Deck 4: Revenue Recognition and the Statement of Incom

Question 1

In retail stores revenue is normally recognized at the time of sale.

Answer 1

True

Question 2

Many service contracts require the seller to provide services for multiple periods. In order to properly recognize revenue, you must use the percentage of completion method.

Answer 2

True

Question 3

Accounting standards identify two revenue recognition criteria that must be met before a company selling goods can recognize revenue.

Answer 3

False

Question 4

If it is probable that economic benefits will flow to the company and the amounts can be reliably measured, then revenue should be recognized.

Question 5

A company may choose numerous methods of recognizing revenue for different revenue types.

Question 6

Part of the revenue recognition criteria includes reasonable assurance of collectability of at least some portion of the amount earned.

Question 7

The incentive built in for prompt payment of cash by a customer for a credit sale is called a cash discount.

Question 8

In order to use the percentage of completion method, it is necessary to have continuing involvement or control over the goods/services.

Question 9

A sales discount of 2/10 means the seller will receive 98% of the selling price.

Question 10

Revenue should be measured at the cost of the consideration received or receivable.

Question 11

The amount of revenue is one of the most significant amounts reported in the financial statements.

Question 12

There must be a receipt of cash in order for a company to recognize revenue.

Question 13

At the time of sale, the selling price does not have to be determined in order for the selling company to quantify the economic benefits of the transactions.

Question 14

When buyers request and receive an adjustment for products damaged during shipping this is called a trade discount.

Question 15

Under the accrual basis, accounting revenues are recognized when they are earned regardless of whether the related cash was received by the company.

Question 16

When making sales, there are costs that may be incurred in the future; an example of a cost is bad debts.

Question 17

Financial statement users can find information about a company's revenue recognition policies in the notes to the financial statements.

Question 18

Bundling is a term used when companies sell both a product and a service.

Question 19

When the customer takes the goods away, the selling company no longer has control over the goods.

Question 20

In order to recognize revenue for interest, royalties, or dividends, all companies must be able to determine the costs incurred to complete the transaction.

Question 21

When there has been a change in the number of preferred shares during the period, a weighted average number of shares must be determined for the EPS calculation.

Question 22

Which of the following would indicate high quality earnings for a company?

A) Increasing revenue while cash from operations is stable.
B) Increasing net income while cash from operations decreases.
C) Revenue and net income that move together.
D) Net income and cash flow from operations that move together.

Question 23

When revenue is earned from the sale of goods, all of the following criteria must be met before revenue can be recognized EXCEPT

A) revenue must be earned.
B) the amount earned is measurable.
C) all sales returns and allowances have been recorded.
D) there is no continuing involvement or control over the goods.

Question 24

If a customer receives goods that are damaged but does not want to return the goods to the seller, the seller can offer a reduction in the selling price which is known as an allowance.

Question 25

In which of the following businesses would the delivery of the product and the collection of cash occur at the same time?

A) a clothing retail store
B) a consulting firm
C) a home builder
D) an advertising firm

Question 26

Comprehensive income must be reported on a separate statement called the Statement of Comprehensive Income.

Question 27

The multi-step income statement allows readers to easily identify gross profit and profits earned from operating activities.

Question 28

When a company uses a mutli step income statement, all revenues are presented first regardless of the source.

Question 29

In the retail industry, when customers pay cash at the time of sale, revenue is recognized

A) when the inventory is purchased.
B) at the time of sale.
C) when the time frame for returns has passed.
D) when the cash is deposited in the bank.

Question 30

A single-step income statement requires several steps to reach a company's net profit or loss.

Question 31

EPS may be reported either on the statement of financial position or the statement of income.

Question 32

Earnings are considered to be of lower quality if

A) cash flow from operating activities is greater than net earnings.
B) cash flow from financing activities is less than net earnings.
C) cash flow from operating activities is less than net earnings.
D) cash flow from investing activities is less than net earnings.

Question 33

Private companies must report comprehensive income in their financial statements.

Question 34

The earnings per share figure expresses net income, after deducting common dividends, on a per-share basis.

Question 35

The choice of presenting expenses based on their nature or function rests with management.

