When compared to the percentage-of-completion method, the completed contract method
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A. B. C. D. E.A
The completed contract method reports larger total assets because it accumulates inventory.
The completed contract method and the percentage-of-completion method are two different ways to account for long-term construction contracts. Let's analyze each answer choice in relation to the comparison between these two methods:
A. Reports larger total assets: The completed contract method recognizes revenue and expenses only upon completion of the contract. Until the contract is completed, no revenue or expenses are recognized, which means that no portion of the contract's value is included in the assets. On the other hand, the percentage-of-completion method recognizes revenue, expenses, and a portion of the contract's value proportionate to the percentage of work completed. Therefore, the percentage-of-completion method typically reports larger total assets compared to the completed contract method. Therefore, option A is incorrect.
B. Reports higher net assets: Net assets refer to total assets minus total liabilities. Since the completed contract method recognizes revenue and expenses only upon completion, it does not impact net assets directly. Similarly, the percentage-of-completion method also does not affect net assets directly because it recognizes revenue and expenses proportionate to the progress of the contract. Therefore, option B is incorrect.
C. Reports higher cash flows: The completed contract method recognizes all cash flows related to the construction contract upon completion. On the other hand, the percentage-of-completion method recognizes cash flows proportionate to the progress of the contract. As a result, the completed contract method typically reports higher cash flows compared to the percentage-of-completion method since it includes all cash flows in the final period. Therefore, option C is incorrect.
D. Reports income earlier: The completed contract method recognizes income only upon completion of the contract. This means that income is reported in a single period, typically the final period. In contrast, the percentage-of-completion method recognizes income proportionate to the progress of the contract. As a result, the percentage-of-completion method reports income earlier over the course of the contract as work progresses. Therefore, option D is incorrect.
E. Uses higher estimates of selling prices: Both the completed contract method and the percentage-of-completion method do not directly involve estimates of selling prices. Instead, they focus on recognizing revenue and expenses based on the progress or completion of the contract. Therefore, option E is incorrect.
In summary, the correct answer is D. The completed contract method reports income later compared to the percentage-of-completion method.