Deck 5: Income Concepts, Revenue Recognition, and Other Methods of Reporting

Question 1

The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of understating assets and revenues and overstating liabilities and expenses is known as

A) the doctrine of conservatism.
B) the materiality constraint.
C) the substance over form principle.
D) the industry practices constraint.

Answer 1

A

Question 2

Which of the following is not a criterion outlined in SEC Staff Accounting Bulletin No. 101 for the recognition of revenue? y. Persuasive evidence of an arrangement exists.
Z) Delivery has not occurred.
{) The vendor's fee is fixed or determinable.
|) Collectability is probable.

Answer 2

B

Question 3

One of the basic features of financial accounting is the

A) Direct measurement of economic resources and obligations and changes in them in terms of money and sociological and psychological impact
B) Direct measurement of economic resources and obligations and changes in them in terms of money
C) Direct measurement of economic resources and obligations and changes in them in terms of money and sociological impact
D) Direct measurement of economic resources and obligations and changes in them in terms of money and psychological impact

Answer 3

D

Question 4

Conventionally accountants measure income

A) By applying a value added concept
B) By using a transactions approach
C) As a change in the value of owners' equity
D) As a change in the purchasing power of owners' equity

Question 5

In the traditional transactions approach to income determination, income was measured by subtracting the expenses resulting from specific transactions during the period from revenues of the period also resulting from transactions. Under a strict transactions approach to income measurement, which of the following would not be considered a transaction?

A) Sale of goods on account at 20 percent markup
B) Exchange of inventory at a regular selling price for equipment
C) Adjustment of inventory in lower of cost or market inventory valuations when market is below cost.
D) Payment of salaries

Question 6

Which of the following is not a concept of income identified by Bedford?

A) Psychic
B) Real
C) Investment
D) Money

Question 7

Deliberately recording errors or ignoring mistakes in the financial statements under the assumption that their impact is not significant, is the definition of which of the following earnings management techniques? …. Taking a bath
†) Creative acquisition accounting
‡) Creasing "cookie jar" reserves
ˆ) Abusing the materiality concept

Question 8

Income is equal to the difference between the present value of the net assets at the end of the period and their present value at the beginning of the period, excluding the effects of investments by owners and distributions to owners is the definition of which of the following current value concepts? u. Replacement cost
V) Selling price
W) Exit value
X) Discounted present value

Question 9

The one-time overstatement of restructuring charges to reduce assets, which reduces future expenses, is the definition of which of the following earnings management techniques? . Taking a bath
‚) Creative acquisition accounting
ƒ) Creasing "cookie jar" reserves
„) Abusing the materiality concept

Question 10

One concept of income suggests that income be measured by determining the net change over time in the discounted present value of net cash flow expected to be received by the firm. Under this concept of income, which of the following, ignoring income taxes would not affect the amount of income for a period?

A) Providing services to outsiders and investments of the funds received
B) Production of goods or services not yet sold not yet delivered to customers or clients.
C) Windfall gains and losses due to external causes.
D) The method used to depreciate property, plant and equipment.

Question 11

The principal disadvantage of using the percentage of completion method of recognizing revenue from long-term contracts is that it

A) Is unacceptable for income tax purposes
B) May require that intraperiod tax allocation procedures be used
C) Gives results bases upon estimates that may be subject to considerable uncertainty
D) Is likely to assign a small amount of revenue to a period during which much revenue was actually earned

Question 12

The term revenue recognition originally referred to

A) The process of identifying transactions to be recorded as revenue in an accounting period.
B) The process of measuring and relating revenue and expenses of an enterprise for an accounting period.
C) The earning process that gives rise to revenue realization.
D) The process of identifying those transactions that result in an inflow of assets from customers.