Question 36

When a company reports net income, financial statement users see this as a sign that

A) the company is viable.
B) the company has the ability to sustain itself.
C) the company has the ability to declare dividends.
D) all of the above.

Question 37

Earnings are considered to be of higher quality if

A) cash flow from operating activities is greater than net earnings.
B) cash flow from operating activities is less than net earnings.
C) cash flow from investing activities is greater than net earnings.
D) cash flow from investing activities is less than net earnings.

Question 38

Estimated returns must be reported in the same period as the related sales, which ensures that the company's net sales revenues are fairly stated.

Question 39

Companies offering sales discounts must adjust the original amount of the sales revenue.

Question 40

Sales returns and allowances is a contra revenue account which is added to sales revenue when determining net sales.

Question 41

Use the following information for questions 51-53.
Big Bump Mountain operates a ski resort in the Rocky mountains of Alberta. They sell three types of ski tickets. Season tickets are sold throughout the year, and entitle the holder to ski any day all season long. They are non-refundable. Daily tickets are sold at the mountain and are only valid for the day they are sold. Corporate group tickets are sold throughout the year. The buyer receives a package of 20 daily ticket coupons at a discounted price and the coupons can be redeemed for a day of skiing any time during the season. The skier needs to present the coupon for a ticket on the desired ski day. Unused tickets (coupons) expire at the end of the season and are non-refundable.
When should Big Bump Mountain recognize revenue for the season tickets?

A) at the time of sale
B) on the day the mountain first opens for skiing
C) throughout the ski season
D) at the end of the ski season

Question 42

Certossi's Spa sells gift certificates for future services. These gift certificate sales should be recorded as

A) a credit to sales revenue.
B) a credit to cash.
C) a debit to sales revenue.
D) a credit to unearned revenue.

Question 43

During the current year, First Flex Corporation sold $1,250,000 in goods that cost $750,000. Cash sales were $500,000 and credit sales $750,000. First Flex collected $500,000 of the credit sales during the year. What amount of revenue should Flex recognize for the year under the revenue recognition principle?

A) $1,250,000
B) $ 500,000
C) $ 750,000
D) $ 1,000,000

Question 44

Use the following information for questions 57-58.
Dinca Construction Co. agreed to build a bridge for Gotham City. The contract specifies that construction will take three years and Dinca will receive $12,500,000. The company expects annual costs to be $3,500,000; $2,750,000; and $1,800,000.
Assume Dinca uses the percentage of completion method. Revenue recognized in year three will be

A) $1,800,000.
B) $2,795,030.
C) $4,166,667.
D) $12,500,000.

Question 45

When revenue is earned from the provision of services, all of the following are necessary for revenue recognition EXCEPT

A) economic benefits from the transaction will flow to the seller.
B) the amount of revenue can be reliably measured.
C) the costs incurred to complete the transaction can be reliably measured.
D) the seller has no continuing involvement.

Question 46

On May 1, Yeung Enterprises paid rent for 3 months in advance. The total payment was $1,200. How much rent expense should Yeung recognize for the month of May?

A) $1,200
B) $ 300
C) $ 600
D) $ 400

Question 47

Revenue may be recognized during production in which of the following types of business?

A) retail sales
B) manufacturing for mass-production
C) construction
D) franchise operations

Question 48

Frenzo Furniture Co. is a manufacturer of specialty furniture. Because each piece is custom manufactured, the company requires a down payment of 40% of the estimated cost of the finished piece before production begins. Frenzo Furniture Co. should record the deposit as a

A) credit to sales revenue.
B) credit to unearned revenue.
C) credit to inventory.
D) credit to cost of goods sold.

Question 49

Use the following information for questions 51-53.
Big Bump Mountain operates a ski resort in the Rocky mountains of Alberta. They sell three types of ski tickets. Season tickets are sold throughout the year, and entitle the holder to ski any day all season long. They are non-refundable. Daily tickets are sold at the mountain and are only valid for the day they are sold. Corporate group tickets are sold throughout the year. The buyer receives a package of 20 daily ticket coupons at a discounted price and the coupons can be redeemed for a day of skiing any time during the season. The skier needs to present the coupon for a ticket on the desired ski day. Unused tickets (coupons) expire at the end of the season and are non-refundable.
How should Big Bump Mountain account for the corporate tickets NOT redeemed?

