Financial Accounting An Introduction to Concepts Methods and Uses 14e Roman L Weil Katherine Schipper Jennifer Francis - Test Bank

Financial Accounting An Introduction to Concepts Methods and Uses 14e Roman L Weil Katherine Schipper Jennifer Francis – Test Bank

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Sample Questions Are Posted Below

Chapter 5: Income Statement: Reporting Results of Operating Activities

TRUE/FALSE

Revenues measure the inflow of net assets from operating activities.

ANS: T PTS: 1 DIF: 1 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Expenses provide future benefits, and assets measure the consumption of those benefits.

ANS: F PTS: 1 DIF: 1 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Expenditures on advertising and research must be recognized as expense in the period of expenditure, regardless of the firm’s expectation of future benefits.

ANS: T PTS: 1 DIF: 1 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Expenses measure the outflow of net assets consumed in the process of generating revenues.

ANS: T PTS: 1 DIF: 1 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Cost is the economic sacrifice made to acquire goods or services.

ANS: T PTS: 1 DIF: 1 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Current accounting practice takes the viewpoint of shareholders by reporting the amount of net income available to shareholders after subtracting from revenues all expenses incurred in generating the revenue by claimants (for example, employees, lenders, governments) other than shareholders.

ANS: T PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Gains/Losses arise from relatively infrequent transactions, and there can be no assurance that they will recur in any future period.

ANS: T PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Common terminology, but not definitions in U.S. GAAP and IFRS, often refers to the difference between sales and cost of sales as gross margin, gross profit, or gross income.

ANS: T PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

The statement of cash flows begin with revenues; for this reason, analysts often refer to revenue growth as “top-line” growth.

ANS: F PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Most firms display the components of cost of sales.

ANS: F PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Both U.S. GAAP and IFRS require the disclosure, in the notes to the financial statements, of selected information about business segments.

ANS: T PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

The income statement typically provides information about the operating results of business segments.

ANS: F PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Items classified as operating expenses reflect management’s judgment that the item is a cost of the core business.

ANS: T PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

All transactions that increase net assets affect income.

ANS: F PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Historically, recognition has described a preference for financial reporting such “that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets.”

ANS: F PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Under the accrual method, the timing of revenue recognition is influenced by when the services or product are provided.

ANS: T PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Both U.S. GAAP and IFRS require firms to report certain information about each of their operating segments.

ANS: T PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

The income statement, also called the statement of financial position, provides information, at

a point in time, on the firm’s productive resources and the financing used to pay for those

resources.

ANS: F PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Comprehensive income equals net income as reported on the income statement plus (minus) the increase (decrease) in other comprehensive income for the year.

ANS: T PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

U.S. GAAP and IFRS require firms to disclose unrealized gains and losses that historically have bypassed the income statement in a category called other comprehensive income.

ANS: T PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

U.S. GAAP and IFRS require firms in some instances to change the carrying value of certain

assets and liabilities. Both sets of accounting standards preclude the recognition of these

changes in net income, and therefore in retained earnings.

ANS: T PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

There are three formats available for both U.S. GAAP and IFRS reporting of the items that are included in Other Comprehensive Income.

ANS: F PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

MULTIPLE CHOICE

U.S. GAAP and IFRS distinguish between revenues and expenses on the one hand and gains and losses on the other. Which of the following is/are not true?

a.	Revenues and expenses result from the recurring, primary operating activities of a business.
b.	Income items include the ordinary, recurring operating activities of the firm.
c.	Gains and losses result from either peripheral activities or nonrecurring activities.
d.	The reporting of revenues and expenses are at gross amounts, and firms report gains and losses at net amounts.
e.	Gains and losses result from the recurring, primary operating activities of a business.

