Deck 5: Income Measurement and Profitability Analysis

Question 1

Revenue is not recognized under the realization principle unless the earnings process is complete or virtually complete and there is reasonable certainty about the expected collection of the asset received.

Answer 1

True

Question 2

SAB 101 was issued by the FASB to clarify its guidelines on revenue recognition.

Answer 2

False

Question 3

Under the percentage-of-completion method, amounts billed and the cash actually received affect income recognition.

Answer 3

False

Question 4

When the expected collection of accounts receivable is difficult to estimate, companies must use the cost recovery method.

Question 5

If the seller is a principal, the seller typically is not vulnerable to risks associated with delivering the product or service.

Question 6

If the seller is a principal, the seller should recognize gross revenue and cost of sales associated with the transaction.

Question 7

Under IFRS, revenue from product sales is recognized when the risks and rewards of ownership have been transferred to the customer.

Question 8

Firms have free choice as to whether they use the percentage-of-completion method or the completed contract method to account for a long-term contract.

Question 9

Use of the installment sales method indicates little uncertainty about collection of the receivable.

Question 10

Under IFRS, firms have free choice as to whether they use the percentage-of-completion method or the cost recovery method to account for a long-term contract.

Question 11

Use of the installment sales method requires that firms track the gross profit percentage associated with a particular sale.

Question 12

If the seller is an agent, the seller typically is vulnerable to risk associated with delivering the product or service.

Question 13

When the right of return exists and a seller cannot make reliable estimates of future returns, the installment method can be used.

Question 14

When the right of return exists, revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns.

Question 15

Over the life of a particular account receivable, the same total amount of gross profit is recognized under the installment method and the cost recovery method.

Question 16

Under the percentage-of-completion method, the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete.

Question 17

The first disclosure note to the financial statements is typically the summary of significant accounting policies.

Question 18

If the seller is an agent, the seller typically recognizes cost associated with the sale on its own line in the income statement.

Question 19

If the seller is a principal, the seller has primary responsibility for delivering a product or service.

Question 20

If the seller is a principal, the seller typically is vulnerable to risks associated with collecting payment from the customer.

Question 21

Under the completed contract method, gross profit or loss is never recognized until the contract is completed.

Question 22

Revenue from the sale of computer software is always recognized at the point of sale.

Question 23

When accounting for multiple-element software arrangements, the revenue for each element is based on the separate prices stated for each element in the software contract.

Question 24

Vendor-specific objective evidence of separate sales prices is required for multipart software contracts, but estimated selling prices can be used for other multiple-element contracts under U.S. GAAP.

Question 25

IFRS provides detailed guidance concerning accounting for revenue with respect to multiple-element contracts.

Question 26

When the cost recovery method is used to account for a long-term contract under IFRS, an equal amount of cost and revenue is typically recognized during the early life of the contract, such that high initial gross profit is recognized in net income.

Question 27

When accounting for multiple-element arrangements, GAAP indicates that sellers can separately record revenue for part of an arrangement even if the part does not have value to the customer on a stand-alone basis.

Question 28

The percentage-of-completion and completed contract methods calculate different amounts of total profit or loss for a particular contract.

Question 29

The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high.

Question 30

Recognition of franchise fee revenue is dependent on judgments of both substantial performance and expected collection of fees.

Question 31

Estimated losses on long-term contracts are recognized as ratable over the contract term regardless of the revenue recognition method used.

Question 32

Use of the percentage-of-completion method is dependent on a firm's ability to make dependable forecasts of future costs.

Question 33

A company could improve its return on assets by increasing its income or by increasing its total assets.

Question 34

Return on shareholders' equity is increased if a firm can maintain its return on assets but increase its leverage.

Question 35

Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and:

A)Revenue is realized.
B)Any receivable is collected.
C)Collection is reasonably certain.
D)Collection is absolutely assured.

Question 36

A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection.

Question 37

Initial franchise fees are always recognized on the date they are received.

Question 38

Revenue on a multiple-element contract typically is allocated to independent parts of the contract based on their relative selling prices.

Question 39

Under IFRS, firms typically use the cost recovery method if they conclude that the percentage-of-completion method is not appropriate to account for a long-term contract.

Question 40

For long-term contracts, the cost recovery method under IFRS requires recognizing equal amounts of revenue and cost until all costs are recovered.

Question 41

Jing Statistical Services operates a website that links experienced statisticians with businesses that need data analyzed. Statisticians post their rates, qualifications, and references on the website, and Jing receives 25% of the fee paid to the statisticians in exchange for identifying potential customers. VetMed Associates contact Jing and arranges to pay a consultant $1,500 in exchange for analyzing some data. Jing's income statement would include the following with respect to this transaction:

A)Revenue of $1,500.
B)Revenue of $1,500, and cost of services of $1,125 (= 75% x $1,500).
C)Revenue of $375 (= 25% x $1,500).
D)None of the other answers is correct.

