Financial Reporting and Analysis Lawrence Revsine 7th Edition-Test Bank
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Sample Test
Financial Reporting and Analysis, 7e (Revsine)
Chapter 3 Revenue Recognition
1) The underlying principal in ASC Topic 606 is that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration expected to be exchanged for those goods
or services.
2) Amounts received from the sale of gift cards should be
recognized by the seller at the time of sale.
3) Under a consignment arrangement, revenue is not recognized
until the consigned goods are sold to a third party.
4) ASC Topic 606 provides a five-step model for evaluating how
and when revenue should be recognized rather than providing detailed
industry-by-industry standards.
5) Ann Smith just saw her doctor. After the appointment, she was
informed by the receptionist that the fee for the visit is $75 and that her
insurance company will be billed for the visit. Ann was also notified that her
insurance company will pay all of the fee except for the $20 co-pay, which she
pays with her debit card right away. Because the doctor’s office has not
entered into a contract, it would not record revenue until it verifies that the
insurance company will pay.
6) Gamebox sells video-gaming devices, games, and online game
subscriptions. The Gamebox system normally sells for $250 and comes prepackaged
with one game. The average price for games is $30. The company also sells its
online game subscription package, which allows members to download and play one
new game per month, for $240. During the holiday season, the company provides a
package deal which includes the gaming system with two games and a free
one-year game subscription for $400. The company should allocate $192.31 of the
$400 package purchase price to the gaming system.
7) Under the percentage-of-completion method, the amount debited
to “construction expense” each period is the actual construction costs incurred
in that period.
8) Treating the “billings on construction in progress” account
as an off-set (contra) to the construction inventory account avoids including
certain costs and profits twice on the balance sheet.
9) Prior to ASC Topic 606, the installment sales method of
recognizing profit for accounting purposes is acceptable GAAP if collection of
the sales price is not reasonably
assured.
10) Initial franchise fee revenue should be recognized when all
material services or conditions relating to the sale have been substantially
performed by the franchisor.
11) The key accounting issue related to bundled
(multiple-element) sales transactions is the amount of revenue to be recognized
over the contract period.
12) Both public U.S. companies and companies reporting under
IFRS must begin reporting revenue based on ASC Topic 606 in January 2018. Early
adoption is permitted under both U.S. GAAP and IFRS.
13) Sell4U is an online site that allows its clients to post
items for sale. Sell4U charges a 5% brokerage fee for use of the site, payable
within 10 days of the sale. As an agent, Sell4U may recognize revenue for the
brokerage fee as soon as an item is sold.
14) Evans Equipment sells, installs, and maintains manufacturing
equipment. The typical sales contract includes the purchase of the equipment,
installation, and a five-year maintenance contract. Most customers choose to
trade in the equipment for the new model at the end of the five-year contract.
Evans Equipment should amortize the cost of installation over five years.
15) Gamebox, a seller of video-gaming systems, games and online
gaming subscriptions, recently made available a coupon that allows its gaming
subscription members to extend their subscriptions by three months at no
charge. Subscribers need only to login to the website using their user name and
password and provide the coupon code. Because this contract modification (from
12 months to 15 months) does not add distinct goods or services from the
original contract, Gamebox need only make a cumulative catch-up adjustment.
16) The time that the performance obligation is satisfied for
revenue recognition is usually:
1. A)
before the sale.
2. B)
after the sale.
3. C) at
the time of sale.
4. D)
when payment is received.
17) If consideration is received before a contract is identified
and the consideration is nonrefundable, revenue may be recognized if:
1. A)
the contract has been terminated.
2. B)
goods have been delivered.
3. C)
there is no remaining obligation to transfer goods.
4. D)
any of these answer choices is correct.
18) Under ASC Topic 606 guidance for revenue recognition, all of
the following conditions must be met to account for a contract with a
customer, except:
1. A)
the contract has commercial substance.
2. B)
collection is likely.
3. C)
each party’s rights are identified regarding goods or services to be exchanged.
4. D)
all parties to the contract have approved the contract.
19) Assuming the requirements for recognizing revenue over time
are met, and using the percentage-of-completion method to recognize revenue,
the measure of completion is computed by dividing:
1. A)
profits earned to date by estimated total profits.
2. B)
costs incurred to date by estimated total costs.
3. C)
costs incurred to date by the contract price.
4. D)
profits earned to date by the contract price.
20) Assuming the requirements for recognizing revenue over time
are met, and using the percentage-of-completion method, the profit to be
recognized in any year is based on the completion ratio of:
1. A)
incurred contract costs divided by estimated total contract costs.
2. B)
incurred contract costs multiplied by estimated total contract costs.
3. C)
estimated total contract costs divided by incurred contract costs.
4. D)
estimated total contract costs multiplied by incurred contract costs.
21) Noah Construction Company is building a large complex for a
contract price of $5,000,000. This is a three-year project and the requirements
for recognizing revenue over time are met. The total estimated cost of the
project is $4,000,000 and the following information is available:
|
($ in thousands) |
Year 1 |
Year 2 |
Year 3 |
|
Costs incurred |
$ 1,000 |
$ 1,500 |
$ 1,250 |
|
Estimated completion costs |
$ 3,000 |
$ 1,500 |
$ 0 |
|
Billings |
$ 750 |
$ 1,750 |
$ 2,500 |
|
Cash collected |
$ 500 |
$ 1,500 |
$ 3,000 |
Using the percentage-of-completion method of revenue
recognition, how much income is recognized in Year 2?
1. A)
$250,000
2. B)
$375,000
3. C)
$625,000
4. D)
$3,125,000
22) Noah Construction Company is building a large complex for a
contract price of $5,000,000. This is a three-year project and the requirements
for recognizing revenue over time are met. The total estimated cost of the
project is $4,000,000 and the following information is available:
|
($ in thousands) |
Year 1 |
Year 2 |
Year 3 |
|
Costs incurred |
$ 1,000 |
$ 1,500 |
$ 1,250 |
|
Estimated completion costs |
$ 3,000 |
$ 1,500 |
$ 0 |
|
Billings |
$ 750 |
$ 1,750 |
$ 2,500 |
|
Cash collected |
$ 500 |
$ 1,500 |
$ 3,000 |
Using the percentage-of-completion method of revenue
recognition, how much income is recognized in Year 3?
1. A) $375,000
2. B)
$625,000
3. C)
$1,000,000
4. D)
$1,250,000
23) Noah Construction Company is building a large complex for a
contract price of $5,000,000. This is a three-year project and the requirements
for recognizing revenue over time are met. The total estimated cost of the
project is $4,000,000 and the following information is available:
|
($ in thousands) |
Year 1 |
Year 2 |
Year 3 |
|
Costs incurred |
$ 1,000 |
$ 1,500 |
$ 1,250 |
|
Estimated completion costs |
$ 3,000 |
$ 1,500 |
$ 0 |
|
Billings |
$ 750 |
$ 1,750 |
$ 2,500 |
|
Cash collected |
$ 500 |
$ 1,500 |
$ 3,000 |
Which one of the following entries would be made in Year 1 to
record the costs incurred using the percentage-of-completion method of revenue
recognition?
1. A) DR Inventory:
Construction in progress $1,000,000 CR Accounts
payable, cash, etc. $1,000,000
2. B) DR Inventory:
Construction in progress$1,000,000 CR Income
on long-term construction contract$1,000,000
3. C) DR Inventory:
Construction in progress$1,000,000 CR Billings
on construction in progress$1,000,000
4. D) DR Income on
long-term construction contract$1,000,000 CR Accounts payable, cash,
etc.$1,000,000
24) Noah Construction Company is building a large complex for a
contract price of $5,000,000. This is a three-year project and the requirements
for recognizing revenue over time are met. The total estimated cost of the
project is $4,000,000 and the following information is available:
|
($ in thousands) |
Year 1 |
Year 2 |
Year 3 |
|
Costs incurred |
$ 1,000 |
$ 1,500 |
$ 1,250 |
|
Estimated completion costs |
$ 3,000 |
$ 1,500 |
$ 0 |
|
Billings |
$ 750 |
$ 1,750 |
$ 2,500 |
|
Cash collected |
$ 500 |
$ 1,500 |
$ 3,000 |
Which one of the following entries would be made in Year 1 to
record the income recognized using the percentage-of-completion method of
revenue recognition?