ANS: E PTS: 1 DIF: 1 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

The firm recognizes an expense when the following condition(s) hold(s).

a.	The consumption of the asset results from a transaction that leads to the recognition of revenue.
b.	The consumption of the asset results from the passage of time.
c.	The expenditures on advertising must be recognized as expense in the period of expenditure.
d.	The expenditures on research must be recognized as expense in the period of expenditure.
e.	all of the above

ANS: E PTS: 1 DIF: 1 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

A seller of goods can easily associate (or match) the consumption of the benefits of the asset sold with revenues from its sale. At the time of sale and revenue recognition, the seller

a.	removes the asset (inventory) from the seller’s balance sheet.
b.	recognizes revenue.
c.	recognizes a reduction in an asset (inventory).
d.	records the cost of goods sold expense in the same amount by which inventory decreases.
e.	all of the above

ANS: E PTS: 1 DIF: 1 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

The matching convention assigns _____ to the related _____.

a.	expenses; revenues
b.	revenues; revenues
c.	assets; liabilities
d.	liabilities; assets
e.	assets; shareholders’ equity

ANS: A PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Which of the following concepts best characterizes the accrual basis of accounting?

a.	Conservatism
b.	Matching
c.	Understandability
d.	Going concern
e.	Unit of measurement

ANS: B PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Which of the following is/are true?

a.	Revenues measure the inflow of net assets from operating activities.
b.	Expenses measure the outflow of net assets consumed in the process of generating revenues.
c.	Recognizing revenues and expenses always involves a simultaneous entry in an asset and/or liability account.
d.	Adjusting entries almost always involve an entry in at least one income statement and one balance sheet account.
e.	All of the above are true.

ANS: E PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

The _____ convention, links the timing of some expenses with revenue recognition.

a.	going concern
b.	conservatism
c.	matching
d.	materiality
e.	objectivity

ANS: C PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

_____ reflect the decrease in shareholders’ equity resulting from the decrease in the net assets consumed during the generation of income.

a.	Revenues
b.	Expenses
c.	Dividends
d.	Liabilities
e.	Common stock

ANS: B PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Revenue and expense accounts

a.	are permanent accounts.
b.	are temporary accounts.
c.	reflect cumulative changes in each account since the organization of the firm.
d.	record all cash receipts and cash disbursements.
e.	none of the above

ANS: B PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Which of the following is/are true?

a.	Cost is the economic sacrifice made to acquire goods or services
b.	When the good or service acquired has reliably measurable future benefits to a firm, the cost is an asset.
c.	When the firm consumes the good or service, the cost is an expense.
d.	All of the above are true.
e.	None of the above are true.

ANS: D PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

When assets and income from operations that a firm has decided to discontinue (and dispose of or abandon), separating the two income components allows users to form better predictions of

a.	past earnings.
b.	current earnings.
c.	future earnings.
d.	all of the above
e.	none of the above

ANS: C PTS: 1 DIF: 1 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Income statements contain which of the following sections or categories, depending on the nature of a firm’s earnings for the period?

a.	income from continuing operations
b.	income, gains, and losses from discontinued operations
c.	extraordinary gains and losses
d.	all of the above
e.	none of the above

ANS: D PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Income statements prepared under IFRS contain which of the following sections or categories, depending on the nature of a firm’s earnings for the period?

a.	income from continuing operations
b.	income, gains, and losses from discontinued operations
c.	separate disclosure of material income items
d.	all of the above
e.	none of the above

ANS: D PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

Income statements prepared under U.S. GAAP contain which of the following sections or categories, depending on the nature of a firm’s earnings for the period?

a.	income from continuing operations
b.	income, gains, and losses from discontinued operations
c.	extraordinary gains and losses
d.	all of the above
e.	none of the above

ANS: D PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

U.S. GAAP and IFRS distinguish between revenues and expenses on the one hand and gains and losses on the other. Which of the following is/are true?

a.	Revenues and expenses result from the recurring, primary operating activities of a business.
b.	Income items include the ordinary, recurring operating activities of the firm.
c.	Gains and losses result from either peripheral activities or nonrecurring activities.
d.	The reporting of revenues and expenses are at gross amounts, and firms report gains and losses at net amounts.
e.	all of the above

