Question 1

Companies usually allocate prepaid expenses, such as prepaid insurance, to expense in equal amounts each time period.

Accepted Answer

Prepaid expenses are allocated to expense in equal amounts each time period to match the portion of the prepaid asset consumed. This is done in order to adhere to the matching principle in accounting.

Question 2

A company that sells multiple deliverables for a single price should normally allocate the revenue among the various deliverables based on the relative selling prices of these deliverables.

Accepted Answer

According to the revenue recognition principle in accounting, companies should allocate revenue based on the relative selling prices of the deliverables in a multiple-element arrangement. This is to ensure that revenue is recognized in proportion to the value of each deliverable.

Question 3

Under both GAAP and IFRS, if a company believes that a long-term contract will lose money, it must recognize the expected losses immediately, and should not allocate any losses to future periods.

Accepted Answer

Under both GAAP and IFRS, a company must recognize the expected losses immediately if it believes a long-term contract will lose money. The losses cannot be allocated to future periods. This is known as the "full disclosure principle" and is meant to provide transparency and accuracy in financial reporting.

Question 4

Under GAAP, a company may freely choose whether to use the percentage of completion method, or the completed contract method, of accounting for long-term contracts. Neither method is preferred by the FASB.

Accepted Answer

The FASB under GAAP generally prefers the percentage of completion method for long-term contracts when the outcome can be estimated reliably. The completed contract method is allowed when the outcome cannot be reliably estimated.

Question 5

GAAP requires companies doing work under long-term contracts to use the percentage of completion method, unless they are unable to reliably estimate costs or their percentage of completion.

Accepted Answer

GAAP does require companies doing work under long-term contracts to use the percentage of completion method, unless they are unable to reliably estimate costs or their percentage of completion.

Question 6

One reason that a company might report a deferred tax liability is because it owns stock in another company that has increased in value.

Accepted Answer

When a company owns stock in another company that has increased in value, it may have to pay taxes on that increase in value in the future. This creates a deferred tax liability, which the company must report on its financial statements.

Question 7

"Allocation" over time involves taking one total number and dividing that total into parts which we then associate with particular time periods.

Accepted Answer

Allocation over time involves distributing a total amount into different time periods.

Question 8

The problem of allocating expenses over time was first considered by accountants in the 1960s.

Accepted Answer

The concept of allocating expenses over time, known as depreciation or amortization, has been considered and practiced by accountants for many centuries, well before the 1960s.

Question 9

In which of the following cases, under GAAP, will a company usually not be able to recognize revenues at the time of shipment?

Accepted Answer

Under GAAP, revenue recognition at the time of shipment becomes uncertain if the sale involves significant rights of return, especially in a new market where the company cannot reliably estimate returns. Choices A, B, and D involve situations where historical data can help estimate returns or bad debts, allowing for revenue recognition with adjustments for estimated returns or bad debts.

Question 10

The basic revenue recognition criteria, under GAAP, are that revenue should not be recognized until:

Accepted Answer

According to GAAP, revenue should only be recognized when the earnings process is complete and the revenue is either realized or realizable. This means that the company must have provided the goods or services, and the payment must be reasonably assured. Choices A and D are incorrect because cash receipt is not a necessary condition for revenue recognition. Choice B is also incorrect because revenue should only be recognized when the service has been delivered, not just when it has been agreed upon.

Question 11

If a company has been in existence for some time, it is sometimes true that income would be higher if it uses the installment method of accounting for sales than if it uses the immediate recognition method.

Accepted Answer

The installment method allows for revenue to be recognized over time as payments are received, which can spread out the income and potentially result in higher total income over a longer period of time. The immediate recognition method would recognize all revenue at once, potentially resulting in a year with a large amount of income followed by years with lower amounts of income.

Question 12

In general, use of the installment method of accounting for a single sale with payments received over a period of time is more conservative than recognition of revenue at the time of shipment.

Accepted Answer

The installment method recognizes revenue over time as payments are received, which is a more conservative approach than recognizing all revenue at the time of shipment. This method takes into account the uncertainty of receiving future payments and the risk of non-payment.

Question 13

In general, the cost recovery method of accounting for a single installment sale is less conservative than the installment method.

Accepted Answer

The cost recovery method is a more conservative method of accounting for a single installment sale, as it only recognizes revenue as the cost of the item sold is fully recovered by the seller. The installment method, on the other hand, recognizes revenue as installment payments are received, even if the full cost of the item sold has not yet been recovered.

Question 14

When a company sells a product, and receives its payments in installments over time, it should recognize the revenue at the time of sale unless there are major uncertainties regarding the amount of money it will ultimately collect.

Accepted Answer

Revenue recognition principles generally allow for revenue to be recognized at the point of sale, even if payments are received over time, as long as the collection of payment is reasonably assured. Uncertainties about collection can affect the timing of revenue recognition.

Question 15

When a company sells a product, and receives its payments in installments over time, it should never recognize all the revenue at the time of shipment of the product.

Accepted Answer

The answer of When a company sells a product, and...

Question 16

The SEC would require a company to recognize revenue on a sale once the goods have been delivered, regardless of whether collection of the sales price is reasonably assured.

Accepted Answer

The SEC requires that revenue can only be recognized when it is realized or realizable and earned, which includes the condition that collection of the sales price is reasonably assured.

Question 17

One of the SEC's criteria for revenue to be recognized is that delivery of goods or services has occurred.

Accepted Answer

The SEC's guidance on revenue recognition states that delivery of goods or services is one of the criteria that must be met before revenue can be recognized.

Question 18

Normally, the SEC would not expect delivery of goods and services to have occurred by the time revenue is recognized.

Accepted Answer

The SEC generally expects that delivery of goods or services to the customer has occurred or services have been rendered before revenue is recognized, ensuring that the earnings process is complete.

Question 19

One of the SEC's criteria for revenue to be recognized is that there must be persuasive evidence of agreement between the buyer and seller.

Accepted Answer

This is true. The SEC requires persuasive evidence of an agreement between the buyer and seller before recognizing revenue.

Question 20

One of the SEC's criteria for revenue to be recognized is that there must always be a written agreement between the buyer and the seller.

Accepted Answer

Revenue recognition criteria set by the SEC and accounting standards do not strictly require a written agreement for revenue to be recognized. The criteria focus on the transfer of control of goods or services to the customer and the ability to reliably measure the revenue, among other factors.

Quiz 9: Setting up New Team Members