1. A) DR Inventory:
Construction in progress$250,000 DR Construction
expense$1,000,000 CR Construction
revenue$1,250,000
2. B) DR Inventory:
Construction in progress$375,000 CR Billings
on construction in progress$375,000
3. C) DR Inventory:
Construction in progress$675,000 CR Billings
on construction in progress$675,000
4. D) DR Income on
long-term construction contract$3,125,000 CR Accounts payable, cash,
etc.$3,125,000
25) Noah Construction Company is building a large complex for a
contract price of $5,000,000. This is a three-year project and the requirements
for recognizing revenue over time are met. The total estimated cost of the
project is $4,000,000 and the following information is available:
|
($ in thousands) |
Year 1 |
Year 2 |
Year 3 |
|
Costs incurred |
$ 1,000 |
$ 1,500 |
$ 1,250 |
|
Estimated completion costs |
$ 3,000 |
$ 1,500 |
$ 0 |
|
Billings |
$ 750 |
$ 1,750 |
$ 2,500 |
|
Cash collected |
$ 500 |
$ 1,500 |
$ 3,000 |
Which one of the following entries would be made in Year 2 to
record the customer billing using the percentage-of-completion method of
revenue recognition?
1. A) DR Accounts
receivable$1,500,000 CR Cash$1,500,000
2. B) DR Accounts
receivable$1,500,000 CR Billings
on construction in progress$1,500,000
3. C) DR Accounts
receivable$1,750,000 CR Income
on long-term construction contract$1,750,000
4. D) DR Accounts
receivable$1,750,000 CR Billings
on construction in progress$1,750,000
26) Noah Construction Company is building a large complex for a
contract price of $5,000,000. This is a three-year project and the requirements
for recognizing revenue over time are met. The total estimated cost of the
project is $4,000,000 and the following information is available:
|
($ in thousands) |
Year 1 |
Year 2 |
Year 3 |
|
Costs incurred |
$ 1,000 |
$ 1,500 |
$ 1,250 |
|
Estimated completion costs |
$ 3,000 |
$ 1,500 |
$ 0 |
|
Billings |
$ 750 |
$ 1,750 |
$ 2,500 |
|
Cash collected |
$ 500 |
$ 1,500 |
$ 3,000 |
Using revenue recognition standards prior to ASC Topic 606,
which one of the following entries would be made in Year 3 to record the
completion and acceptance of the project using the completed-contract method of
revenue recognition?
1. A) DR Inventory:
Construction in progress$5,000,000 CR Billings
on construction in progress$5,000,000
2. B) DR Billings on
construction in progress$5,000,000 CR Inventory:
Construction in progress$3,750,000 CR Income
on long-term construction contract$1,250,000
3. C) DR Inventory:
Construction in progress$3,750,000 DR Income
on long-term construction contract$1,250,000 CR Billings on
construction in progress$5,000,000
4. D) DR Billings on
construction in progress$1,250,000 CR Inventory:
Construction in progress$1,250,000
27) Borden Construction entered into the following contracts
with Lovely Landscaping, LLP: (1) construct a paver patio, (2) plant trees, and
(3) landscape planting beds for a new home construction project. Lovely
Landscaping should treat the contracts:
1. A) as
a single contract.
2. B) as
three separate contracts.
3. C) as
two contracts-one for hardscaping and one for landscaping.
4. D) None
of these.
28) Prior to ASC Topic 606 for revenue recognition, when losses
occur on long-term contracts using the completed-contract method, they are
recognized:
1. A)
proportionately over the contract period using costs incurred as a base.
2. B)
evenly over the contract period.
3. C) in
their entirety as soon as it becomes known that a loss will be suffered.
4. D) at
the completion of the project.
29) On January 1, 2018, Monroe Contractors signed a contract to
inspect and complete needed repairs to the water lines for the town of
Pleasantville. Because Monroe will not know which water lines will need repairs
until after it completes the inspections, it is difficult to accurately
estimate the amount it will charge the town. Therefore, Monroe will recognize
revenue for the contract using the completed-contract method. The work is
expected to be completed in 2020.
Using a completed-contract method prior to ASC Topic 606 for
revenue recognition, if Monroe had $1.5 million in its Construction In Progress
Inventory account and billings to Pleasantville of $2 million as of December
31, 2018, how much net income should Monroe Construction recognize for 2018?
1. A) $0
2. B)
$500,000
3. C) $2
million
4. D)
$1.5 million
30) On January 1, 2018, Monroe Contractors signed a contract to
inspect and complete needed repairs to the water lines for the town of
Pleasantville. Because Monroe will not know which water lines will need repairs
until after it completes the inspections, it is difficult to accurately
estimate the amount it will charge the town. Therefore, Monroe will recognize
revenue for the contract using the completed-contract method. The work is
expected to be completed in 2020.
Which of the following is not a permitted simpler approach
to revenue recognition under ASC Topic 606 for revenue recognition?
1. A)
Applying the 5-step model to a portfolio of similar contracts.
2. B)
Using the previous revenue recognition rules instead of the 5-step model.
3. C)
Not adjusting for significant financial components if the contract period is
one year or less.
4. D)
Recognizing revenue for the amount invoiced to the customer.
31) On January 1, 2018, Monroe Contractors signed a contract to
inspect and complete needed repairs to the water lines for the town of
Pleasantville. Because Monroe will not know which water lines will need repairs
until after it completes the inspections, it is difficult to accurately
estimate the amount it will charge the town. Therefore, Monroe will recognize
revenue for the contract using the completed-contract method. The work is
expected to be completed in 2020.
Burgers and More operates a chain of fast-food restaurants
across the United States. The restaurants are franchised operations. Under the
franchise agreement, restaurant owners have the right to use the Burgers and
More trade name, financing arrangements for franchisees, and management
training at the corporate headquarters as well as the right to use training
videos for their employees. The Burgers and More franchise contracts contain
the following separate performance obligations:
1. A)
intellectual property, training
2. B)
intellectual property, financing, and training
3. C)
intellectual property
4. D)
financing and training
32) On January 1, 2018, Monroe Contractors signed a contract to
inspect and complete needed repairs to the water lines for the town of
Pleasantville. Because Monroe will not know which water lines will need repairs
until after it completes the inspections, it is difficult to accurately
estimate the amount it will charge the town. Therefore, Monroe will recognize
revenue for the contract using the completed-contract method. The work is
expected to be completed in 2020.
Which of the following criteria must be met to recognize revenue
under a bill-and-hold arrangement?
1. A)
The reason for the bill-and-hold arrangement is substantive.
2. B)
The product is identified separately as belonging to the customer.
3. C)
The product is ready for physical transfer to the customer.
4. D)
All of these criteria must be met to recognize revenue under a bill-and-hold
arrangement.
33) Ford Appliance Center records revenue on the installment
sales method, prior to ASC Topic 606 for revenue recognition. The following
information is available for the first two years of business.
|
|
Year 1 |
|
|
Year 2 |
|
||||||
|
Sales |
$ |
200,000 |
|
|
$ |
250,000 |
|
|
|||
|
Cost of goods sold |
|
140,000 |
|
|
|
162,500 |
|
|
|||
|
Cash collections: |
|
|
|
|
|
|
|
|
|||
|
Year 1 sales |
|
100,000 |
|
|
|
80,000 |
|
|
|||
|
Year 2 sales |
|
|
|
|
|
130,000 |
|
|
|||
How much realized gross profit on installment sales will Ford
recognize in Year 1?
