One of your tasks is to control and manage costs for a consulting company. At th
ID: 2493670 • Letter: O
Question
One of your tasks is to control and manage costs for a consulting company. At the end of a recent month, you find that three consulting jobs were completed and two are 60% complete. Each unfinished job is estimated to cost $10,000 and to earn a revenue of $12,000. You are unsure how to recognize work in process inventory and record costs and revenues. Do you recognize any inventory? If so, how much? How much revenue is recorded for unfinished jobs this month?" Why is important to know and do this and over the long run does not doing this make the numbers different, is there an accounting rule that forces us to think this way?
Explanation / Answer
Inventory should be recognised.
Inventory to be recognised:
Work In Progress Inventory = $10000 * 60% = $6000
Revenue to be recognised for finished jobs = nil
It is important to record the transactions in this manner sinve revenue should not be over estimated and expenses should not be under estimated as per Prudence principle of accounting
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