Question 13

Each asset-inventory, plant, equipment, and so on-would be valued based on the selling price that would be realized if the firm chose to dispose of it is the definition of which of the following current value concepts? m. Replacement cost
N) Entry price
O) Exit value
P) Discounted present value

Question 14

Which of the following is not an approach to determining current value? i. Replacement cost
J) Thrift value
K) Selling price
L) Discounting present value

Question 15

The definition of the economic concept of income is usually attributed to which of the following economists?
E) J. R. Hicks
F) Paul Samuelson
G) Ben Bernanke h. Adam Smith

Question 16

Uncertainty and risks inherent in business situations should be adequately considered in financial reporting. This statement is an example of the concept of

A) Conservatism
B) Completeness
C) Neutrality
D) Representational faithfulness

Question 17

Determining periodic earnings and financial position depends on measuring economic resources and obligations and changes in them as these changes occur. This explanation pertains to

A) Disclosure
B) Accrual accounting
C) Materiality
D) The matching concept

Question 18

The cost to replace assets with similar assets in a similar condition is the definition of which of the following current value concepts? q. Replacement cost
R) Selling price
S) Exit value
T) Discounted present value

Question 19

Which of the following accounting theorists called of conservatism the most influential principle of valuation in accounting? }. Henry Sweeney
~) Robert Sprouse
) Robert Sterling
€) Edgar Edwards

Question 20

Overstating sales returns or warranty costs in good times and using these overstatements in bad times to reduce similar charges, is the definition of which of the following earnings management techniques? ‰. Taking a bath
Š) Creative acquisition accounting
‹) Creasing "cookie jar" reserves
Œ) Abusing the materiality concept

Question 21

Under FASB ASC 606, the second step in the revenue recognition process is to

A) Allocate transaction price to the separate performance obligations
B) Determine the transaction price
C) Identify the contract with customers
D) Identify the separate performance obligations in the contract

Question 22

Discuss the differences between the economic and accounting concepts of income.

Question 23

According to FASB ASC 606, the transaction price

A) Excludes discounts, volume rebates, coupons and free products, or services
B) Is the amount of consideration that a company expects to receive from a customer
C) Excludes time value of money if the contract involves a significant financing component
D) Does not consider noncash consideration such as donations, gifts, equipment or labor

Question 24

According to FASB ASC 606, a transaction price for multiple performance obligations should be allocated

A) Based on selling price from the company's competitors
B) Based on what the company could sell the goods for on a standalone basis
C) Based on forecasted cost of satisfying performance obligation
D) Based on total transaction price less residual value

Question 25

Under the provisions of FASB ASC 606, when a customer purchases a product but is not yet ready for delivery, this is referred to as

A) A repurchase agreement
B) A consignment
C) A principal-agent relationship
D) A bill-and-hold arrangement

Question 26

Under the provisions of FASB ASC 606 A company has satisfied its performance obligation when the
A) The company has transferred physical possession of the asset

A) The company has received payment for goods or services
B) The company has significant risks and rewards of ownership
C) The company has legal title to the asset

Question 27

Under FASB ASC 606, the third step in the revenue recognition process is to

A) Determine the transaction price
B) Identify the separate performance obligations in the contract
C) Allocate transaction price to the separate performance obligations
D) Recognize revenue when each performance obligation is satisfied

Question 28

Discuss the three basic concepts of income as defined by Bedford.

Question 29

Phoenix Music Company manufactures and sells stereo systems that include an assurance-type warranty for the first 120 days. Phoenix also offers an optional extended coverage plan under which it will repair or replace any defective part for 2 years beyond the expiration of the assurance-type warranty. The total transaction price for the sale of the stereo system and the extended warranty is $2,000. The standalone price of each is $1,600 and $400, respectively. The estimated cost of the assurance-warranty is $200. The amount assigned to the assurance warranty as unearned warranty revenue should be

A) $2,000
B) $1,600
C) $400
D) $200

Question 30

Under FASB ASC 606, the last step in the revenue recognition process is to

A) Allocate transaction price to the separate performance obligations
B) Recognize revenue when each performance obligation is satisfied
C) Determine the transaction price
D) Identify the contract with customers

Question 31

Consignments are a specialized marketing method whereby the

A) Consignee purchases goods for sale and sends payment when goods are sold
B) Consignee (agent) holds title to the product
C) Consignee pays for good up front and is paid when merchandise is sold
D) Consignee takes possession of merchandise but title remains with manufacturer

Question 32

Business organizations have long recognized that primarily using financial measures such as sales or profitability to measure performance often fails to provide information about the factors that result in success. One of these factors is sustainability. Which of the following is not a pillar of sustainability identified in chapter 5?

A) Phycological
B) Economic
C) Social
D) Environmental

Question 33

According to FASB ASC 606, a company must account for a contract modification as a new contract if the

A) Goods or services are interdependent on each other
B) Promised goods or services are distinct
C) Company has the right to receive consideration equal to standalone price
D) Goods or services are distinct and company has right to receive the standalone price

Question 34

FASB ASC 606 outlines the accounting for contract modifications. Discuss accounting for contract modifications.