Question 42

In its December 31, 2013, balance sheet, Rigsby would report:

A)Realized gross profit of $100,000.
B)Deferred gross profit of $100,000.
C)Installment receivables (net) of $3,200,000.
D)Installment receivables (net) of $4,000,000.

Question 43

Which of the following is not an indicator that the seller is a principal with respect to a transaction?

A)The seller is primarily responsible for providing the product or service to the customer.
B)The seller's primary role is facilitating the sale of the product or service.
C)The seller owns inventory prior to a customer ordering it and after a customer returns it.
D)The seller has discretion in setting prices and identifying suppliers.

Question 44

In its 2013 year-end balance sheet, Reliable would report installment receivables (net) of:

A)$0.
B)$20,000.
C)$4,000.
D)$15,000.

Question 45

Under IFRS, which of the following is not a condition for recognizing revenue?

A)The amount of revenue and costs associated with the transaction can be measured reliably.
B)It is reasonably possible that the economic benefits associated with the transaction will flow to the seller.
C)For sales of goods, the seller has transferred to the buyer the risks and rewards of ownership and doesn't effectively manage or control the goods.
D)For sales of services, the stage of completion can be measured reliably.

Question 46

Merchandise sold FOB destination indicates that:

A)The seller holds the title until the merchandise is received at the buyer's location.
B)The buyer is responsible for delivery of the merchandise to the destination.
C)The full order is back-ordered to its destination.
D)The buyer pays the freight to the destination.

Question 47

In 2014, Rigsby would recognize realized gross profit of:

A)$0.
B)$450,000.
C)$300,000.
D)$400,000.

Question 48

In 2013, Reliable would recognize gross profit of:

A)$0.
B)$6,000.
C)$5,000.
D)$10,000.

Question 49

Explodia.com sells fireworks over the Internet. Customers access Explodia's website and select particular products, and Explodia refers the customer order to a fireworks manufacturer who fulfills the order, ships to the customer, and pays Explodia a 20% commission. Which of the following is true about Explodia?

A)Explodia is an agent in this transaction.
B)Explodia is primarily responsible for providing the product to the customer.
C)Explodia's income statement would report gross revenue and cost of sales associated with these transactions.
D)None of the other answers is true about Explodia.

Question 50

Under IFRS, revenue for a product sale should occur when:

A)Inventory production is complete.
B)Warrantee fulfillment is viewed as unlikely.
C)The seller has transferred to the buyer the risks and rewards of ownership and doesn't effectively manage or control the goods.
D)The buyer has paid a preponderance of installment amounts due.

Question 51

In 2012, Reliable would recognize gross profit of:

A)$0.
B)$25,000.
C)$8,090.
D)$8,333.

Question 52

For a typical manufacturing company, the most common critical point for recognizing revenue is the date:

A)An order is received.
B)Production is completed.
C)The product is delivered.
D)Payment is received.

Question 53

Merchandise sold FOB shipping point indicates that:

A)The seller pays the freight.
B)The buyer holds title after the merchandise leaves the seller's location.
C)The common carrier holds the title until the merchandise is delivered.
D)The sale is not consummated until the merchandise reaches the point to which it is being shipped.

Question 54

Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:

A)Installment sales method.
B)Point of sales method.
C)Cost recovery method.
D)Installment sales method or cost recovery method.

Question 55

Bert's Meat Market sells quarters and sides of beef on the installment basis. Losses on receivables are very difficult to predict, and meat products cannot be repossessed. The revenue recognition method used by Bert would be:

A)Point of sale.
B)Installment sales.
C)Cost recovery.
D)Installment sales or cost recovery.

Question 56

Which of the following was not a criterion for revenue recognition in SAB 101?

A)Cash has been collected.
B)Collection is reasonably assured.
C)Persuasive evidence of an arrangement exists.
D)The seller's price to the buyer is fixed or determinable.

Question 57

At December 31, 2014, Rigsby would report in its balance sheet:

A)Realized gross profit of $500,000.
B)Deferred gross profit of $400,000.
C)Realized gross profit of $400,000.
D)Cost of installment sales $1,600,000.

Question 58

In 2013, Rigsby would recognize realized gross profit of:

A)$500,000.
B)$0.
C)$900,000.
D)$100,000.

Question 59

In 2014, Reliable would recognize gross profit of:

A)$0.
B)$6,000.
C)$8,000.
D)$20,000.

Question 60

In its 2012 year-end balance sheet, Reliable would report installment receivables (net) of:

A)$20,000.
B)$35,000.
C)$25,909.
D)$10,000.