1. A)
$20,000
2. B)
$30,000
3. C)
$60,000
4. D)
$100,000
34) Ford Appliance Center records revenue on the installment
sales method, prior to ASC Topic 606 for revenue recognition. The following
information is available for the first two years of business.
|
|
Year 1 |
|
|
Year 2 |
|
||||||
|
Sales |
$ |
200,000 |
|
|
$ |
250,000 |
|
|
|||
|
Cost of goods sold |
|
140,000 |
|
|
|
162,500 |
|
|
|||
|
Cash collections: |
|
|
|
|
|
|
|
|
|||
|
Year 1 sales |
|
100,000 |
|
|
|
80,000 |
|
|
|||
|
Year 2 sales |
|
|
|
|
|
130,000 |
|
|
|||
Assume that Ford Appliance Center has consistently recognized
revenue on installment sales using the cost recovery method. How much realized
gross profit on installment sales will Ford recognize in Year 1?
1. A) $0
2. B)
$30,000
3. C)
$60,000
4. D)
$100,000
35) Ford Appliance Center records revenue on the installment
sales method, prior to ASC Topic 606 for revenue recognition. The following
information is available for the first two years of business.
|
|
Year 1 |
|
|
Year 2 |
|
||||||
|
Sales |
$ |
200,000 |
|
|
$ |
250,000 |
|
|
|||
|
Cost of goods sold |
|
140,000 |
|
|
|
162,500 |
|
|
|||
|
Cash collections: |
|
|
|
|
|
|
|
|
|||
|
Year 1 sales |
|
100,000 |
|
|
|
80,000 |
|
|
|||
|
Year 2 sales |
|
|
|
|
|
130,000 |
|
|
|||
How much realized gross profit on installment sales will Ford
recognize in Year 2?
1. A)
$24,000
2. B)
$45,500
3. C)
$69,500
4. D)
$130,000
36) Ford Appliance Center records revenue on the installment
sales method, prior to ASC Topic 606 for revenue recognition. The following
information is available for the first two years of business.
|
|
Year 1 |
|
|
Year 2 |
|
||||||
|
Sales |
$ |
200,000 |
|
|
$ |
250,000 |
|
|
|||
|
Cost of goods sold |
|
140,000 |
|
|
|
162,500 |
|
|
|||
|
Cash collections: |
|
|
|
|
|
|
|
|
|||
|
Year 1 sales |
|
100,000 |
|
|
|
80,000 |
|
|
|||
|
Year 2 sales |
|
|
|
|
|
130,000 |
|
|
|||
Which one of the following entries properly records the
installment sales for Year 2?
1. A) DR Accounts
receivable-Year 1$200,000 DR Accounts
receivable-Year 2$250,000 CR Realized
gross profit on installment sales$450,000
2. B) DR Realized
gross profit on installment sales$250,000 CR Installment sales
revenue$250,000
3. C) DR Installment
sales revenue$250,000 CR Realized
gross profit on installment sales$250,000
4. D) DR Accounts
receivable-Year 2$250,000 CR Installment
sales revenue$250,000
37) Ford Appliance Center records revenue on the installment
sales method, prior to ASC Topic 606 for revenue recognition. The following
information is available for the first two years of business.
|
|
Year 1 |
|
|
Year 2 |
|
||||||
|
Sales |
$ |
200,000 |
|
|
$ |
250,000 |
|
|
|||
|
Cost of goods sold |
|
140,000 |
|
|
|
162,500 |
|
|
|||
|
Cash collections: |
|
|
|
|
|
|
|
|
|||
|
Year 1 sales |
|
100,000 |
|
|
|
80,000 |
|
|
|||
|
Year 2 sales |
|
|
|
|
|
130,000 |
|
|
|||
Which one of the following entries properly records the cost of
installment goods sold for Year 2?
1. A) DR Cost of
installment goods sold$162,500 CR Inventory$162,500
2. B) DR Cost of
installment goods sold$302,500 CR Inventory$302,500
3. C) DR Cost of
installment goods sold$162,500 CR Installment
sales revenue$162,500
4. D) DR Cost of
installment goods sold$302,500 CR Installment
sales revenue$302,500
38) Which of the following is not a factor that indicates
multiple performance obligations in a contract?
1. A)
The integration of multiple goods and services provides a significant service
to the customer.
2. B)
One or more of the goods or services significantly modifies other goods or
services promised in the contract.
3. C)
The goods or services in the contract are highly interdependent or
interrelated.
4. D)
All of these are factors.
39) CPA Now developed an app to help prepare for the CPA exam.
Customers may separately purchase (a) the app, (b) updates to the app, and (c)
coaching support for the exam, or a package that includes the app and free
updates coaching support until they pass the exam. The package deal includes
performance obligation(s).
1. A)
one
2. B)
two
3. C)
three
4. D)
zero
40) :Yashito Corporation sells cameras and accessories. The
company’s newest model, popular with preteens, takes wallet-sized instant
photos. The wholesale price for this camera is $50. In addition, the company
sells carrying cases ($25), film cartridges ($15), and selfie lenses ($10) made
especially for this camera. During the holiday season, Yashito offers the
camera, film, carrying case, and selfie lens as a package for $75. For each
package sold, the transaction price allocated to the camera is:
100.
A) $100.
101.
B) $75.
102.
C) $50.
103.
D) $37.50.
41) Under ASC Topic 606 for revenue recognition, a performance
obligation is considered satisfied when control over the goods and services is
transferred to the customer. Which of the following is not an
indicator that control has transferred?
1. A)
The customer is legally obligated to pay for the goods or services.
2. B)
The customer has legal title of the goods.
3. C)
The customer has accepted the goods and has physical possession of the goods.
4. D)
All of these are indicators that control has transferred.
42) Hargren Publishing offers its Accounting textbooks as e-texts
through its online homework management system. Purchase of an access code
provides the student with access to the e-text and online learning materials
for six months. During that time, students have access to updates to the text
and learning materials. Hargren should recognize revenue for purchases of
access codes:
1. A) at
the end of the six-month access period.
2. B)
when they occur.
3. C)
over the six-month period during which the customer has access.
4. D) at
the beginning of the semester in which the student will use the access code.
43) In 2017, Borden Construction was contracted to build an
apartment complex for its client, Deer Park Realty Management. The project was
estimated to cost $15 million; however, on December 31, 2017, when the project
was 75% complete, Borden estimated that the project costs would be much less,
and agreed to adjust the contract price to $10 million. Prior to December 31,
2017, Borden Construction had recognized revenue of $10 million. At year end,
Borden should:
2. A)
make a correction for $2.5 million in over-recognized revenue.
3. B)
record nothing.
4. C)
record additional $5 million in revenue.
5. D)
make a correction for $5 million in over-recognized revenue.
44) Continuing franchise fees that are based on the franchisee’s
percentage of sales should be recognized by the franchisor as revenue:
1. A)
when the fee is received.
2. B)
over time when the sales are reported to the franchisor.
3. C) in
accordance with the franchise agreement.
4. D)
only after the balance of the initial franchise fee has been received.
45) Initial franchise fees should be recorded as revenue by the
franchisor:
1. A) in
accordance with the franchise agreement.
2. B)
when cash is received from the franchisee.
3. C)
when all material services relating to the sale have been performed.
4. D)
during the year the franchise agreement is signed.
46) Under GAAP prior to ASC Topic 606 for revenue recognition,
which of the following conditions is not necessary for a seller to
recognize revenue at time of sale when a right of return exists?
1. A)
The seller’s price to the buyer is fixed.
2. B)
The buyer has paid the seller.
3. C)
The goods must have been delivered under a formal consignment arrangement.
4. D)
The amount of future returns can be reasonably estimated.
47) GAAP prior to ASC Topic 606 for revenue recognition
specifies that for a seller to record revenue at time of sale when right of return exists
the following conditions must be met except:
1. A)
The seller’s price to the buyer is substantially fixed or determinable at the
date of sale.
