporting Standards, which of the following is a condition
that must be met for revenue recognition to occur?

A. Costs can be reliably measured.

B. Goods have been delivered to the customer.
C. Payment has been partially received.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
A is correct
The IFRS conditions that must be met include that the costs incurred can be reliably measured, the seller
knows what it expects to collect and is reasonably certain of collection, and the significant risks and
rewards of ownership have been transferred, which is normally (but not always) when the goods have
been delivered.

B is incorrect because actual delivery is not required, but the transfer of significant risks and rewards of
ownership to the customer is a requirement.

C is incorrect because it only needs to be probable that the economic benefits associated with the
transaction will flow to the entity.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 6
A company uses the percentage-of-completion method to recognize revenue from its long-term
construction contracts and estimates percent completion based on expenditures incurred as a percentage
of total estimated expenditures. A three-year contract for €10 million was undertaken with a 30% gross
profit margin anticipated. The project is now at the end of its second year, and the following end-of-year
information is available:
Year 1 Year 2
Costs incurred during year €3,117,500 €2,582,500
Estimated total costs €7,250,000 €7,600,000

The gross profit recognized in Year 2 is closest to:

A. €617,500.
B. €960,000.
C. €880,000.
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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
A is correct
Percent completed: (Costs incurred/Total costs anticipated) × 100
Gross profit in the year: Percent complete × Future anticipated profit − Profit already recognized
Year 1 Year 2
Costs incurred €3,117,500 €3,117,500 + €2,582,500 = €5,700,000
Percent complete €3,117,500 €5,700,000
 43.0%  75.0%
€7,250,000 €7,600,000

Gross profit 43.0% × (€10,000,000 − 75.0% × (€10,000,000 − €7,600,000) −

€7,250,000) = €1,182,500 €1,182,500 = €617,500
C is incorrect because it calculates the correct percent of completion with changing costs, but uses the
profit margin based on Year 1’s costs:
Gross profit based on first year: 10,000,000 − 7,250,000 = 2,750,000
Change in precent completion × (incorrectly) estimated profit:
(75.0% − 43.0%) × (2,750,000) = 880,000

B is incorrect because it calculates the correct percent of completion with changing costs, but uses the
original profit margin.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
First year gross profit: 43.0% × 10,000,000 × 30% = 1,290,000
Original Anticipated costs: 75.0% × 10,000,000 × 30% − 1,290,000 = 960,000
Or, alternatively: (75.0% − 43.0%) × (30% × 10,000,000) = 960,000

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 7
A retailer provides credit cards only to its most valued customers who pass a rigorous credit
check. A credit card customer ordered an item from the retailer in May. The item was shipped
and delivered in July. The item appeared on the customer’s July credit card statement and was
paid in full by the due date in August. The most appropriate month in which the retailer should
recognize the revenue is:

A. May
B. July
C. August

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
B is correct
The appropriate time to recognize revenue would be in the month of July because the risks and rewards
have been transferred to the buyer (shipped and delivered), the revenue can be reliably measured, and it is
probable that the economic benefits will flow to the seller (the rigorous credit check was completed).
Neither the actual payment date nor the credit card statement date is relevant here.

A is incorrect because the order date is not relevant here because all of the critical elements in the revenue
recognition process are not satisfied until July.

C is incorrect because the payment date is not relevant here because all of the critical elements in the
revenue recognition process are not satisfied until July.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 8
A company entered into a three-year construction project with a total contract price of $10.6 million and
an expected total cost of $8.8 million. The following table provides cash flow information relating to the
contract:
($ millions) Year 1 Year 2 Year 3 Total
Costs incurred and paid $1.2 $6.0 $1.6 $8.8
Amounts billed and payments received $2.4 $5.6 $2.6 $10.6

If the company uses the percentage-of-completion method, the amount of revenue recognized (in millions)
in Year 2 is closest to:
A. $7.2.
B. $5.6.
C. $3.5.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
A is correct
The portion of revenue recognized in Year 2 is equal to the total portion of the costs completed by the end
of the year minus any revenue recognized in Year 1.
($ millions)
Total costs to end of Year 2 $1.2 + $6.0 = $7.2
Total costs of the project $8.8
Percentage of revenue to be recognized by 81.81%
the end of Year 2
Percentage of costs (and revenue) recognized $1.2/$8.8 = 13.63%
in Year 1
Portion of revenue to be recognized in Year 2 68.18%
Revenue recognized in Year 2 68.18% × $10.6 = $7.2

Alternatively:
The revenue reported is equal to the percentage of the contract that is completed in that period, in which
percentage completion is based on costs.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
In Year 2: ($6.0/$8.8) × $10.6 = $7.2.
B is incorrect because it recognizes the amounts billed and collected as revenue.

