Deck 4: Revenue Recognition and the Statement of Income

Question 1

Under the contract-based approach,revenue is recognized whenever a company's net position in a contract decreases.

Answer 1

False

Question 2

A contract has commercial substance when the risk,timing,or amount of
the company's future cash flows is expected to change as a result of the contract.

Answer 2

True

Question 3

Revenue recognition approaches differ between IFRS and ASPE.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

Private companies must report comprehensive income in their financial statements.

Question 8

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 9

Revenue and gains arise from a company's ordinary activities.

Question 10

When customers are granted a right to return goods purchased,management must estimate the extent of expected returns.

Question 11

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

Question 12

Comprehensive income must be reported on a separate statement called the Statement of Comprehensive Income or on the statement of income,immediately below next income.

Question 13

When following ASPE,part of the revenue recognition criteria includes reasonable assurance of collectability of at least some portion of the amount earned.

Question 14

A service warranty is considered to be a separate performance obligation under the contract-based approach for revenue recognition.

Question 15

Under IFRS,companies offering sales discounts must adjust the original amount of the sales revenue by the expected sales discount.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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 24

Rainbow 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 Rainbow Designers recognize revenue for this job assuming the job is performed on one accounting period?

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)$5,000 as revenue at the completion of the project.
D)The $1,500 as unearned revenue and $5,000 as revenue when the project is completed.

Question 25

For a contract to exist all of the following criteria must be met,except for

A)it has been approved and the parties are committed to their obligations
B)a contractual commitment in the form of a deposit
C)it must have commercial substance
D)it is legally enforceable

Question 26

Under ASPE,when revenue is earned from the sale of goods under the earnings based approach,all of the following criteria must be met before revenue can be recognized except

A)the amount of consideration received can be measured with reasonable assurance.
B)collection is reasonably assured.
C)all sales returns and allowances have been recorded.
D)risks and rewards of ownership have been transferred to the customer.

Question 27

Bailey Consulting,a Winnipeg based company that uses the contract-based approach to revenue recognition,has just signed a contract to complete a strategic plan for a local business.The five-step model Bailey Consulting should follow to recognize revenue should include all of the following,except for

A)Allocate the transaction price to performance obligations
B)Sign the contract
C)Identify the performance obligations
D)Determine the transaction price

Question 28

Under the contract-based approach,revenue is recognized when:

A)a company's net position is increased
B)when the transaction price is determined
C)when the performance obligation has been defined
D)the contract has commercial substance

Question 29

When goods and services are bundled in a sales transaction

A)the service must be performed before any revenue is recognized.
B)collection must occur before any revenue is recognized
C)the amount of consideration received for the service must be recognized first.
D)each performance obligation under the contract must be measured separately.

Question 30

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

Question 31

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 32

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 33

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 34

Variable consideration in the transaction price refers to,at least in part:

A)variations in the number of items ordered and delivered
B)the impact of price related to discounts or refunds
C)the selling company's return policies
D)the purchaser's payment terms

Question 35

Frenzo Furniture Co.is a manufacturer of specialty furniture,and uses the contract-based approach for revenue recognition.Because each piece of furniture is custom manufactured,the company requires a contract prior to beginning the production process.Contract terms include a payment of 40% of the estimated cost of the finished piece before production begins.Frenzo Furniture Co.should record the collection as a

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

Question 36

Indicators that control has been transferred to a customer under the contract-based approach include all of the following,except for

A)payment has been received
B)transfer of risks and rewards of ownership
C)physical possession
D)legal title

Question 37

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 38

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 39

Performance obligations relate to:

A)distinct goods or services
B)input costs of products or services
C)customer payment terms
D)the transaction price

Question 40

If a company generates gains,

A)this represents income from ordinary activities
B)this is not considered income
C)this is separate and distinct from sales revenue
D)this is considered a financing activity

Question 41

When should Magic 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

The Carluccis decided to open a resort.In the first month of operation they collected cash and credit card receipts of $1,612.50.All rooms rent out at $75 a night and during the month they had 19 room rentals.In addition to the 19 rentals,they received non-refundable deposits of $37.50 each on another five nights of rentals.Two of those deposits related to the current month and the people failed to show up.The Carluccis did not refund the deposits for these two customers.The remaining three deposits are 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 43

With consignment arrangements

A)the consignee owns the goods
B)the consignor has physical possession of the goods
C)the consignor recognizes revenue when it transfers the goods to the consignee
D)the consignor owns the goods until they are sold

Question 44

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)contracts.

Question 45

When following ASPE,all of the following criteria must be satisfied in order to recognize revenue for the provision of services,under the earnings based approach,except

A)the service has been performed.
B)the amount of consideration to be received can be measured with reasonably assurance.
C)the seller has no continuing involvement.
D)collection is reasonably assured.

Question 46

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.

Question 47

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 48

During the current year,BMI Corporation sold $1,250,000 in goods that cost $750,000.Cash sales were $500,000 and credit sales $750,000.BMI collected $500,000 of the credit sales during the year.What amount of revenue should BMI recognize for the year under the revenue recognition criteria of the contract-based approach?

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

Question 49

When following ASPE,all of the following criteria must be satisfied in order to recognize revenue for the sales of goods under the earnings based approach,except

A)the service has been performed.
B)the risks and rewards have been transferred to the customer.
C)the seller has no continuing involvement.
D)collection is reasonably assured.

Question 50

The difference between sales revenue and cost of goods sold is

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

Question 51

Melanie purchases an new Honda Civic.During the negotiations the sales representative gives her the opportunity to purchase a 10-year bumper to bumper warranty.This is referred to as a(n):

A)Assurance warranty
B)Purchase warranty
C)Money back guarantee
D)Service warranty

Question 52

When should Magic 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 53

Under the contract base approach,when management estimates the extent of expected returns as a form of variable consideration,the company must establish a(n):

A)Warranty expense account
B)Returns and allowances account
C)Refund liability account
D)Warranty liability account

Question 54

The contract-based approach to revenue recognition must be used under:

A)ASPE
B)IFRS
C)For both IFRS and ASPE
D)This is an option under both IFRS and ASPE,companies may choose the method that best reflect the firm's economic position.

Question 55

Tuition services when universities and colleges 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 56

Factors that are indicative of a service warranty include all of the following except for

A)The warranty is legally required.
B)The warranty's price is negotiated separately.
C)The warranty is considered to be a separate performance obligation.
D)Warranty coverage period is longer.

Question 57

Oceans 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 Oceans Ltd.?

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

Question 58

On September 1,Duval Enterprises collected rent for 3 months in advance.The total collected was $1,200.How much rent revenue should Duval recognize for the month of September?

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

Question 59

Use the following information for questions below
Magic Mountain accounts for revenues using the contract-based approach.It 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 Magic 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 60

With consignment sales,at the time of the sale to a third party:

A)the consignee only records revenue
B)the consignor only records revenue
C)the customer records the sale
D)the consignee and the consignor record revenue

Question 61

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

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