2. B)
The buyer has paid the seller, or the buyer is obligated to pay the seller and
the obligation is not contingent on resale of the product.
3. C)
The buyer’s obligation to the seller does not change in the event of theft or
physical destruction or damage of the product.
4. D)
The buyer is a special purpose entity established by the seller for the sole
purpose of buying and reselling the seller’s product.
48) The key accounting issue related to bundled products such as
software licenses and technical support:
1. A) is
the method of revenue recognition.
2. B) is
the amount of revenue to recognize over the life of the contract.
3. C)
depends on whether the customer is able to pay for the contracted services.
4. D)
concerns the amount of transaction price to allocate to each contract element.
49) Under ASC Topic 606 for revenue recognition, which of the
following statements is not accurate
regarding performance obligations?
1. A)
Firms must disclose qualitative information about their performance
obligations.
2. B)
Firms must disclose warranties provided.
3. C)
Firms are not required to disclose any judgments used to apply the standard.
4. D)
Firms must disclose the aggregate amount of the transaction price allocated to
unsatisfied performance obligations.
50) Examples of variable consideration include all of the
following except:
1. A)
penalties for not completing performing on a contract on time.
2. B)
bonuses for completing performance on a contract early.
3. C)
discounts on transaction prices.
4. D)
all of the answer choices are correct.
51) A right of return exists when:
1. A)
the customer is entitled to a full or partial refund.
2. B)
the customer is entitled to a credit against amounts owed.
3. C)
the customer is entitled to another product in exchange.
4. D)
any one of these conditions is met.
52) Under ASC Topic 606 for revenue recognition, which of the
following factors is not an
indicator of the principal/agent determination?
1. A)
Inventory risk.
2. B)
Credit risk.
3. C)
Shipping terms.
4. D)
Control of prices of the goods or services.
53) Which of the following disclosures is not required by
ASC Topic 606 guidance for revenue recognition?
1. A)
Explanation of significant changes in contract assets and liabilities.
2. B)
Beginning and ending balances of contract assets and liabilities.
3. C) Amount
of revenue recognized in the current period that was included in the beginning
contract liability balance.
4. D)
Financial stability of major customers.
54) Under the new revenue recognition guidance in ASC Topic 606,
a performance obligation is satisfied over time if:
1. A)
the customer simultaneously receives and consumes the goods and services
provided by the firm.
2. B)
the firm’s performance creates or enhances an asset under the customer’s
control.
3. C)
the firm’s performance does not create an asset with an alternative use and the
firm has a right to receive payment for its performance to date.
4. D)
any of these answer choices is correct.
55) Which of the following statements is not applicable
to revenue recognition guidance under ASC Topic 606?
1. A)
Firms must disaggregate revenues into categories that depict how revenue is
affected by economic factors.
2. B)
The standard applies a minimum number of categories that must be provided.
3. C)
Disaggregated revenues are to be disclosed in a note to the financial statements.
4. D)
Revenue may be disaggregated by geographic region.
56) Which of the following statements is not applicable
to contract acquisition costs under ASC Topic 606 guidance for revenue
recognition?
1. A)
Incremental costs of acquiring a contract must be capitalized and amortized
over the life of the contract.
2. B)
Costs that would be incurred regardless of whether a contract is obtained are
not capitalized.
3. C)
The capitalization requirement is subject to a practical expedient.
4. D)
Costs must be capitalized even if the amortization period is one year or less.
57) Which of the following statements is not applicable
to ASC Topic 606 guidance for revenue recognition?
1. A) A
contract asset is written down if it is deemed impaired and any related loss is
recognized.
2. B) A
contract asset is impaired if the carrying amount exceeds the recoverable
amount.
3. C)
The recoverable amount is the remaining expected consideration to be received
less the costs of providing the goods and services that have not yet been
expensed.
4. D) A
contract asset is written down if it is deemed impaired and any related loss is
deferred.
58) The new ASC Topic 606 provides a model for revenue
recognition that includes:
1. A)
five steps.
2. B)
four steps.
3. C)
three steps.
4. D)
two steps.
59) Under ASC Topic 606, which of the following is not a criteria
for revenue recognition?
1. A)
Rights regarding goods or services have been identified.
2. B)
Delivery has occurred or services have been rendered.
3. C)
Collectibility is probable.
4. D)
The shipping terms are clearly stated in the contract.
60) Revenue for goods to be sold under a consignment arrangement
of a manufacturer and a retail store should be recognized by the manufacturer
when:
1. A)
the manufacturer delivers the product to a retail store.
2. B)
the seller promises to pay the manufacturer.
3. C)
the goods are sold by the retail store.
4. D)
the seller receives payment for the goods.
61) In the case of sales where the customer is billed before
delivery of the goods,
1. A)
the seller should always recognize revenue before the products are delivered to
the customer.
2. B)
the goods belong to the customer and revenue recognition is deferred until
delivery.
3. C)
the seller may recognize revenue if control of the goods has been transferred
to the customer even though physical delivery has not taken place.
4. D)
revenue will not be recognized until the goods are shipped to the customer.
62) In the case of goods delivered to a consignee under a
consignment arrangement,
1. A)
the consignor should not recognize revenue until the goods are transferred to a
third party.
2. B)
the cash received to date should be recognized by the consignor as deferred
revenue until merchandise is delivered to the consignee.
3. C)
revenue should be recognized when the consignor collects payment from the
consignee.
4. D)
the seller should recognize revenue although the goods have not yet been
transferred to a third party.
63) Payments to a customer for slotting fees:
1. A)
can never be recognized.
2. B)
must be expensed immediately.
3. C)
might be considered a reduction in the selling price of goods sold to the
customer.
4. D)
are always expensed over the period benefited for the right to shelf space.
64) Internet companies that simply act as agent or broker for
the transfer of goods must record revenue based on:
1. A)
the cost of the product sold.
2. B)
the fees it charges sellers.
3. C)
the sales price of the product.
4. D)
the gross profit of the product sold.
65) Which of thefollowingstatements does not apply to
the principal/agent relationship under ASC Topic 606 guidance for revenue
recognition?
1. A) An
agent reports revenue only for the net amount retained.
2. B) An
agent may recognize revenue when its performance obligation to the principal is
satisfied.
3. C) A
principal recognizes revenue for the gross amount paid by the customer.
4. D)
Inventory risk is not an important factor in determining the relationship.
66) Under ASC Topic 606, revenue should be recognized for
services when:
1. A)
the customer promises to pay for the service and the service date is confirmed.
2. B)
the service contract is in writing and signed.
3. C)
the service performance obligation is satisfied.
4. D) it
is assured that there will be no need for warranty performance after service is
rendered.
67) The cost-plus approach:
1. A)
refers to contracts that are modified from their original terms during the
course of the contract.
2. B)
refers to contracts where the contractor is not expected to recover all costs
incurred in completing the project.
3. C) is
not allowed under ASC Topic 606 guidance for revenue recognition.
4. D)
uses an assumed reasonable profit margin to determine the stand-alone price.
68) Examples of variable consideration include the
following except:
1. A)
rebates.
2. B)
slotting fees.
3. C)
performance bonuses.
4. D)
volume discounts.
69) Wilson, Inc. sells, installs and maintains manufacturing
equipment. The contract with its customers to purchase equipment includes
installation and includes a one-year maintenance contract, renewable for up to
five years. Because the useful life of the equipment is expected to be five
years, the company can reasonably expect its customers to renew the maintenance
contracts for the full five years. Wilson records the cost of installation of
the equipment as a capitalized contract and amortizes the cost over the
five-year maintenance agreement period. Because of a defect in model A5403,
Wilson anticipates that many of its customers will trade in the model and not
renew the maintenance contracts. Wilson, Inc. should:
1. A)
write down the full amount received for maintenance contracts for the full five
years.
2. B)
write down the full amount of installation costs.
3. C)
write down the contract asset and recognize a loss equal to the difference
between the amount of maintenance contracts expected and the carrying amount.
