Deck 2: Accrual Accounting and Income Determination

Question 1

The two conditions for revenue recognition are occasionally satisfied even before a sale of product occurs.

Answer 1

True

Question 2

"Book value" refers to the amount at which an account is carried in the company's accounting records as opposed to "carrying amount" which refers to the amount at which an account is reported in the company's financial statements.

Answer 2

False

Question 3

In order to recognize revenue,it must be possible to measure the amount of revenue that has been earned with a reasonable degree of assurance.

Answer 3

True

Question 4

Revenue is earned when the seller substantially completes performance required by an agreement.

Question 5

Recognition of revenue under the cash basis occurs when the revenue is received.

Question 6

The principles that govern revenue and expense recognition under accrual accounting are designed to alleviate the mismatching problems that exist under cash-basis accounting.

Question 7

The matching principle requires that expenses incurred in generating revenue are recognized in the same period the related revenue is recognized.

Question 8

A ship building company is likely to recognize revenue at the completion of production.

Question 9

Since net income is earned as a result of complex,multiple-stage processes,the key issue in net income determination is the timing of net income recognition.

Question 10

Accrual accounting decouples measured earnings from operating cash inflows and outflows.

Question 11

GAAP specifies three conditions that must be satisfied in order for revenue to be appropriately recognized.

Question 12

According to generally accepted accounting principles,revenue should be recognized at the earliest time that both (1)the "critical event" has taken place,and (2)the proceeds have been collected.

Question 13

Accrual accounting can produce large discrepancies between the firm's reported profit performance and the amount of cash generated from operations.

Question 14

Cash-basis accounting provides the most useful measure of future operating performance.

Question 15

Reported accrual accounting net income for a period always provides an accurate picture of underlying economic performance.

Question 16

While the earnings process is the result of many separate activities,it is generally acknowledged that there is usually one critical event or key stage considered to be absolutely essential to the ultimate increase in net asset value of the firm.

Question 17

Net asset valuation and net income determination are inextricably intertwined.

Question 18

To measure earnings under accrual accounting,revenue is recognized only when received.

Question 19

Under the cash basis,expenses are recognized when the costs expire or assets are used.

Question 20

The activities comprising the operating cycle are generally consistent across firms.

Question 21

To be reported as an extraordinary item on the income statement,an event must be either unusual in nature or an infrequent occurrence.

Question 22

Costs expensed with the passage of time are called period costs.

Question 23

The write-off of obsolete inventory would be reported on the income statement as a special item in continuing operations.

Question 24

Firms that use early debt retirement on a recurring basis as part of their ongoing risk management practices will report the associated gains and losses as part of income from continuing operations with separate line-item disclosure.

Question 25

Traceable costs are also called period costs.

Question 26

If a component of an entity is classified as "held for sale," its results of operations are to be reported as discontinued operations.

Question 27

The disposal group notion under IFRS rules envisions a larger unit than the component of an entity notion under U.S.GAAP.

Question 28

Traditional financial reporting presents forecasted cash flow information.

Question 29

Income statements prepared in accordance with GAAP differentiate between income components that are believed to be sustainable and those that are transitory.

Question 30

If a material event is either unusual in nature or an infrequent occurrence-such as a one-time charge resulting from a major restructuring-it may be classified on the income statement as a special or unusual item in continuing operations or treated as an extraordinary item if it has been a number of years since the company's last major restructuring.

Question 31

Transitory items are disclosed separately on the income statement so that statement users can place less weight on these earnings components when forecasting future profitability.

Question 32

The process of reporting transitory income items net of tax on the income statement is known as intraperiod income tax allocation.

Question 33

If a material event is either unusual in nature or an infrequent occurrence it is classified on the income statement as a special or unusual item in continuing operations.

Question 34

By definition,discontinued operations will not generate future cash flows thus transactions related to operations the firm intends to discontinue,or has already discontinued,must be reported separately from other income items on the income statement.

Question 35

A component of an entity may be a reportable segment or operating segment,a reporting unit,a subsidiary,or an asset group.An asset group represents the highest level for which identifiable cash flows are largely independent of the cash flows of other components of the entity.

Question 36

The income statement isolates a key figure called "income from sustainable operations."

Question 37

Period costs would include costs like advertising or insurance where the linkage between these costs and individual sales is difficult to establish.

Question 38

Financial reporting assists statement users in forecasting future cash flows by providing an income statement format that segregates components of net income.

Question 39

The matching principle says that expenses are matched to the revenue recognized during the period,not that revenue is matched to the period's expenses.

Question 40

Gains or losses from the sale of property,plant or equipment would be reported on the income statement as a special item in continuing operations.

Question 41

Selected unrealized gains (or losses)sometimes bypass the income statement and are reported as direct adjustments to a stockholders' equity account.

Question 42

The advantage of the retrospective approach to accounting for changes in accounting principle is that the financial statements in the year of the change and for prior years presented for comparative purposes are prepared on the same basis of accounting.

Question 43

While basic earnings per share (EPS)must be disclosed,management may opt to place it in the notes to the financial statements.

Question 44

The basic accounting equation may be expressed as assets = liabilities - owners' equity.

Question 45

GAAP states that if it is impractical to determine the cumulative effect of applying a change in accounting principle to prior periods-such as when a firm adopts the LIFO inventory accounting method-the new accounting principle is to be applied as if the change was made prospectively as of the earliest date practicable.