C is incorrect because it uses one-third of the revenues (just evenly over time): 10.6/3 = 3.5.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 9
An artists’ cooperative sells its artwork on a consignment basis through a local art gallery. The
cooperative should most likely recognize revenue when the art gallery:

A. sells the artwork.

B. remits payment for the artwork.
C. receives the artwork.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
A is correct
Revenue is recognized by the cooperative when the art gallery sells the artwork because that is the point at
which the risks and rewards transfer from the cooperative to a third party and the amount of revenue is
measurable.

B is incorrect because this would be appropriate only if there was a significant collectability concern.

C is incorrect because this would be the usual revenue recognition timing for the sale of goods to a third
party directly.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 10
Under US GAAP, revenue is recognized when:

A. payment is received.
B. earned.
C. product has shipped to buyer.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
B is correct.
A fundamental principle of accrual accounting is that revenue is recognized (reported on the income
statement) when it is earned. US GAAP specify that revenue should be recognized when it is realized or
realizable and earned.

A is incorrect because a company’s financial records reflect revenue from a sale when the risk and reward
of ownership is transferred. If a company receives cash in advance and actually delivers the product or
service later, revenue is recognized as being earned over time as products and services are delivered, not
when payment is initially received.

C is incorrect because until the product has been delivered or the service has been rendered, revenue is
not recognized under US GAAP. This would preclude revenue recognition when the product has been
shipped but the risks and rewards of ownership have not actually passed to the buyer.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 11
Which revenue recognition method is appropriate under US GAAP when there is doubt about a
real estate buyer’s ability and commitment to complete all payments?

A. Installment
B. Completed contract
C. Percentage of completion

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution

A is correct.
The installment method is appropriate when there is doubt about the buyer’s ability to complete
payments.

B is incorrect because the completed contract method is used when the outcome of the contract cannot be
measured accurately, but only if it is probable that the costs will be recovered.

C is incorrect because the percentage-of-completion method is used with long-term contracts when the
outcome can be reliably measured, not when there is doubt about a buyer’s ability to complete payments.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 12
In comparing the financial performance of multiple companies, it is most essential for a
financial analyst to determine:

A. if the monetary effects of their expense recognition policies can be calculated.

B. when cash payments are received.
C. differences in their revenue recognition policies.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
C is correct.
In order to compare one company’s financial statements with those of another company, it is helpful to
understand any differences in their revenue recognition policies. The following aspects of a company’s
revenue recognition policy are particularly relevant to financial analysis: the extent to which a company’s
revenue recognition policy results in the recognition of revenue sooner rather than later, and to what
extent a policy requires the company to make estimates of revenue.

A is incorrect because whether a single-step or multi-step format is used in presenting an income

statement, the resulting net income should be the same, and thus this should be less important to an
analyst in comparing the financial performance of multiple companies.

B is incorrect because a fundamental principle of accrual accounting is that revenue is recognized when it is
earned not when cash payments are received.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 13
At the start of the current year, Company A, which reports using US GAAP, sold a piece of land
to Company B for $10 million. The land cost $6 million. Company B made a $2 million down
payment with the remaining balance to be paid over the next five years. Over the course of the
year, it has been determined that there is significant doubt about the ability and commitment
of Company B to complete all payments. In the current year, Company A would most
likely report a profit related to the sale of the land of:

A. $4 million using the accrual method.

B. $0.8 million using the installment method.
C. $2 million using the cost recovery method.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
B is correct
Because of the uncertainty about collection of the remaining payments, it would not be appropriate to use
the accrual method. Under the installment method, the portion of the total profit that is recognized in
each period is determined by the percentage of the total sales price for which the seller has received cash.
Company A will recognize 2/10 × $4 million = $0.8 million. Although the cost recovery method could have
been used in this situation, the reported profit would be $0.

A is incorrect because, of the significant doubt in the ability of the buyer to complete payment for a real
estate sales contract, either the installment method or cost recovery method should be used to account
for the profit. Therefore, it is inappropriate to book the entire $4 million profit in the current year when
only the down payment of $2 million was made.