4. D) do
nothing until the customers fail to renew the maintenance contracts.
70) The new ASC Topic 606 for revenue recognition:
1. A)
addresses when and how revenue should be recognized in contracts that provide
both goods and services to customers.
2. B)
eliminates both the percentage-of-completion method and the installment sales
method of revenue recognition.
3. C)
will require companies to recognize a net liability contract position on all
new contracts; revenue will then arise from increases in the net contract position
over the life of the contract.
4. D) is
more rules based than are existing standards.
71) Which of the following statements is not true
regarding ASC Topic 606?
1. A)
Long-term construction contracts is an area where the new standard clearly
differs from existing guidance.
2. B)
Adoption for calendar reporting entities is first required for calendar 2018.
3. C)
Current guidance on long-term contracts gives more flexibility to firms for
determining when revenue is recognized.
4. D)
The new standard precludes the use of percentage-of-completion method for
long-term construction contracts.
72) Which of the following methods can be used to recognize
revenue when a performance obligation is satisfied over time?
1. A)
The output method.
2. B)
The present value method.
3. C)
The future value method.
4. D)
The fair value method.
73) Which of the following statements is true regarding the new
ASC Topic 606 for revenue recognition?
1. A)
The focus is on when the firm has earned the consideration to which it is
entitled.
2. B)
Early adoption is not allowed.
3. C)
The new rules are more rules-based than principle-oriented.
4. D)
Under IFRS, both public and non-public firms must adopt by 2018.
74) Which of the following statements is true regarding the
five-step model in the ASC Topic 606 guidance for revenue recognition?
1. A)
The sale itself is the sole criterion for recognizing revenue.
2. B) If
a sale is not paid for on time, the seller should not recognize revenue.
3. C)
The performance obligations in the contract need to be identified.
4. D)
The transaction price is not relevant.
75) Which of the following is not a necessary
condition for a firm to account for a customer contract under the ASC Topic 606
guidance for revenue recognition?
1. A)
The contract has commercial substance.
2. B) Collection
is probable.
3. C)
Payment terms may not include a variable component.
4. D)
The rights of each party can be identified.
76) Contracts must be:
1. A)
legally enforceable.
2. B) in
writing.
3. C)
communicated verbally.
4. D)
drafted by an attorney.
77) The residual approach to allocate transaction prices to
multiple performance obligations in a contract is appropriate when:
1. A)
The stand-along price of one or more of the goods or services is highly
variable or uncertain.
2. B)
None of the goods and services included in the contract are not sold on a
stand-alone basis.
3. C)
The stand-alone price of all of the goods or services is known.
4. D)
None of these.
78) A patient of Dr. Jones presents his Medicare card after his
appointment. The total charge for the services was $100; however, Medicare will
pay only $60 for this service and the patient is to pay $20. Acceptance of the
patient’s Medicare insurance creates a contract:
1. A)
for payment of $100, regardless of what Medicare will pay.
2. B)
for $20 and an $80 discount or price concession.
3. C)
for payment of $80 and a $20 discount or price concession.
4. D)
for payment of $60 and a price concession of $40.
79) Under the ASC Topic 606, which of the following statements
is not a
criteria that may determine whether the percentage of completion method may be
used to recognize revenue:
1. A)
The customer receives and consumes the goods and services as the performance
obligations are satisfied.
2. B)
The firm’s performance creates or enhances an asset under the customer’s control.
3. C)
Satisfying the performance obligations does not create an asset with an
alternative use and the firm has a right to receive payment fro performance to
date.
4. D)
All of these are criteria that may be used to determine whether the percentage
of completion method may be used.
80) Which of the following statements does not apply to
the installment sales method?
1. A)
Deferred gross profit on installment sales is generally treated as a deduction
from installment sales in calculating the gross profit percentage.
2. B)
Selling, general and administrative expenses related to installment sales are
treated as period costs.
3. C)
The deferred gross profit account is generally classified as a contra-account
to accounts receivable.
4. D)
The accounting system must match cash collections with the specific sales year
to which the cash collections relate.
81) Which of the following statements is true prior to ASC Topic
606 regarding accounting for revenue recognition?
1. A)
Under GAAP, the completed-contract method is always an acceptable alternative
to the percentage-of-completion method of accounting for a long-term
construction project.
2. B) At
the end of a long-term construction project, “retained earnings” will be the
same whether the completed-contract or the percentage-of-completion method of
accounting is used for the project.
3. C)
Net asset balances will be the same no matter what revenue recognition method
is used.
4. D)
Input measures are not applicable to any revenue recognition accounting method.
82) According to revenue recognition under ASC Topic 606, which
of the following is a factor applicable to identifying performance obligations
in a contract?
1. A)
The length of the contract.
2. B)
The obligation is distinct in the context of the contract.
3. C)
The payment terms of the contract.
4. D)
The shipping terms of the contract.
83) Regarding ASC Topic 606 guidance for revenue recognition,
which of the following statements is not true?
1. A)
Prior to ASC Topic 606, U.S. GAAP related to revenue recognition was generally based
on industry-specific guidance.
2. B)
The FASB was involved with deciding to create a single, unifying framework for
revenue recognition.
3. C)
ASC Topic 606 is based on principles that are radically different from prior
guidance.
4. D) A
goal was to create a framework that could be applied to any industry and
provide similar results for similar fact sets.
84) Which of the following statements is not true
regarding ASC Topic 606 guidance for revenue recognition?
1. A)
ASC Topic 606 applies to the sales of used equipment.
2. B)
ASC Topic 606 includes the definition of a customer.
3. C)
ASC Topic 606 allows for the combination of certain separate contracts.
4. D)
ASC Topic 606 covers contract modifications.
85) Which of the following statements is true regarding contracts
in ASC Topic 606 guidance for revenue recognition?
606.
A) Contracts need to be legally enforceable to be considered
under ASC Topic 606.
607.
B) Contracts need to be in written form to be considered under
ASC Topic 606.
608.
C) No consideration can be received before a contract exists.
609.
D) No price concessions can be made to an existing contract.
86) Which of the following statements is not true
regarding the software developer example provided in ASC Topic 606 guidance for
revenue recognition?
1. A)
The example deals with the license of software.
2. B)
Software installation, software updates, and technical support are not
addressed.
3. C)
The example covers four distinct performance obligations.
4. D)
All the performance obligations can be separately identified.
87) Which of the following statements is not true
regarding the treatment of warranties under the new revenue recognition
guidance in ASC Topic 606?
1. A) A
warranty that assures the product is free of defects is not a distinct
performance obligation.
2. B) Warranties
that provide services beyond assuring the product is defect-free at the time of
sale are separate performance obligations.
3. C) A
warranty that covers services that are normally considered routine maintenance
is an assurance warranty.
4. D)
The length of the warranty period should be considered.
88) Under the new revenue recognition guidance in ASC Topic 606,
which of the following statements is true regarding contracts with customer
options?
1. A) In
some cases where customers have an option to acquire additional goods or
services, an evaluation is required to determine if the option creates an
additional performance obligation.
2. B) An
additional performance obligation is created if the customer could obtain the
same rights to additional goods or services without entering the contract.
3. C) An
additional performance obligation is created if the option provides the
customer a right to purchase the goods or services at the stand-alone selling
price for those goods or services.
4. D) It
is generally not considered a performance obligation when a retailer grants a
“customer appreciation dividend” to a customer.
89) Under ASC Topic 606 guidance for revenue recognition, which
of the following factors is not a
consideration when determining the transaction price of a contract?
1. A)
Variable consideration.
2. B)
Shipping terms.
3. C)
Significant financing components.
4. D)
Whether the firm is a principal or an agent.
90) Under the new revenue recognition guidelines in ASC Topic
606, which of the following statements is not true regarding performance
obligations satisfied over time?
1. A)
The firm must determine at each reporting date the extent to which the
performance obligation has been satisfied.
2. B)
Output and input methods may be used for measurement purposes.
