Question

The principal advantage of the completed-contract method is that

a. reported revenue is based on final results rather than estimates of unperformed work.
b. it reflects current performance when the period of a contract extends into more than
one accounting period.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used.

Answer 1

The main advantage of the completed-contract method is the accurate revenue reporting based on the final results of the contract instead of estimates, ensuring precise reflection of a contract's profitability.

Step-by-step explanation:

The principal advantage of the completed contract method is that reported revenue is based on final results rather than estimates of unperformed work. This method allows revenue recognition only when a contract is fully completed, thereby basing profits on exact and known amounts rather than estimates, which might change. This technique contrasts with other revenue recognition methods, such as the percentage-of-completion method, where revenue is recognized progressively based on estimated completion percentages and thus can involve more uncertainty and potentially frequent adjustments. It is essential to differentiate between accounting profit, which is total revenue minus explicit costs, and economic profit, which encompasses both explicit and implicit costs. The completed contract method deals with these concepts on the basis of final figures rather than estimates, ensuring a more accurate reflection of a contract's profitability only after its completion.