C is incorrect because under the cost recovery method of revenue recognition, the company would not
recognize any profit attributable to the down payment because the cash amounts paid by the buyer still do
not exceed the cost of $6 million.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS B : Describe general principles of revenue recognition and accrual accounting, specific
revenue recognition applications (including accounting for long-term contracts, installment
sales, barter transactions, gross and net reporting of revenue), and implications of revenue
recognition principles for financial analysis

Question 14
A company that uses International Financial Reporting Standards (IFRS) entered into a three-
year construction project with a total contract price (all figures in thousands) of $5,300 and
expected costs of $4,400. At inception, the outcome of the contract could not be reliably
measured, but the company did expect to recover its costs. Actual results are shown in the
following table:
($ thousands) Year 1 Year 2 Year 3 Total
Costs incurred and paid $1,200 $2,000 $1,200 $4,400
Amounts billed and $800 $3,000 $1,500 $5,300
payments received

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
The amount of revenue (in thousands) the company recognized in Year 2 was closest to:
A. $2,409.
B. $0.
C. $2,000.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
C is correct

Under IFRS, if the outcome of the contract cannot be reliably measured but the company expects to
recover its costs, then revenue may be recognized to the extent of the contract costs incurred. In Year 2,
the costs incurred were $2,000 thousand, thus the revenue would also be $2,000 thousand and the gross
profit would be $0.

A is incorrect because it is the percent completion revenue 2,000/4,400 × 5,300 = 2,409.

B is incorrect because this is the amount under US GAAP (the completed contract method).

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS C : Calculate revenue given information that might influence the choice of revenue
recognition method

Question 15
A company sells a non-refundable, two-year service contract for €420. Based on historical
patterns, the company expects to incur 25% of service costs in the first year of the contract and
the remainder in the second year. The amount of revenue the company recognizes in the first
year is closest to:

A. €105
B. €420
C. €210

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
A is correct.
Service revenues are recognized by reference to the stage of completion of the service contract. Historical
patterns provide evidence that 25% of the services performed under the contract are incurred during the
contract’s first year. As such, only 25% of the contract revenue would be recognized in the first year:

Calculation
Total contract value €420
Stage of completion at end of first year 25%
Revenue recognized in first year €105 25% ×
€420

B is incorrect because this calculation incorrectly implies that all of the services provided under the
warranty have been rendered by the end of the first year.

C is incorrect because this calculation incorrectly implies that half of the services provided under the
warranty have been rendered by the end of the first year. In fact, historical experience indicates that only
25% of the services provided will have been rendered by the end of that year.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS C : Calculate revenue given information that might influence the choice of revenue
recognition method

Question 16
At the start of the year, a company that uses US GAAP entered a contract to design and build a
bridge with the following terms:

Contract length 3 years

Fixed contract price $40 million
Estimated contract cost $32 million
Costs incurred in first year $12 million

The company was initially quite certain about its cost estimates and intended to recognize
revenue based on them. However, unexpected problems during the first year have caused
engineers to suggest that a more expensive design may be required, costing up to $8 million
more. If the appropriate design cannot be determined before the company’s financial

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
statements are issued, the difference in the amount of revenue the company would recognize
is closest to:

A. $0.
B. $3 million.
C. $15 million.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
C is correct
US GAAP requires that long-term contracts whose outcomes can be reliably measured should be
accounted for using the percentage-of-completion method, based on the stage of completion. Under the
original assumptions, the company would have recognized $15 million of revenue.

Calculations under the Percentage-of-Completion Method

Costs incurred to date $12 million

Estimated total costs $32 million
% total costs incurred to date 37.5%
Total contract revenue $40 million
% revenue to be recognized 37.5%
Current year revenue $15 million
Now that the company is unclear on the appropriate design and thus the cost, the outcome cannot be
reliably measured. The completed contract method is used. Under this approach, no revenue ($0) is
recognized until the contract is substantially complete. The difference in reported revenue under the two
methods is: $15 million − $0 = $15 million.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
A is incorrect because this answer incorrectly implies that the company would still recognize $15 million of
revenue even though the outcome is no longer reliably measurable.

B is incorrect because the cost recovery approach, which is appropriate under IFRS when the outcome
cannot be reliably measured, results in revenue recognition of $12 million, and thus a difference in
revenue of only $3 million ($15 million − $12 million). This approach is not available under US GAAP and is
not appropriate if the original design is confirmed.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS C : Calculate revenue given information that might influence the choice of revenue
recognition method

Question 17

At the time of signing a contract to build a bridge, a construction company has the following
information available on the contract. Engineers estimate that the work will take three years
and that 70% of the work will be completed by the end of Year 2.