3. C) To
obtain quality measurement, input methods must always be closely related to the
transfer of the goods or services to the customer.
4. D)
Usable input measures include labor hours, costs incurred, and time elapsed.
91) Which of the following statements is not true
regarding transactions involving intellectual property?
1. A) A
transaction involving intellectual property can represent a sale or a license.
2. B)
The revenue recognition approach depends on whether the transaction is
considered a sale or a license.
3. C) If
a contract is considered a license, the firm must determine if the license is a
distinct performance obligation.
4. D) If
the customer’s right to use the intellectual property is not limited, the
contract is considered a license.
92) Which of the following statements is not true
regarding revenue recognition regarding gift cards?
1. A)
“Breakage” refers to the unused portion of gift card balances.
2. B)
“Breakage” can only be recognized as revenue to the extent that it is probable
a reversal will not be necessary.
3. C)
The amount received from the sale of gift cards is required to be recognized as
revenue when the gift cards are sold.
4. D) It
is typical that a portion of gift card sales will go unused by customers.
93) Under ASC Topic 606, which of the following statements
is not true
regarding the use of practical expedients in applying the revenue recognition
model?
1. A) A
firm can file an application to use a practical expedient on a large contract
if it is under severe time pressure.
2. B)
One expedient is to use a portfolio approach to numerous contracts with similar
characteristics.
3. C)
Determining the use of an expedient is dependent on whether there would not be
a material difference in the financial statements from a more vigorous
application of the standard.
4. D) A
firm is not required to adjust the transaction price for a significant
financing component if at the contract inception, the period between the
payment and the transfer of goods or services is expected to be a year or less.
94) Which of the following statements is not true
regarding the adoption of ASC Topic 606 guidance for revenue recognition?
1. A)
Upon adoption, entities can choose between the retrospective approach or the
cumulative effect approach.
2. B)
When using the cumulative approach, the prior three years of financial
statements need to be restated.
3. C)
Under the cumulative effect, the firm determines how the balance sheet would
differ as of the first day of the year of adoption.
4. D)
Under the retrospective approach, each period presented is restated to what the
financial statements would have been had the new standard always been in place.
95) Under IFRS in accounting for revenue recognition, for
collection to be probable in order for revenue to be recognized on a contract,
“probable” means:
1. A)
Likely to occur.
2. B)
More likely to occur.
3. C)
Most likely than not to occur.
4. D)
More likely than not to occur.
96) In accounting for revenue recognition under ASC Topic 606, a
contract modification is considered a new, separate contract when:
1. A)
The modification adds distinct goods or services to the agreement.
2. B)
The revised contract price reflects the original contract price cost of the
additional goods or services.
3. C)
The revised contract adds distinct goods or services and the revised contract
price reflects the allocated transaction price for the additional goods or
services.
4. D)
The revised contract adds distinct goods or services and the revised contract
price reflects the stand-alone selling price of the additional goods or services.
97) In accounting for revenue recognition under ASC Topic 606,
when there is a modification of a contract, which of the following is correct?
1. A) If
the modification adds distinct goods or services to the original contract, then
a new contract must be created.
2. B) If
the new contract price does not reflect the stand-alone selling price of the
additional goods or services to be exchanged, then a new contract must be
created.
3. C) If
the modification adds distinct goods or services to the original contract and
the change in the original contract price reflects the stand-alone price of the
additional goods or services to be exchanged, then a new contract need not be
created.
4. D) If
the modification adds distinct goods or services to the original contract and
the change in the original contract price reflects the stand-alone price of the
additional goods or services to be exchanged, then a new contract must be
created.
98) In accounting for revenue recognition under ASC Topic 606,
revenue can be recognized before a contract exists when cash has been received
and:
1. A)
Goods have already been delivered to a customer, and there is no further
obligation for the seller to deliver goods or services.
2. B)
The cash has been received for goods identified to be delivered and the cash is
refundable.
3. C)
The cash has been received for goods or services to be delivered and the cash
is nonrefundable.
4. D)
Revenue should never be recognized before a contract exists.
99) According to ASC Topic 606 guidance for revenue recognition,
which of the following statements is true regarding customer options when
identifying performance obligations in a contract?
1. A)
There is an additional performance obligation for additional goods or services
if the customer could obtain the same rights to additional goods or services
without entering into the current contract agreement.
2. B)
There is an additional performance obligation for additional goods or services
if the option in the contract provides for the additional goods or services at
their stand-alone selling price.
3. C)
There is an additional performance obligation for additional goods or services
if the customer could obtain the same rights to additional goods or services
elsewhere but the additional good or services are provided for free or at a
discount in the current contract.
4. D)
There is no additional performance obligation for additional goods or services
if they will be received for free or at a discount, as long as the goods or
services are similar to the other goods in the current contract.
100) Sew & More sells sewing machines and sewing supplies.
The company recently ran a sales promotion on sewing machines that allowed
customers to purchase a new sewing machine using store credit. The terms of the
contract stated that customers would make 12 monthly payments that included a
6% annual interest rate. On the date of each sale, Sew & More should
record.
1. A) No
revenue until the contract is paid in full.
2. B)
Sales revenue equal to the sales price of the sewing machine, interest revenue equal
to the total amount of interest for the contract, and a receivable for the
total of the sales price plus the interest.
3. C)
revenue equal to the sales price of the sewing machine plus the total interest
to be collected and a receivable for the same amount.
4. D)
revenue equal to the sales price of the sewing machine and a receivable for the
same amount.
101) CPA Now sells print materials and an app to help its
customers prepare for the CPA exam. Along with these products, the company also
provides updates to the app and coaching services. The stand-alone prices for
these goods and services are:
|
Good/Service |
Price |
|
Print materials |
$100 per exam section (4 exam sections
total) |
|
App |
$100 (contains questions for all 4
sections) |
|
App updates |
Not sold separately |
|
Coaching services |
Not sold separately |
CPA Now provides a package deal for Accounting students that
includes the print materials for all four exam sections, the app, and free
updates and coaching until the student passes the exam. The cost of the package
is $1,000. Customers download an average of two updates to the app while using
it. Using the residual approach, the company estimates the value of an app
update to be $25 and the value of the coaching services to be $1,050.
Required:
- How
many separate performance obligations are included in the package deal?
- How
much of the package price of $1,050 should CPA Now allocate to each of the
performance obligations?
102) Trans Fat Express, Inc. entered an agreement with a
franchisee on July 1, 2018. The agreement specified that Trans Fat Express
receive an initial franchise fee of $200,000 (30% due at signing; the balance
to be paid in equal annual installments plus interest at 8% of the unpaid
balance beginning July 1, 2019). The $200,000 franchise fee is comprised of (1)
consideration for the right to operate the franchise, and (2) payment for
services to be performed by Trans Fat Express that include site selection and
building design, employee training, and management training. Performance of
these services is deemed to have occurred when the franchise opens for business
in April 2019. Trans Fat Express allocates 60% of the fee to the right to
operate the franchise and the remainder to the services performed.
Required:
- Prepare
the entry to record the signing of the franchise agreement and receipt of
the payment due at that time.
- Prepare
any adjusting journal entries necessitated at December 31, 2018 by this
agreement
- Prepare
the entry Trans Fat Express should make when the franchisee opens the
location in April 2019
103) Peachpit Software Developers shipped its accounting package
to a customer on September 10, 2018. In addition to the software, Peachpit’s
contract requires the company to provide: (1) training to the customer’s
accounting staff during October of 2018 and again in January 2019 when the
upgrade is released—75% of the training hours are provided during October, (2)
technical product support for one year starting October 1, 2018, and (3) a
major upgrade to the software early in 2019. The customer paid the total
contract price of $80,000 upon receipt of the invoice on September 17, 2018.