A) They should estimate an amount at the time of sale and recognize it as revenue then.
B) They should estimate an amount at the time of sale and recognize it as revenue evenly throughout the ski season.
C) They should estimate an amount at the time of sale and recognize it as revenue proportionally every time a coupon is redeemed.
D) They should recognize it as revenue at the end of the ski season.

Question 50

Frozen Limited sold $1,750,000 worth of goods during the current year. The cost of goods sold is $1,050,000. Credit sales were $1,575,000, of which 40% were still outstanding. How much cash was collected by Frozen Ltd.?

A) $1,575,000
B) $1,120,000
C) $ 805,000
D) $ 175,000

Question 51

Duro Brothers Ltd. is a construction company located in Toronto. The company is responsible for several large building complexes currently being constructed in the Toronto area. Total revenue and costs can be readily estimated and each contract is expected to take several years to complete. How is Duro most likely to recognize revenue?

A) percentage of completion method
B) equally over the term of the contract
C) at the time of contract signing
D) all revenue at the end of the job

Question 52

The Carluccis decided to open a resort. In the first month of operation they collected cash and credit card receipts of $1,800. All rooms rent out at $75 a night and during the month they had 19 room rentals and had received non-refundable deposits of $37.50 each on another five nights of rentals. For two of those deposits the people had failed to show up and the Carluccis did not refund the deposits, the other three deposits were for future stays. The appropriate amount for them to recognize as revenue for their first month is

A) $1,425.
B) $1,500.
C) $1,800.
D) $1,575.

Question 53

All of the following statements are true EXCEPT

A) a company that has multiple lines of business must consistently apply one revenue recognition policy for all types of revenue.
B) a company that has multiple lines of business can use different methods of revenue recognition for different products.
C) a company that has multiple lines of business must tell users what policies they are using so that that they can make informed decisions.
D) A company that has multiple lines of business must choose revenue recognition policies that are appropriate for their revenue streams.

Question 54

Duguay Designers took a $1,500 deposit from a customer when they signed the contract to paint the customer's residence. It took them three weeks to complete the job. On completion the customer paid the $3,500 balance. How should Duguay Designers recognize revenue for this job?

A) The $1,500 as revenue when it is received, and the $3,500 as revenue when it is received.
B) The $1,500 as unearned revenue and the $3,500 as revenue when it is received.
C) $1,667 a week during the painting period.
D) $5,000 as revenue at the completion of the project.

Question 55

Bailey Consulting, a Winnipeg based Company, has just signed a contract to complete a strategic plan for a local business. This plan will likely take 2 to 3 months to complete. How should Bailey Consulting recognize revenue?

A) percentage of completion method
B) equally over the term of the contract
C) at the time of contract signing
D) all revenue at the end of the job

Question 56

Use the following information for questions 51-53.
Big Bump Mountain operates a ski resort in the Rocky mountains of Alberta. They sell three types of ski tickets. Season tickets are sold throughout the year, and entitle the holder to ski any day all season long. They are non-refundable. Daily tickets are sold at the mountain and are only valid for the day they are sold. Corporate group tickets are sold throughout the year. The buyer receives a package of 20 daily ticket coupons at a discounted price and the coupons can be redeemed for a day of skiing any time during the season. The skier needs to present the coupon for a ticket on the desired ski day. Unused tickets (coupons) expire at the end of the season and are non-refundable.
When should Big Bump Mountain recognize revenue for the corporate tickets redeemed?

A) at the time of sale
B) on the day they are redeemed for a ticket
C) throughout the ski season
D) at the end of the ski season

Question 57

The revenue recognition method most often used for short-term construction projects is to recognize revenue

A) during the construction process as a percentage of the costs completed.
B) at the completion of the project.
C) at the time the construction contract is signed.
D) as cash is received.

Question 58

In order to apply the percentage of completion method the contractor must be able to estimate all the following EXCEPT

A) the total cost of the project.
B) the total revenue for the project.
C) the collectability of all receivables.
D) the amount of revenue to be recognized each period.