£
Total contract amount 500,000
Estimated cost to complete contract 300,000
Estimated expenses for Year 1 155,000
Estimated expenses for Year 2 55,000

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Actual costs incurred were £150,000 and £51,000 in Years 1 and 2, respectively. The company
recognizes revenue using the percentage-of-completion method based on expenses incurred.
The revenue the company will recognize in Year 2 is closest to:
A. £85,000.
B. £91,667.
C. £166,667.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
A is correct
The company will recognize revenue as follows:
Costs Percentage of Costs Incurred to
Year Incurred (£) Date Revenue Recognized per Year
1 150,000 £150,000 50% × £500,000 = £250,000
 50%
£300,000

2 51,000 £201,000 67% × £500,000 − £250,000 =

 67%
£300,000 £85,000
Amount recognized is 67% less
amounts previously recognized
(50%)
B is incorrect because it uses the estimated cost of services incurred in Year 2 as a percentage of the total
£55,000
contract revenue to calculate the percentage complete:  18.33% and £500,000 × 18.33% =
£300,000
£91,667
500,000
C is incorrect because it uses straight-line recognition of revenues over 3 years:  166,667
3

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS D : Describe key aspects of the converged accounting standards for revenue recognition
issued by the International Accounting Standards Board and Financial Accounting Standards
Board in May 2014

Question 18
A company entered into a $100 million contract to build a new sports facility. Construction was
15% complete at the end of Year 1 and 65% complete at the end of Year 2. Just prior to the end
of Year 2, however, the buyer requested some upgrades to the original contract (higher-quality
exterior and interior finishing materials) and agreed to pay an extra $10 million for these
changes. The project manager estimates that the expanded contract (including extras) is 60%
complete. Under the converged revenue recognition standard issued by the International
Accounting Standards Board and Financial Accounting Standards Board in May 2014, the
amount of revenue that the company should recognize in Year 2 is closest to:
A. $51 million.
B. $56 million.
C. $50 million.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
A is correct
The $10 million of upgrades is considered a modification of an existing contract. The company must reflect
the effect of the modification on a cumulative catch-up basis.
Updated contract value $110 million
Stage of completion at end of Year 2 60%
Cumulative revenue to be recognized $66 million
Minus: Revenue recognized in Year 1 $15 million*
Revenue to be recognized in Year 2 $51 million

* Contract value × Percentage complete at end of Year 1 = $100 million × 15% = $15 million
B is incorrect because this answer considers the old project at 65% × $100 million, and the contract extras
at 60% × $10 million = 65 + 6 = 71 − 15 = 56.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
C is incorrect because per the calculation below:
Metric
Original contract value (incorrect) $100 million
Original stage of completion at end of 65%
Year 2 (incorrect)
Cumulative revenue to be recognized $65 million
Less: Revenue recognized in Year 1 $15 million*
Revenue to be recognized in Year 2 $50 million
* Contract value × Percentage complete at end of Year 1 = $100 million × 15% = $15 million

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS D : Describe key aspects of the converged accounting standards for revenue recognition
issued by the International Accounting Standards Board and Financial Accounting Standards
Board in May 2014

Question 19
The industries most likely to be affected by the converged revenue recognition standard issued
in May 2014 by the International Accounting Standards Board and Financial Accounting
Standards Board are those:

A. with repetitive, low-value sales, such as the retail industry.

B. with bundled sales, such as the telecommunications services industry.
C. in highly regulated sectors, such as banking and financial services.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
B is correct
Industries in which bundled services are common are expected to be significantly affected by the
converged standard.

A is incorrect because this is not one of the industries identified as likely to be significantly affected.

C is incorrect because this sector has not been identified as likely to be significantly affected.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
LOS D : Describe key aspects of the converged accounting standards for revenue recognition
issued by the International Accounting Standards Board and Financial Accounting Standards
Board in May 2014

Question 20
The converged revenue recognition standards (issued by the International Accounting
Standards Board and the Financial Accounting Standards Board in May 2014)
are best described as differing from current US GAAP in that they:

A. align the recognition of revenue with the customer’s fulfillment of payment obligations.
B. provide extensive additional guidance for specific industries and transactions.
C. provide a principles-based approach applicable to many types of revenue-generating
activities.

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CFA LEVEL - 1 FRA - UNDERSTANDING INCOME STATEMENT
Solution
C is correct
The converged standards aim to take a principles-based approach that avoids the provision of specific rules
and requirements characteristic of current US GAAP revenue recognition standards.

A is incorrect because neither current US GAAP nor the new standard suggests aligning revenue
recognition with receipt of payments, except where collectability is uncertain.

B is incorrect because current US GAAP includes extensive guidance on specific industries and transactions.
The new standard moves away from this approach.

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