Question 35

Under FASB ASC 606, the fourth step in the revenue recognition process is to

A) Recognize revenue when each performance obligation is satisfied
B) Identify the separate performance obligations in the contract
C) Allocate transaction price to the separate performance obligations
D) Determine the transaction price

Question 36

Under FASB ASC 606, when a contract modification does not result in a separate performance obligation, the additional products are priced at the

A) Standalone price of the product
B) Blended price of original contract and contract modification
C) Average selling price of original selling price and standalone price
D) Selling price specified in contract modification

Question 37

List three reasons why income reporting is important to our economic society.

Question 38

Under FASB ASC 606, when multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when

A) Each service is interdependent and interrelated
B) Both performance obligations are distinct but interdependent
C) The product is distinct within the contract
D) Determination cannot be made

Question 39

According to FASB ASC 606, a performance obligation exists when

A) A company receives the right to receive consideration
B) A contract is approved and signed
C) A company provides a distinct product or service
D) A company provides interdependent product or service

Question 40

Under FASB ASC 606, the first step in the revenue recognition process is to

A) Determine the transaction price
B) Identify the contract with customers
C) Allocate transaction price to the separate performance obligations
D) Identify the separate performance obligations in the contract

Question 41

According to the provisions of FASB ASC 606 How do companies recognize revenue from a performance obligation over time?

Question 42

Explain the accounting for sales with right of return under the provisions of FASB ASC 606.

Question 43

Felix Corp. is evaluating a contract to determine proper revenue recognition. The contract is for construction of 10 yachts for a total price of $10,000,000. The customer needs the boats in its showrooms by March 1, 2018, for the yacht purchase season; the customer will provide a bonus payment of $100,000 if all yachts are delivered by the March 1 deadline. The bonus is reduced by $25,000 each week that the boats are delivered after the deadline until no bonus is paid if the boats are delivered after March 22, 2018. Felix frequently includes such bonus terms in it contracts and thus has good historical data for estimating the probabilities of completion at different dates. It estimates an equal probability (25%) for each full delivery outcome. How should Felix determine the transaction price under FASB ASC 606 for this contract?

Question 44

Norford Truck Company sells tractors to area farmers. The price of each tractor includes GPS service for 12 months The GPS service is regularly sold on a standalone basis by Norford for a monthly fee. After the 12-month period, the consumer can renew the service on a fee basis. How many performance obligations does Norford have?

Question 45

Discuss how revenue might be recognized at various points in a company's production - sale cycle.

Question 46

FASB ASC 606 introduces the concept of a performance obligation in recognizing revenue. Discuss:
a. A performance obligation is a promise in a contract to provide a product or service to a customer. This promise may be explicit, implicit, or possibly based on customary business practice.
a. How a performance obligation is defined under FASB ASC 606?
b. How companies determine if a performance obligation exists?
b. To determine whether a performance obligation exists, a company must determine whether the customer can benefit from the good or service on its own or together with other readily available resources.

Question 47

Service warranties. Warranties that provide an additional service beyond the assurance-type warranty. This warranty is not included in the sale price of the product and is referred to as a service-type warranty.
a. Companies do not record a separate performance obligation for assurance-type warranties. These types of warranties are nothing more than a quality guarantee that the good or service is free from defects at the point of sale. These types of obligations should be expensed in the period the goods are provided or services performed. In addition, the company should record a warranty liability. The estimated amount of the liability includes all the costs that the company will incur after sale and that are incident to the correction of defects or deficiencies required under the warranty provisions.
Warranties that provide the customer a service beyond fixing defects that existed at the time of sale represent a separate service and are an additional performance obligation. As a result, companies should allocate a portion of the transaction price to this performance obligation. The company recognizes revenue in the period that the service type warranty is in effect.

Question 48

Discuss the difference between financial capital maintenance and physical capital maintenance.

