Utah General Contractors - Business and Law Practice Exam

Which accounting method is used when a company recognizes revenue only after a contract is completed?

1. Cash Method

2. Accrual Method

3. Completed Contract Method

4. Percentage of Completion Method

The correct answer is: Completed Contract Method

The correct response, which identifies the accounting method used when a company recognizes revenue only after a contract is completed, is the Completed Contract Method. This method is particularly relevant for long-term construction projects or contracts where the outcome and ultimate revenue cannot be reliably determined until the entire contract is fulfilled. Under this methodology, revenue and expenses associated with a project are recorded only upon completion, which means that the financial results of the project don't affect the company’s income statement until all aspects of the contract are finalized. This approach helps in providing a clearer picture of profitability on the project since it avoids the complications that can arise from estimating revenues and expenses during the project’s duration. In contrast, other methods such as the Cash Method and the Accrual Method have different timing for revenue recognition. The Cash Method recognizes revenue when cash is received, and the Accrual Method recognizes revenue when it is earned, regardless of cash flow. The Percentage of Completion Method recognizes revenue based on the work completed to date on a project, which allows for revenue and expenses to be recorded throughout the duration of the contract rather than waiting for its completion. Thus, the Completed Contract Method is uniquely focused on recognizing revenue only at the contract's end, making it the correct choice.