Question 59

Use the following information for questions 57-58.
Dinca Construction Co. agreed to build a bridge for Gotham City. The contract specifies that construction will take three years and Dinca will receive $12,500,000. The company expects annual costs to be $3,500,000; $2,750,000; and $1,800,000.
Assume Dinca uses the percentage of completion method. Profits for year one will be

A) $0.
B) $1,483,333.
C) $1,934,783.
D) $4,450,000.

Question 60

Khouri Construction agreed to build a shopping centre for $25,000,000 over the next four years. Estimated cost for years one through four are: $7,500,000; $5,000,000; $5,000,000; and $2,500,000. Estimated profit or loss for year one, assuming the percentage of completion method, would be

A) $(1,250,000).
B) $0.
C) $1,250,000.
D) $1,875,000.

Question 61

Examples of functional areas of the income statement are

A) sales, gross profit, and net income.
B) cost of sales, administrative activities, and selling activities.
C) wages expenses, depreciation, and rent expense.
D) gross profit, operating income, and net income.

Question 62

The difference between gross profit and the company's operating expenses is

A) sales revenue.
B) gross profit.
C) operating income.
D) net income.

Question 63

A typical sales discount is "2/10, n/30" which means that the customer

A) could take a 2% discount in 10 days.
B) could take a 10% discount in 2 days.
C) could take a 2% discount in 30 days.
D) will get no discount if paid in 10 days.

Question 64

All of the following categories have established revenue recognition criteria EXCEPT

A) sales of goods.
B) collection of accounts receivable.
C) provision of services.
D) receipt of interest, royalties, and dividends.

Question 65

Comprehensive income is equal to

A) net income minus comprehensive income.
B) net income plus comprehensive income.
C) gross profit plus comprehensive income.
D) gross profit minus comprehensive income.

Question 66

Which of the following criteria must be satisfied in order to recognize revenue for the receipt of interest, royalties, and dividends?

A) The portion of total services can be reliably measured.
B) Significant risks and rewards have been transferred to the buyer.
C) The seller has no continuing involvement.
D) The amount of revenue can be reliably measured.

Question 67

All of the following criteria must be satisfied in order to recognize revenue for the provision of services EXCEPT

A) the portion of total services can be reliably measured.
B) the costs incurred can be reliably measured.
C) the seller has no continuing involvement.
D) the amount of revenue can be reliably measured.

Question 68

If a $6,750 sale is made on December 30 with terms of 2/10, net 30 and collection is made on January 31, the amount collected is

A) $5,400.
B) $6,615.
C) $6,750.
D) $6,885.

Question 69

If a $12,500 sale is made on September 21 with terms 2/10 net 30 and collection is made on October 2, the amount collected is

A) $12,250.
B) $10,000.
C) $12,750.
D) $12,500.

Question 70

Tuition services when universities and college provide educational services are considered revenue from

A) sale of goods.
B) provision of services.
C) receipt of interest.
D) none of the above.

Question 71

If the goods sold to a customer are damaged in shipment, the buyer normally asks for a(n)

A) sales discount.
B) accounts receivable.
C) sales allowance.
D) purchase discount.

Question 72

The difference between sales revenue and cost of goods sold is

A) sales revenue.
B) gross profit.
C) operating income.
D) net income.

Question 73

All of the following criteria must be satisfied in order to recognize revenue for the sales of goods EXCEPT

A) the portion of total services can be reliably measured.
B) significant risks and rewards have been transferred to the buyer.
C) the seller has no continuing involvement.
D) the amount of revenue can be reliably measured.

Question 74

The final step in preparing the multi-step income statement is

A) sales revenue.
B) gross profit.
C) operating income.
D) net income.

Question 75

Operating expenses included all of the following EXCEPT

A) advertising.
B) depreciation.
C) rent.
D) loss on sale of equipment.

Question 76

All of the following are examples of service revenues EXCEPT

A) cell phone, internet, or television services.
B) cargo revenues when airlines provide flight services to their customers.
C) textbook sales by universities and colleges.
D) service and maintenance revenue by vehicle manufacturers.