Question 49

Felix Corp. is evaluating a contract to determine proper revenue recognition. The contract is for construction of 10 yachts for a total price of $10,000,000. The customer needs the boats in its showrooms by March 1, 2018, for the yacht purchase season; the customer will provide a bonus payment of $100,000 if all yachts are delivered by the March 1 deadline. The bonus is reduced by $25,000 each week that the boats are delivered after the deadline until no bonus is paid if the boats are delivered after March 22, 2018. Felix frequently includes such bonus terms in it contracts and thus has good historical data for estimating the probabilities of completion at different dates. It estimates an equal probability (25%) for each full delivery outcome. Assume that Felix has limited experience with a construction project on the same scale as the 10 yachts. How should Felix determine the transaction price for this contract?

Question 50

When measuring the transaction price under the provisions of FASB ASC 606, how does a company account for
a. The existence of a significant financing component (i.e., time value of money), and
a. The existence of a significant financing component-A company must account for the time value of money if the contract involves a significant financing component. When a sales transaction involves a significant financing component the fair value is determined either by measuring the consideration received or by discounting the payment using an imputed interest rate. To determine whether a financing component is significant, a company considers all relevant facts and circumstances, including:
b. Noncash considerations.

Question 51

FASB ASC 606 discusses the concept of transaction price.
a. The transaction price is defined by FASB ASC 606 as the amount of consideration that a company expects to receive from a customer in exchange for transferring goods and services.
a. What is the transaction price according to FASB ASC 606?
b. Some additional factors companies must consider include: (1) Variable consideration, (2) The time value of money, (3) Noncash consideration, and (4) Consideration paid or payable to customer.
b. What are some additional factors related to the transaction price that must be considered in determining the transaction price?

Question 52

Discuss the matching concept.

Question 53

What conditions must be satisfied in order to recognize revenue according to Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements?

Question 54

Under the provisions of FASB ASC 606, companies satisfy performance obligations either at a point in time or over a period of time. Under what conditions does a company recognize revenue over a period of time?

Question 55

Define the following terms:
a. Entry price
When productive capacity is measured using entry price, assets are stated at the cost to replace them with similar assets in similar condition. In order to maintain the entity's physical productive capacity, it must generate enough cash flows to provide for the physical replacement of operating assets. To determine income under this approach, revenues are matched against the current cost of replacing these assets. Consequently, income can be distributed to the owners without impairing the physical capacity to continue operating into the future. As a result, the appropriateness of using the entry value approach relies on the accounting assumption of business continuity.
b. Exit price
Determining current value using exit value requires the assessment of each asset from a disposal point of view. Each asset-inventory, plant, equipment, and so on-would be valued based on the selling price that would be realized if the firm chose to dispose of it. In determining the cash equivalent exit price, it is presumed that the asset will be sold in an orderly manner, rather than be subject to forced liquidation'
Because holding gains and losses receive immediate recognition, the exit price approach to valuation completely abandons the realization principle for the recognition of revenues. The critical event for earnings recognition purposes becomes the point of purchase rather than the point of sale.
c. Discounted present value
When using the present value of the future cash flows expected to be received from an asset (or disbursed for a liability) to determine current value each asset's discounted present value is the relevant value of the asset (or liability) that should be disclosed in the balance sheet. Under this method, income is equal to the difference between the present value of the net assets at the end of the period and their present value at the beginning of the period, excluding the effects of investments by owners and distributions to owners. This measurement process is similar to the economic concept of income because discounted present value is perhaps the closest approximation of the actual value of the assets in use --and hence may be viewed as an appropriate surrogate measure of welloffness.

Question 56

Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?

Question 57

Define the following terms:
a. Holding gains
A holding gain or loss occurs when the value of a balance sheet item changes during an accounting period. For example, when land held by a company increases in value, a holding gain has occurred
b. Materiality
The concept of materiality has had a pervasive influence on all accounting activities despite the fact that no all-encompassing definition of the concept exists. Accounting Research Study No. 7 originally provided the following qualitative definition:
A statement, fact or item is material, if giving full consideration to the surrounding circumstances, as they exist at the time, it is of such a nature that its disclosure, or the method of treating it, would be likely to influence or to "make a difference" in the judgment and conduct of a reasonable person.
Later in SFAC No. 8, the FASB made the following statement regarding materiality:
Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information
of a specific reporting entity. In other words, materiality is an entity specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity's financial report. Consequently, the Board cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.
c. Conservatism
Simply stated, conservatism holds that when you are in doubt; choose the accounting alternative that will be least likely to overstate assets or income.

Question 58

Discuss the four types of income defined by Edwards and Bell.