Chapter 4

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Questions and Answers

Which of the following is the primary reason why there is significant pressure on management of public companies to reach targeted revenue forecasts?

Decreasing revenues lead to decreasing share prices.
Meeting revenue forecasts avoids internal audits.
Increasing revenues allow companies to expand and lead to increasing share prices. (correct)
Reaching revenue targets ensures compliance with tax regulations.

Under ASPE, revenue from the sale of goods can be recognized even if the seller retains some control over the goods.

False (B)

According to the content provided, what two key issues must be addressed with revenue recognition?

recognition and measurement

Entities reporting under ASPE use an ______-based approach to revenue recognition.

earnings Signup and view all the answers

Which event might negatively affect an entity's reputation causing shareholders to question the integrity of management?

Restating previously released financial statements. (C) Signup and view all the answers

It is not necessary for entities to disclose their revenue recognition policies in the notes to their financial statements.

False (B) Signup and view all the answers

Under IFRS, what is the primary focus of the contract-based approach to revenue recognition?

The contracts a company has with its customers. (C) Signup and view all the answers

Match the condition of revenue recognition with the description of it:

Transfer of Significant Risks and Rewards = The buyer now bears the economic risks associated with owning the goods. Measurable Consideration = The amount to be received is reliably determined. Performance of Service = The service must be completed to the agreed standards. Assured Collection = The seller must be reasonably sure of receiving payment. Signup and view all the answers

What is the typical consequence for companies that fraudulently overstate income by prematurely recognizing revenue?

They must restate their previously released financial statements and often face fines, sanctions and class-action lawsuits. (A) Signup and view all the answers

When a company offers customers the right to return goods, it is acceptable to delay estimating potential refunds until the return period expires.

False (B) Signup and view all the answers

What are the five steps management uses to determine when to recognize revenue?

<ol> <li>Identify the contract; 2. Identify the performance obligations; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations; 5. Recognize revenue when the performance obligation is satisfied.</li> </ol> Signup and view all the answers

An assurance warranty against defects of a product is considered a _________ obligation.

performance Signup and view all the answers

Match the type of warranty with its accounting treatment:

Assurance Warranty = Liability established at the time of sale, based on historical claims. Service Warranty = Revenue recognized over the warranty period. Signup and view all the answers

How are actual warranty claims typically handled in relation to an established warranty liability?

They reduce the warranty liability. (C) Signup and view all the answers

The income statement measures the financial position of an entity at a specific point in time.

False (B) Signup and view all the answers

When a company sells an extended warranty separately from the initial sales transaction, how is the revenue typically recognized?

Recognized as deferred revenue and amortized over the warranty period. (C) Signup and view all the answers

What is the primary reason companies offer sales discounts?

To entice customers to pay their invoices as quickly as possible. (A) Signup and view all the answers

A 'Sales Discount' account increases the balance of sales revenue on the income statement.

False (B) Signup and view all the answers

A company offers terms 3/15, n/45. What does this notation signify regarding payment and discounts?

A 3% discount is offered if payment is made within 15 days; otherwise, the full amount is due within 45 days. Signup and view all the answers

When a customer returns a product, the seller debits the _____ account.

Sales Returns Signup and view all the answers

Match the following terms with their correct meaning related to sales and accounts receivable:

Terms 2/10, n/30 = 2% discount if paid within 10 days, full amount due in 30 days Sales Discount = Contra account reducing sales revenue for early payment discounts Sales Returns = Contra account used to record products returned by customers Sales Allowances = Reduction in price granted to customers, recorded as a contra account Signup and view all the answers

What is the purpose of management setting up a 'Sales Returns' account?

To monitor and analyze the level of returns. (B) Signup and view all the answers

Which of the following journal entries is correct when a customer is granted a sales allowance?

Debit Sales Allowances, Credit Accounts Receivable (C) Signup and view all the answers

Explain why 'Sales Discounts', 'Sales Returns', and 'Sales Allowances' are classified as contra accounts.

They are contra accounts because they reduce the gross sales revenue to reflect actual revenue earned after discounts, returns, and allowances. Signup and view all the answers

Which of the following is a key difference between a single-step and a multiple-step income statement?

A multiple-step income statement presents subtotals like gross profit and operating profit, while a single-step income statement does not. (B) Signup and view all the answers

A service organization typically reports a cost of goods sold and calculates a gross margin on its income statement.

False (B) Signup and view all the answers

What does 'operating profit' represent on a multiple-step income statement, and how is it calculated?

Operating profit represents the profit earned from the normal operations of a business. It is calculated as gross margin less operating expenses. Signup and view all the answers

Items such as investment income, rental income, or interest expense are typically classified as ______ on the income statement.

other income/expenses Signup and view all the answers

Which of the following items is deducted from profit before income taxes to arrive at profit for the year?

Income tax expense (D) Signup and view all the answers

Earnings per share (EPS) is calculated using which of the following formulas?

(Net income - Preferred dividends) / Weighted average number of common shares outstanding (D) Signup and view all the answers

Discontinued operations should be presented as a separate line item on the income statement.

True (A) Signup and view all the answers

Match each income statement component with its description.

Revenue = Earnings from normal business activities. Cost of Goods Sold = Direct costs of producing goods sold. Operating Expenses = Costs incurred during normal business operations. Income Tax Expense = Expense for income taxes accrued. Signup and view all the answers

Which of the following best describes the purpose of the Statement of Comprehensive Income for public companies?

To present the traditional Income Statement along with gains and losses from revaluing financial statement items and foreign currency rate changes. (A) Signup and view all the answers

According to the material, sales settled with credit cards are considered 'sales on account'.

False (B) Signup and view all the answers

Briefly explain the difference between 'FOB shipping point' and 'FOB destination' in terms of when the title of goods transfers to the buyer.

Under FOB shipping point, title transfers when the goods are shipped. Under FOB destination, title transfers when the goods are delivered. Signup and view all the answers

The ultimate sales price times the quantity sold is referred to as ______ sales.

gross Signup and view all the answers

What does 'FOB' stand for?

Free On Board (C) Signup and view all the answers

Which of the following journal entries correctly represents recording a sale paid with a credit card from the seller’s perspective?

Dr Cash, Dr Credit Card Charge, Cr Sales (D) Signup and view all the answers

Match each journal entry with the type of sale it represents:

Dr Cash, Cr Sales = Cash Sale Dr Accounts Receivable, Cr Sales = Sale on Account Dr Cash, Dr Credit Card Charge, Cr Sales = Credit Card Sale Signup and view all the answers

Why might a company offer different prices based on the quantity ordered by a customer?

To encourage larger purchases, potentially increasing overall sales volume. (B) Signup and view all the answers

Flashcards

Statement of Comprehensive Income

A financial statement including the Income Statement and Other Comprehensive Income.

Other Comprehensive Income

Includes gains/losses from fair value revaluations and currency changes.