Question 61

When using the cost recovery method of accounting for long-term contracts under IFRS, early in the life of the contract it is typically the case that:

A)Expenses in excess of revenues are recognized.
B)Revenues in excess of expenses are recognized.
C)An equal amount of revenue and expense is recognized.
D)There is no predictable pattern of revenue and expense.

Question 62

In its December 31, 2013, balance sheet, Lake would report:

A)Deferred gross profit of $700,000.
B)Deferred gross profit of $600,000.
C)Installment receivables (net) of $700,000.
D)Installment receivables (net) of $400,000.

Question 63

After Sweeney has transferred a painting to a barbershop, the painting:

A)Should be counted in Sweeney's inventory until the barbershop sells it.
B)Should be counted in the barbershop's inventory, as they now possess it.
C)Should be counted in either Sweeney's or the barbershop's inventory, depending on which incurred the cost of preparing the painting for display.
D)None of the other answers is correct.

Question 64

In 2015, Lake would record a loss on repossession of:

A)$45,000.
B)$200,000.
C)$120,000.
D)$80,000

Question 65

The percentage-of-completion method is preferable to the completed contract method and should only be avoided if:

A)Completion rates are certain.
B)Profits are low.
C)Projects are more than five years to completion.
D)There is a lack of dependable estimates or inherent hazards cause forecasts to be doubtful.

Question 66

Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing gross profit associated with one of these sales?

A)No time delay, recognize gross profit upon delivery.
B)Gunk should recognize gross profit as cash is received under the installment method.
C)Gunk should defer gross until costs are recovered under the cost recovery method.
D)Three years, after the right of return has expireD.If returns can't be estimated, revenue should be deferred until it can or until the return of right expires.

Question 67

Total cash collections on installment sales during 2013 would be:

A)$700,000.
B)$300,000.
C)$800,000.
D)$0

Question 68

When using the percentage-of-completion method of accounting for long-term contracts, the percentage of completion used to recognize gross profit in the first year usually is determined by measuring:

A)Costs incurred in the first year, divided by estimated remaining costs to complete the project.
B)Costs incurred in first year, divided by estimated total costs of the completed project.
C)Costs incurred in first year, divided by estimated gross profit.
D)None of the other answers is correct.

Question 69

In 2012, Lake would recognize realized gross profit of:

A)$150,000.
B)$0.
C)$300,000.
D)$450,000.

Question 70

When using the completed contract method of accounting for long-term contracts:

A)Estimated losses on the overall contract are recognized before the contract is completed.
B)Expenses are recorded each period, but revenue is only recognized when the contract is completed.
C)Use of this method is not permitted under generally accepted accounting principles.
D)Neither gains nor losses are recognized until the contract is completed.

Question 71

The percentage-of-completion method violates the general rule for revenue recognition that:

A)Collection is reasonably assured.
B)Costs are known or reasonably estimated.
C)The earnings process is complete.
D)Collections have been received.

Question 72

In 2014, Lake would recognize realized gross profit of:

A)$0.
B)$450,000.
C)$310,000.
D)$700,000.

Question 73

When using the cost recovery method of accounting for long-term contracts under IFRS:

A)Estimated losses on the overall contract are recognized before the contract is completed.
B)Expenses are recorded each period, but revenue is only recognized when the contract is completed.
C)Companies can use the percentage-of-completion method if that is their preference.
D)Neither gains nor losses are recognized until the contract is completed.

Question 74

Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:

A)When Boomerang delivers a computer to a customer.
B)When Boomerang receives cash from the customer.
C)When a customer returns a computer.
D)Never, because the right of return is unconditional.

Question 75

Sweeney most likely should recognize revenue when:

A)He paints the painting, because the painting is produced while he works.
B)When he transfers a painting to a barbershop.
C)When the barbershop sells the painting.
D)When the barbershop's right of return expires.

Question 76

In 2014, Lake would recognize realized gross profit of:

A)$0.
B)$300,000.
C)$310,000.
D)$700,000.

Question 77

The rationale for adoption of the percentage-of-completion method is that:

A)Results are more conservative.
B)It provides a measure of periodic accomplishment.
C)It is a better match with legal ownership.
D)It results in a lower income tax.

Question 78

In 2012, Lake would recognize realized gross profit of:

A)$150,000.
B)$0.
C)$300,000.
D)$450,000.

Question 79

In its December 31, 2013, balance sheet, Lake would report:

A)Deferred gross profit of $700,000.
B)Deferred gross profit of $1,050,000.
C)Installment receivables (net) of $750,000.
D)Installment receivables (net) of $900,000.

Question 80

The cost recovery method of accounting for long-term contracts under IFRS is sometimes referred to as the:

A)"Sales-neutral approach."
B)"Completed contract method."
C)"Multi-step approach."
D)"Zero profit method."