Question 46

Basic earnings per share (EPS)is always computed by dividing net income by the weighted average number of common shares of stock outstanding.

Question 47

Changes in accounting principle arise only when there are changes mandated by a standards-setting body such as the FASB.

Question 48

Diluted earnings per share reflects the EPS that would result if all potentially dilutive securities were converted into shares of common stock.

Question 49

The change in equity of an entity during a period from transactions and other events from non-owner sources is known as comprehensive income.

Question 50

An entry to record a change in accounting principle will typically require an adjustment to the firm's retained earnings balance to reflect the cumulative effect of the change in accounting principle on all prior periods' reported net income.

Question 51

The business environment in which an enterprise operates is of little consideration in determining whether an underlying event or transaction is unusual in nature and infrequent in occurrence.

Question 52

Changes in accounting principle and changes in accounting estimate are reported under the prospective approach.

Question 53

Debit means increase.

Question 54

Diluted earnings per share is a required disclosure for all corporations that have outstanding preferred stock.

Question 55

Changes in accounting principle and changes in the reporting entity are reported under the retrospective approach.

Question 56

When a company acquires another company,the merger gives rise to a type of accounting change.

Question 57

Each set of EPS numbers includes separately reported numbers for income from continuing operations and the items that appear below it on the income statement.

Question 58

When accounting estimates are changed,the income effect of the changed estimate is accounted for in the period of the change and in future periods if the change affects both.

Question 59

Management might,in a "down" earnings year,be tempted to treat nonrecurring gains as part of income from continuing operations and nonrecurring losses as extraordinary.

Question 60

When firms use different accounting principles to account for similar accounting events in adjacent periods,the period-to-period consistency of the reported numbers can be compromised.

Question 61

For each transaction,the dollar total of the debits must equal the dollar total of the credits.

Question 62

A contra account is an account that is subtracted from a related account.

Question 63

One difference between U.S.GAAP and IFRS is that IFRS requires companies to present a single statement of comprehensive income while U.S.GAAP allows companies to alternatively present separately a net income statement and a statement of comprehensive income.

Question 64

Hickory Furniture Company had the following costs paid during the month of May:
$\begin{array}{lr}\text { Inventory purchases } & \$ 40,000 \\\text { Advertising costs } & 8,000 \\\text { Delivery costs } & 2.000\end{array}$
Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).

-What is the amount of Hickory's May expenses when applying the matching principle?

A)$33,600
B)$42,400
C)$43,600
D)$50,000

Question 65

Both IFRS and U.S.GAAP require companies to report valuation changes to the company's expected liability to its retired employees due to changes in actuarial estimates in other comprehensive income each period.

Question 66

U.S.GAAP permits companies to report components of other comprehensive income (OCI)as part of the statement of changes in stockholders' equity.

Question 67

Which of the following statements best describes expenses?

A)They are recorded in the accounting period when they are "earned" and become "measurable."
B)They consist of amounts paid for consumable items and services rendered to the organization during the accounting period.
C)They are the expired costs or assets "used up" during the accounting period.
D)They consist of cash payments to employees during the period for services rendereD.

Question 68

An adjusting entry is required whenever all economic events that have occurred are not already reflected in the accounts.

Question 69

Under IFRS if a company opts to present separately a net income statement and a statement of comprehensive income,the net income statement must immediately follow the statement of comprehensive income.

Question 70

Under the accrual basis,how much revenue should Canon recognize in November?

A)$0
B)$16,000
C)$24,000
D)$40,000

Question 71

Adjusting entries always fall into one of two categories: adjustments for prepayments or adjustments for unearned revenue.

Question 72

To get revenue and expense account balances to zero an adjusting entry is made.

Question 73

What type of cost is the advertising expense?

A)Product cost
B)Traceable cost
C)Inventory cost
D)Period cost

Question 74

Revenue increases owners' equity and expenses decrease owners' equity.

Question 75

As a general rule,IFRS allows more opportunities for managers to change balance sheet valuations of certain assets even when management has no intention to sell these assets.

Question 76

U.S.GAAP requires some firms to periodically recategorize a portion of actuarial adjustment losses relating to pensions into periodic net income.

Question 77

Under the cash basis,how much revenue should Canon recognize in October?

A)$0
B)$16,000
C)$24,000
D)$40,000

Question 78

Using the accrual basis,which one of the following entries would properly record Canon's revenue recognition for October?

A) DR Cash $\quad$$\quad$ 40,000
CR Copier sales $\quad$$\quad$ 40,000
B) DR Cash $\quad$ 16,000
CR Copier sales $\quad$ 16,000
C) DR Cash $\quad$$\quad$ 16,000
DR Accounts receivable $\quad$$\quad$ 24,000
CR Copier sales $\quad$$\quad$ 40,000
D) DR Accounts receivable $\quad$ 40,000
CR Copier sales $\quad$ 40,000

Question 79

The shareholders' equity account,Revaluation Surplus,is likely to be found on the balance sheet of a company reporting under U.S.GAAP.

Question 80

Hickory Furniture Company had the following costs paid during the month of May:
$\begin{array}{lr}\text { Inventory purchases } & \$ 40,000 \\\text { Advertising costs } & 8,000 \\\text { Delivery costs } & 2.000\end{array}$
Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).

-What is the amount of Hickory's cash-basis expenses for the month of May?

A)$33,600
B)$42,400
C)$50,000
D)$51,600