Question 1

The FASB appears to be continuing to take a revenue-expense approach to financial statements.

Accepted Answer

False

Question 2

The majority of exceptions to the general rule regarding revenue recognition has evolved because new transactions have emerged that do not fit the mold of traditional transactions.

Accepted Answer

The majority of exceptions to the general rule regarding revenue recognition have arisen due to new and complex transactions that do not fit the traditional mold. These exceptions aim to provide guidance on how to account for these unique transactions.

Question 3

Research on the smoothing of year-to-year income suggests that operating income is better predicted by operating rather than all-inclusive income.

Accepted Answer

Research has shown that operating income is a better predictor of future operating income than all-inclusive income, as all-inclusive income can be more affected by non-recurring items and accounting adjustments. Smoothing year-to-year income using operating income can provide a more accurate representation of a company's ongoing operations.

Question 4

Comprehensive income is the change in equity of an entity during a period of transactions and other events and circumstances, from owner and non-owner sources.

Accepted Answer

The answer of Comprehensive income is the change in equity...

Question 5

Management intent is an accepted basis for recognition of future events.

Accepted Answer

Management intent is not sufficient by itself for the recognition of future events in financial statements; recognition is based on more objective criteria such as the occurrence of an event or a transaction that meets the definitions and recognition criteria for assets, liabilities, income, or expenses as per the applicable financial reporting framework.

Question 6

Although there are exceptions, revenue is generally recognized at the time cash is collected.

Accepted Answer

Revenue is generally recognized at the time when it is earned, not when cash is collected. This is known as the accrual basis of accounting. However, there are certain situations where cash may be collected before or after revenue is recognized, such as when a customer pays in advance or revenue is recognized on an installment basis.

Question 7

Predicting future legal changes that have not yet been enacted should be a major consideration in the recognition of future events.

Accepted Answer

Predicting future legal changes is speculative and generally not considered a reliable basis for recognizing future events in accounting or legal practices. Recognition of future events typically relies on existing laws and regulations.

Question 8

Prior period adjustments are accounting changes that should be accounted for in comprehensive income on the income statement of the period of change.

Accepted Answer

Prior period adjustments are typically reported in retained earnings, not in comprehensive income on the income statement. They correct errors from previous periods and are not included in the current period's income statement.

Question 9

The income statement is largely a legacy of 50 years of accounting standards based on the revenue-expense approach.

Accepted Answer

The income statement has been primarily based on the revenue-expense approach for the past 50 years, making it a legacy of accounting standards.

Question 10

The distinction between losses and expenses is important under the all-inclusive income concept.

Accepted Answer

The answer of The distinction between losses and expenses is...

Question 11

Recognition of a past event is sometimes governed by whether a "one-event view" or a "two-event view" is held.

Accepted Answer

Recognition of a past event can be influenced by whether a person views the event as a single event or as a series of events. This is sometimes referred to as the "one-event view" versus the "two-event view." Therefore, the statement is true.

Question 12

As a result of APB Opinion No. 30, extraordinary items other than gains and losses from early extinguishment of debt have practically disappeared.

Accepted Answer

APB Opinion No. 30 eliminated the concept of most extraordinary items, including gains and losses on disposal of a segment of a business or expropriation of assets. The only remaining extraordinary item is gains or losses related to early extinguishment of debt.

Question 13

The expense recognition model based on historical cost, as well as the model based on current value, must allocate the costs incurred.

Accepted Answer

The answer of The expense recognition model based on historical...

Question 14

All empirical evidence supports the all-inclusive income concept.

Accepted Answer

The all-inclusive income concept, which suggests that all changes in wealth and all transactions should be reflected in the income statement, is not universally supported by empirical evidence. Critics argue that including every change in wealth can make income statements less useful for predicting future performance, and not all changes (like unrealized gains or losses) are universally agreed upon to be included in the concept of income.

Question 15

The current operating approach has led to the concept of comprehensive income.

Accepted Answer

The answer of The current operating approach has led to...

Question 16

The major expense-recognition problem concerns those costs that are clearly not expired in the period incurred but are clearly not associated with the revenues of a particular period.

Accepted Answer

This statement is true. Examples of costs that are not clearly associated with a particular period's revenue include research and development costs, advertising costs, and certain types of administrative expenses. These costs may need to be allocated over multiple periods to better match them with the related revenue.

Question 17

According to the "big bath theory," when firms disclose bad news, there is a positive response by the market because the firm has recognized in the financial statements that a major problem exists and is moving to redress the problem.

Accepted Answer

The "big bath theory" suggests that firms intentionally disclose bad news all at once to "clean the slate" and present a positive outlook for the future. The market may respond positively because the firm is taking action to address issues, even if it means recognizing losses or other negative impacts in the financial statements.

Question 18

Most accountants believe that the method of cost allocation used is nothing more than an arbitrary decision.

Accepted Answer

Most accountants believe that cost allocation methods are based on subjective judgment and do not necessarily reflect the true costs of producing a product or providing a service.

Question 19

Extraordinary items should be disclosed net of tax.

Accepted Answer

Extraordinary items should be disclosed net of tax in the income statement. This means that the tax impact of any gain or loss from an extraordinary event should be calculated and reflected in the net amount reported for the item.

Question 20

Predicting changes in future economic conditions should be a major consideration in the recognition of future events.

Accepted Answer

The answer of Predicting changes in future economic conditions should...

Quiz 12: The Income Statement