Question 1

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

Accepted Answer

False

Question 2

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

Accepted Answer

The general rule regarding revenue recognition is based on the principle that revenue should be recognized when it is earned and realized or realizable. However, as new transactions have emerged, such as long-term contracts, multiple-element arrangements, and software sales, exceptions to the general rule have been established to provide guidance on how to recognize revenue in these unique circumstances. Therefore, the majority of exceptions to the general rule have evolved because of new transactions that do not fit traditional models.

Question 3

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 4

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...

Question 5

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 6

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

Accepted Answer

Revenue recognition typically occurs when goods or services are provided, not necessarily at the time cash is collected. There are specific accounting principles and guidelines that govern when revenue can be recognized.

Question 7

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 the individual believes the event occurred as a single event or as two separate events. This is known as the "one-event view" versus the "two-event view." So, the statement is true.

Question 8

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

Accepted Answer

The answer of The FASB appears to be continuing to...

Question 9

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 10

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 is true. It is an issue in accounting when expenses are incurred but it is not clear which period's revenues they are associated with.

Question 11

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 all bad news at once, leading to a significant negative impact on their financial statements. However, this allows the firms to start fresh with a clean slate and promotes a positive response from the market.

Question 12

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

Accepted Answer

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

Question 13

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 14

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 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

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

Accepted Answer

While cost allocation methods have been developed and standardized, ultimately the choice of method is subjective and can vary depending on the organization's goals and preferences. Therefore, many accountants believe that cost allocation is an arbitrary decision.

Question 17

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 using operating income (which excludes one-time or non-recurring items) provides a more accurate prediction of future operating income, as it removes the volatility associated with those items. Using all-inclusive income, which includes non-recurring items, can result in a less accurate prediction.

Question 18

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

Accepted Answer

The income statement is indeed largely based on the revenue-expense approach, and this approach has been the basis for accounting standards for many decades.

Question 19

Extraordinary items should be disclosed net of tax.

Accepted Answer

Extraordinary items should be disclosed net of tax, meaning the amount reported should already reflect any applicable tax effects.

Question 20

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

This statement is correct. APB Opinion No. 30 mandated that only gains and losses from early extinguishment of debt could be classified as extraordinary items in financial statements. Other types of extraordinary items were no longer recognized.

Quiz 12: The Income Statement