Peachpit would charge the following if these individual contract elements were
sold separately:
|
|
|
Fair Value |
|
||
|
Accounting package (software) |
|
$ |
65,000 |
|
|
|
Training customer’s staff |
|
|
10,000 |
|
|
|
Customer support |
|
|
15,000 |
|
|
|
Accounting software upgrade |
|
|
10,000 |
|
|
|
Totals |
|
$ |
100,000 |
|
|
Required:
1. Prepare
a journal entry to record receipt of the cash payment.
2. Determine
the amount of revenue to be recognized in 2018 and prepare the necessary
journal entry.
Financial Reporting and Analysis, 7e (Revsine)
Chapter 5 Essentials of Financial Statement Analysis
1) An analyst interested in learning the degree to which a
company’s earnings have fluctuated historically in relation to changes in
economic growth would employ cross-sectional analysis.
2) A benchmark comparison is an analytic tool similar in
approach to time-series analysis.
3) Operating and administrative efficiencies that result in
lower expenses per dollar of sales possibly explain a trend where net income
grows faster than sales.
4) Return on assets will generally equal return on common equity
except when the company has no long-term debt.
5) Financial leverage is beneficial when the company earns more
than the incremental after-tax cost of debt.
6) Both common and preferred stock dividends are subtracted in
arriving at net income available to common stockholders.
7) When return on assets is high at a highly levered firm,
return on common equity will be low.
8) Activity ratios describe the profitability of a company.
9) The Z-score model combines five financial ratios in a precise
way to estimate a company’s default risk.
10) Days payable outstanding helps analysts understand the
company’s pattern of cash receipts from customers.
11) A low-credit-risk company generates operating cash flows
substantially in excess of what are required to sustain its business
activities.
12) Although a company’s earnings are important, an analysis of
its cash flows is central to credit evaluations and lending decisions.
13) Credit risk analysis uses financial ratios that focus on an
assessment of liquidity and solvency.
14) In the highest-risk Standard & Poor’s rating category
that is a CCC/C rating, more than half of the firms default within a year.
15) When analyzing a company’s risk of bankruptcy using Altman’s
Z-score, a high Z-score indicates low risk of default.
16) All of the following are used as financial analysis
tools except:
1. A)
managements’ discussion and analysis.
2. B)
common-size statements.
3. C)
trend statements.
4. D)
financial ratios.
17) Time-series analysis helps identify financial trends:
1. A)
across companies at a single point in time.
2. B)
across business units at a single point in time.
3. C)
over time for a single company or business unit.
4. D)
among the companies that comprise an industry group.
18) A type of analysis that helps identify similarities and
differences across companies or business units at a single moment in time is:
1. A)
trend analysis.
2. B)
common-size statements analysis.
3. C)
time-series analysis.
4. D)
cross-sectional analysis.
19) Which of the following is not correct
with respect to an analyst’s use of financial information?
1. A) Analysts
use financial statement information to assess the economic activities of a
company and its condition.
2. B)
The first step to informed financial statement analysis is a careful
examination of the auditor’s opinion.
3. C)
Analysts need to understand what accounting data do and do not reveal about a
company’s economic activities and condition.
4. D)
Analysts must always be vigilant about the possibility that accounting
distortions are present and complicate the interpretation of financial ratios,
percentage relations, and trend indices.
20) Which of the following does not reflect
disclosures in financial statements?
1. A)
Related party transactions must be disclosed.
2. B)
GAAP disclosure by segment is required only for some companies.
3. C)
GAAP limits how much a company can disclose in their financial statements.
4. D)
Management may disclose more than GAAP requires.
21) Common-size financial statements recast each statement item
as:
1. A) a
percentage using industry averages for the “base number.”
2. B) a percentage
using a base year number for each line item.
3. C) a
percentage of some “base number” on the financial statement in question.
4. D) a
percentage of the “bottom line.”
22) An analytical tool that measures a company’s performance
against a predetermined standard is a/an:
1. A)
benchmark comparison analysis.
2. B)
profitability analysis.
3. C)
time-series analysis.
4. D)
common-size statement.
23) The financial statement reporting “filter” is:
1. A)
SEC reporting regulations that vary from GAAP for publicly traded companies.
2. B)
SEC required reporting regulations for all entities.
3. C)
management’s distortion of accounting data.
4. D)
management’s discretion to choose alternative accounting procedures with in
GAAP
24) Which one of the following helps the analyst remove the
effects of an information filter?
1. A)
Financial statements.
2. B)
SEC Form 10-K.
3. C)
Note disclosures in financial statements.
4. D)
Trend analysis.
25) Trend statements help the user:
1. A)
determine the reason(s) for changes over time in each financial statement line
item.
2. B)
spot relationships among financial statement items.
3. C)
spot changes over time in each financial statement line item.
4. D)
identify variations between companies in financial statement line items.
26) Manero Company included the following information in its
annual report:
|
|
2019 |
|
2018 |
|
2017 |
|
|||||||
|
Sales |
$ |
178,400 |
|
|
$ |
162,500 |
|
|
$ |
155,500 |
|
||
|
Cost of goods sold |
|
115,000 |
|
|
|
102,500 |
|
|
|
100,000 |
|
||
|
Operating expenses |
|
50,000 |
|
|
|
50,000 |
|
|
|
45,000 |
|
||
|
Operating income |
|
13,400 |
|
|
|
10,000 |
|
|
|
10,500 |
|
||
In a common-size income statement for 2019, the operating
expenses are expressed as:
28.
A) 28.0%
29.
B) 30.3%
30.
C) 43.8%
31.
D) 100.0%
27) Manero Company included the following information in its
annual report:
|
|
2019 |
|
2018 |
|
2017 |
|
|||||||
|
Sales |
$ |
178,400 |
|
|
$ |
162,500 |
|
|
$ |
155,500 |
|
||
|
Cost of goods sold |
|
115,000 |
|
|
|
102,500 |
|
|
|
100,000 |
|
||
|
Operating expenses |
|
50,000 |
|
|
|
50,000 |
|
|
|
45,000 |
|
||
|
Operating income |
|
13,400 |
|
|
|
10,000 |
|
|
|
10,500 |
|
||
In a common-size income statement for 2017, the cost of goods
sold is expressed as:
40.
A) 40.0%
41.
B) 64.3%
42.
C) 100.0%
43.
D) 230.0%
28) Manero Company included the following information in its
annual report:
|
|
2019 |
|
2018 |
|
2017 |
|
|||||||
|
Sales |
$ |
178,400 |
|
|
$ |
162,500 |
|
|
$ |
155,500 |
|
||
|
Cost of goods sold |
|
115,000 |
|
|
|
102,500 |
|
|
|
100,000 |
|
||
|
Operating expenses |
|
50,000 |
|
|
|
50,000 |
|
|
|
45,000 |
|
||
|
Operating income |
|
13,400 |
|
|
|
10,000 |
|
|
|
10,500 |
|
||
In a common-size income statement for 2019, the cost of goods
sold is expressed as:
64.
A) 64.5%
65.
B) 100.0%
66.
C) 112.3%
67.
D) 130.0%
29) Manero Company included the following information in its
annual report:
|
|
2019 |
|
2018 |
|
2017 |
|
|||||||
|
Sales |
$ |
178,400 |
|
|
$ |
162,500 |
|
|
$ |
155,500 |
|
||
|
Cost of goods sold |
|
115,000 |
|
|
|
102,500 |
|
|
|
100,000 |
|
||
|
Operating expenses |
|
50,000 |
|
|
|
50,000 |
|
|
|
45,000 |
|
||
|
Operating income |
|
13,400 |
|
|
|
10,000 |
|
|
|
10,500 |
|
||
In a trend income statement for 2017, where 2017 is the base
year, sales are expressed as:
84.
A) 84.4%
85.
B) 92.6%
86.
C) 100.0%
87.
