Cut-off testing around year-end for WIP and costs in construction projects is intended to verify which of the following?

• A. Verify that costs incurred near year-end are associated with the correct period; test by tracing invoices and change orders dated before/after period end and comparing to subsequent payments.
• B. Revenue recognized on cash basis
• C. Cut-off is not necessary for construction
• D. Only track invoices over a threshold

Answer: (D)

The main concept here is making sure that costs and work-in-progress for construction projects are recorded in the correct accounting period, especially around year-end. In construction, many costs (labor, materials, subcontractors, change orders) accumulate as WIP, and some items cross the period boundary. Cut-off testing around year-end checks that those costs are assigned to the right period and reflected properly in the WIP balance.

The best answer is that you verify those near-year-end costs by tracing the supporting documents—such as invoices and change orders—dated around the period end and comparing them to subsequent payments. This approach ties the incurred costs to the period in which they belong and confirms how they flow into the WIP and eventual recognition, ensuring the timing of recording is correct.

Why the other ideas don’t fit as well: revenue recognized on a cash basis is about revenue timing, not the cost/WIP cutoff around year-end. Cut-off is indeed necessary for construction because of long-duration projects and the importance of accurate WIP and cost timing. Focusing only on invoices above a threshold could miss smaller, but still material, items and wouldn’t guarantee proper period recording.