Question 1

The installment and the cost recovery are methods that recognize revenue after the earnings process is complete and when realization occurs.

Accepted Answer

Both installment and cost recovery methods recognize revenue after the earnings process is complete and when realization occurs, which means that they are examples of revenue recognition methods that adhere to the accrual accounting principle.

Question 2

Which of the following situations would require the recognition of revenue to be deferred?

Accepted Answer

Revenue should be deferred if the realizability of the receivable from a sale is not reasonably assured. This means that if there is doubt about whether or not the customer will pay for the product or service, revenue recognition should be deferred until the payment is reasonably assured. Choices A, C, and D all indicate that ownership has either been transferred or is in the process of being transferred, which would support the recognition of revenue.

Question 3

Net assets increase from cost to selling price when revenue is recognized

Accepted Answer

This statement is a basic accounting principle based on the recognition of revenue. When revenue is recognized, the corresponding costs are also recognized, resulting in an increase in net assets from cost to selling price.

Question 4

In selecting the appropriate method of recognizing revenue, which of the following qualitative characteristics of useful accounting information is paramount to the decision?

Accepted Answer

The most important qualitative characteristic when selecting the appropriate method of recognizing revenue is relevance. This means that the information must be capable of making a difference in the decision-making process of users. While the other characteristics (materiality and reliability) are also important, they are secondary to relevance in this instance. Decision usefulness is a broader concept that encompasses multiple qualitative characteristics, including relevance, reliability, comparability, and consistency.

Question 5

If a company has an agreement to deliver software that does not require significant production, modification, or customization of software then revenue is recognized based upon the percentage-of-completion method.

Accepted Answer

Revenue for software that does not require significant production, modification, or customization is typically recognized when the software is delivered, not using the percentage-of-completion method.

Question 6

Realization occurs when

Accepted Answer

The answer of Realization occurs when
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Question 7

SEC Staff Accounting Bulletin 106 summarizes the SEC's view of when recognition of revenue should occur.

Accepted Answer

SEC Staff Accounting Bulletin 106 does not summarize the SEC's view on revenue recognition; it addresses the accounting for the effects of the Tax Cuts and Jobs Act on deferred tax assets and liabilities.

Question 8

Theoretically, for revenue to be recognized the risks and benefits of ownership must have been transferred to the buyer. This refers to

Accepted Answer

The correct answer is B because it accurately describes the concept of recognizing revenue in accounting, where benefits refer to the expected net cash flows from the transaction, and risks involve the uncertainty or likelihood of receiving a different amount of cash than initially expected.

Question 9

Alternative methods of revenue recognition are used because these methods increase the

Accepted Answer

Alternative methods of revenue recognition are used to ensure that the financial statements reflect the economic reality of transactions, thus increasing their relevance to users.

Question 10

Revenue recognition is defined as the accomplishments of operating activities.

Accepted Answer

Revenue recognition is the process of recording revenue when it is earned, regardless of when cash is received. Operating activities are the activities that a company undertakes to generate revenue. Therefore, revenue recognition is an accomplishment of operating activities.

Question 11

When a long-term service contract requires similar services to be performed in more than one act, revenue is recognized by the percentage-of-performance method.

Accepted Answer

The answer of When a long-term service contract requires similar...

Question 12

The percentage-of-completion method and the proportional performance method are methods that recognize revenue at a point in the earnings process completed.

Accepted Answer

The percentage-of-completion method and the proportional performance method recognize revenue over time as the earnings process progresses, not at a single point.

Question 13

If collectibility is reasonably certain or there is a reliable basis for estimating collectibility then the cost recovery method is appropriate.

Accepted Answer

The cost recovery method is used when collectibility is not reasonably certain, as it defers profit recognition until cash collected exceeds the cost of the goods sold.

Question 14

The importance the economic substance of an event taking precedence over the legal form refers to revenue being

Accepted Answer

The answer of The importance the economic substance of an...

Question 15

Accrual method is usually associated with

Accepted Answer

The accrual method of accounting recognizes revenues in the period they are earned, regardless of when payment is received. Therefore, revenue recognition is associated with the period of sale.

Question 16

If revenue is not recognized at the time of sale, which of the following accounts may be affected at the time of sale?

Accepted Answer

The answer of If revenue is not recognized at the...

Question 17

The period in which a company recognizes revenue is also the period in which it recognizes an increase in the

Accepted Answer

Recognizing revenue typically leads to an increase in net assets, as it reflects an increase in resources controlled by the company.

Question 18

The operating-cycle concept is used to justify that the net amounts of Construction in Progress and Partial Billings be included as current assets or current liabilities.

Accepted Answer

The operating-cycle concept states that the time it takes to acquire inventory, produce goods, sell them, and collect payment is considered the operating cycle of a business. Construction in Progress and Partial Billings are part of this cycle and are considered current assets or liabilities depending on where they fall in the cycle. Therefore, the operating-cycle concept justifies including them as current assets or liabilities.

Question 19

For retail land sales, revenue is recognized in full using the accrual method if it is earned and the receivable is realized or realizable.

Accepted Answer

Revenue can be recognized in full using the accrual method if it is earned and the receivable is realized or realizable, according to generally accepted accounting principles (GAAP).

Question 20

It is important to understand the difference between an installment sale and the installment method of revenue recognition, which a company recognizes revenue in full at the time of the sale if collectibility is reasonably assured.

Accepted Answer

The installment method of revenue recognition involves recognizing revenue over time as payments are received, not in full at the time of sale.

Quiz 17: Advanced Issues in Revenue Recognition