D) 150.5%
30) Manero Company included the following information in its
annual report:
|
|
2019 |
|
2018 |
|
2017 |
|
|||||||
|
Sales |
$ |
178,400 |
|
|
$ |
162,500 |
|
|
$ |
155,500 |
|
||
|
Cost of goods sold |
|
115,000 |
|
|
|
102,500 |
|
|
|
100,000 |
|
||
|
Operating expenses |
|
50,000 |
|
|
|
50,000 |
|
|
|
45,000 |
|
||
|
Operating income |
|
13,400 |
|
|
|
10,000 |
|
|
|
10,500 |
|
||
In a trend income statement for 2019, where 2017 is the base
year, sales are expressed as:
87.
A) 87.2%
88.
B) 100.0%
89.
C) 114.7%
90.
D) 148.7%
31) Manero Company included the following information in its
annual report:
|
|
2019 |
|
2018 |
|
2017 |
|
|||||||
|
Sales |
$ |
178,400 |
|
|
$ |
162,500 |
|
|
$ |
155,500 |
|
||
|
Cost of goods sold |
|
115,000 |
|
|
|
102,500 |
|
|
|
100,000 |
|
||
|
Operating expenses |
|
50,000 |
|
|
|
50,000 |
|
|
|
45,000 |
|
||
|
Operating income |
|
13,400 |
|
|
|
10,000 |
|
|
|
10,500 |
|
||
In comparison to year 2018, the increase in operating income of
2019 was primarily caused by (ignore taxes):
1. A) the
effect of sales growth.
2. B)
the effect of cost of goods sold growth.
3. C)
the effect of margin growth.
4. D)
the answer cannot be derived from the information provided.
32) Manero Company included the following information in its
annual report:
|
|
2019 |
|
2018 |
|
2017 |
|
|||||||
|
Sales |
$ |
178,400 |
|
|
$ |
162,500 |
|
|
$ |
155,500 |
|
||
|
Cost of goods sold |
|
115,000 |
|
|
|
102,500 |
|
|
|
100,000 |
|
||
|
Operating expenses |
|
50,000 |
|
|
|
50,000 |
|
|
|
45,000 |
|
||
|
Operating income |
|
13,400 |
|
|
|
10,000 |
|
|
|
10,500 |
|
||
In comparison to year 2018, the increase in operating income of
2019 was primarily caused by the effect of margin increase of (ignore taxes):
978.
A) $978.
979.
B) $1,194.
980.
C) $2,422.
981.
D) $3,400.
33) Manero Company included the following information in its
annual report:
|
|
2019 |
|
2018 |
|
2017 |
|
||||||||||
|
Sales |
$ |
178,400 |
|
|
$ |
162,500 |
|
|
$ |
155,500 |
|
|||||
|
Cost of goods sold |
|
115,000 |
|
|
|
102,500 |
|
|
|
100,000 |
|
|||||
|
Operating expenses |
|
50,000 |
|
|
|
50,000 |
|
|
|
45,000 |
|
|||||
|
Operating income |
|
13,400 |
|
|
|
10,000 |
|
|
|
10,500 |
|
|||||
In comparison to year 2017, the effect of sales growth on
operating income of 2018 was (ignore taxes):
473.
A) $473.
474.
B) $431.
475.
C) $6,667.
476.
D) $7,000.
34) In a common-size balance sheet, all items are expressed as a
percentage of:
1. A)
total assets.
2. B)
total liabilities.
3. C)
total equity.
4. D)
total sales.
35) In a trend balance sheet, each balance sheet item is
expressed as a percentage of:
1. A)
total assets.
2. B)
the base year item.
3. C)
sales.
4. D)
equity.
36) Hansel Corporation’s condensed balance sheets appear below:
|
|
|
2019 |
|
2018 |
|
2017 |
|
||||||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Current assets |
|
$ |
55,000 |
|
|
$ |
56,500 |
|
|
$ |
70,000 |
|
|||||
|
Plant & equipment, net |
|
|
495,000 |
|
|
|
410,000 |
|
|
|
440,000 |
|
|||||
|
Intangible assets, net |
|
|
20,000 |
|
|
|
27,500 |
|
|
|
40,000 |
|
|||||
|
Total assets |
|
$ |
570,000 |
|
|
$ |
494,000 |
|
|
$ |
550,000 |
|
|||||
|
Liabilities & Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Current liabilities |
|
|
40,000 |
|
|
$ |
35,000 |
|
|
$ |
32,500 |
|
|||||
|
Long-term liabilities |
|
|
395,000 |
|
|
|
310,000 |
|
|
|
375,000 |
|
|||||
|
Stockholders’ equity |
|
|
135,000 |
|
|
|
149,000 |
|
|
|
142,500 |
|
|||||
|
Total liabilities & equity |
|
$ |
570,000 |
|
|
$ |
494,000 |
|
|
$ |
550,000 |
|
|||||
In a common size balance sheet for 2018, plant and equipment
(net) is expressed as:
83.
A) 83.0%
84.
B) 83.6%
85.
C) 91.1%
86.
D) 100.0%
37) Hansel Corporation’s condensed balance sheets appear below:
|
|
|
2019 |
|
2018 |
|
2017 |
|
||||||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Current assets |
|
$ |
55,000 |
|
|
$ |
56,500 |
|
|
$ |
70,000 |
|
|||||
|
Plant & equipment, net |
|
|
495,000 |
|
|
|
410,000 |
|
|
|
440,000 |
|
|||||
|
Intangible assets, net |
|
|
20,000 |
|
|
|
27,500 |
|
|
|
40,000 |
|
|||||
|
Total assets |
|
$ |
570,000 |
|
|
$ |
494,000 |
|
|
$ |
550,000 |
|
|||||
|
Liabilities & Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Current liabilities |
|
|
40,000 |
|
|
$ |
35,000 |
|
|
$ |
32,500 |
|
|||||
|
Long-term liabilities |
|
|
395,000 |
|
|
|
310,000 |
|
|
|
375,000 |
|
|||||
|
Stockholders’ equity |
|
|
135,000 |
|
|
|
149,000 |
|
|
|
142,500 |
|
|||||
|
Total liabilities & equity |
|
$ |
570,000 |
|
|
$ |
494,000 |
|
|
$ |
550,000 |
|
|||||
In a common size balance sheet for 2019, total liabilities and
equity are expressed as:
89.
A) 89.9%
90.
B) 96.5%
91.
C) 100.0%
92.
D) 111.3%
38) Hansel Corporation’s condensed balance sheets appear below:
|
|
|
2019 |
|
2018 |
|
2017 |
|
||||||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Current assets |
|
$ |
55,000 |
|
|
$ |
56,500 |
|
|
$ |
70,000 |
|
|||||
|
Plant & equipment, net |
|
|
495,000 |
|
|
|
410,000 |
|
|
|
440,000 |
|
|||||
|
Intangible assets, net |
|
|
20,000 |
|
|
|
27,500 |
|
|
|
40,000 |
|
|||||
|
Total assets |
|
$ |
570,000 |
|
|
$ |
494,000 |
|
|
$ |
550,000 |
|
|||||
|
Liabilities & Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Current liabilities |
|
|
40,000 |
|
|
$ |
35,000 |
|
|
$ |
32,500 |
|
|||||
|
Long-term liabilities |
|
|
395,000 |
|
|
|
310,000 |
|
|
|
375,000 |
|
|||||
|
Stockholders’ equity |
|
|
135,000 |
|
|
|
149,000 |
|
|
|
142,500 |
|
|||||
|
Total liabilities & equity |
|
$ |
570,000 |
|
|
$ |
494,000 |
|
|
$ |
550,000 |
|
|||||
In a trend balance sheet for 2019, long-term liabilities are
expressed as:
69.
A) 69.3%
70.
B) 100.0%
71.
C) 105.3%
72.
D) 127.4%
39) In a trend balance sheet for 2018, stockholders’ equity is
expressed as:
10.
A) 10.2%
11.
B) 100.0%
12.
C) 104.6%
13.
D) 110.4%
40) Trend statements are better than common size statements at
indicating which of the following?
1. A)
stability.
2. B)
monetary changes.
3. C)
profitability.
4. D)
growth and decline.
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