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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Sunrise Foods Ltd. signed a contract to sell goods worth Rs 5,00,000 to Delhi Mart. Goods were delivered on 28 March, the last day of the financial year, with title passed, and payment is due in 45 days. Delhi Mart has an excellent payment record. Under the Framework, how should Sunrise Foods treat the transaction?

Sunrise Foods should recognise a receivable and income of Rs 5,00,000 in the current year. Goods were delivered with title passed, the customer is reliable, and the amount is measurable, so inflow of benefits is probable. Under the accrual basis, recognition does not wait for cash receipt.

  1. ARecognise a receivable and income of Rs 5,00,000, since the inflow of economic benefits is probable and measurableCorrect
  2. BRecognise only the income when cash is received
  3. CDisclose the amount as a contingent asset
  4. DDefer recognition until the next financial year

Explanation

An asset (receivable) and income are recognised when it is probable that future economic benefits will flow and the amount can be measured reliably. Delivery and transfer of title have occurred and the customer is creditworthy. Waiting for cash would contradict the accrual basis, and a contingent asset applies only where inflow is not virtually certain.

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