ANS: E PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

What criteria must sales transactions meet in order for the seller to recognize revenues before collecting cash?

a.	The revenues must be earned (the firm must have achieved substantial performance).
b.	The amount to be received must qualify as an asset (there must be a future economic benefit and the amount must be measured with sufficient reliability).
c.	The firm must have a reasonable expectation that it will collect the amount owed from the customer.
d.	all of the above
e.	none of the above

ANS: D PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

_____ arise from relatively infrequent transactions, and there can be no assurance that they will recur in any future period.

a.	Gains/Losses
b.	Revenues
c.	Expenses
d.	Assets
e.	Liabilities

ANS: A PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Application

Which of the following is/are false?

a.	Firms do not necessarily recognize revenues when they receive cash
b.	Firms do not necessarily recognize expenses when they disburse cash.
c.	Net income will not necessarily equal cash flow from operations each period.
d.	A profitable firm will likely borrow funds in order to remain in business, but eventually operations must generate cash to repay the borrowing.
e.	None of the above are false

ANS: E PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

The income statement is not also called the statement of

a.	operations.
b.	operating activity.
c.	profit and loss.
d.	receipts and disbursements.
e.	All of the above are different names assigned to the income statement.

ANS: D PTS: 1 DIF: 1 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Knowledge

_____ present an ordered list, grouped by broad categories of revenues and expenses. They begin with revenues followed by a list of expenses.

a.	Income Statement
b.	Balance Sheets
c.	Statement of Retained Earnings
d.	Statement of Cash Flows
e.	None of the above

ANS: A PTS: 1 DIF: 2 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Common terminology, but not definitions in U.S. GAAP and IFRS, often refers to the difference between sales and cost of sales as gross

a.	sales.
b.	profit.
c.	operations.
d.	all of the above
e.	none of the above

ANS: B PTS: 1 DIF: 2 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following is/are true?

a.	After cost of sales, the income statement typically shows deductions for other expenses associated with operations (other operating expenses).
b.	Many firms present a subtotal called operating income or operating profit, the difference between revenues and expenses associated with core operating activities.
c.	two common types of operating expenses are selling, general, and administrative expenses (SG&A) and research and development expenses (R&D).
d.	all of the above
e.	none of the above

ANS: D PTS: 1 DIF: 2 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Subtraction of total operating expenses from sales yields:

a.	net income.
b.	gross margin.
c.	operating profit.
d.	all of the above
e.	none of the above

ANS: C PTS: 1 DIF: 2 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Other (nonoperating) items follow operating expenses or the subtotal for operating profit. Most firms reporting under U.S. GAAP separately report financing costs, such as

a.	principal payments.
b.	interest revenue.
c.	interest expense.
d.	principal receipts.
e.	none of the above

ANS: C PTS: 1 DIF: 2 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

A firms decision to sell its headquarters building at a gain

a.	would increase income in the year of sale.
b.	is not part of the core business.
c.	would be aggregated with other noncore, nonoperating items.
d.	reported below operating income, probably as Other Income.
e.	all of the above

ANS: E PTS: 1 DIF: 2 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Subtracting nonoperating expenses from operating income yields:

a.	income tax expense
b.	profit before income taxes
c.	net income
d.	gross profit
e.	none of the above

ANS: B PTS: 1 DIF: 2 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

U.S. GAAP and IFRS require separate income statement display of income from continuing operations and _____earnings that will not continue because the firm either sold, or made a decision to sell, a portion of its business). Such a requirement aids users of the income statement in predicting future earnings.

a.	income from discontinued operations
b.	extraordinary items
c.	changes in accounting principles
d.	sale of individual assets
e.	none of the above

ANS: A PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Revenue recognition is among the most complex issues in financial reporting. The quantity and complexity of the authoritative guidance for recognizing revenues result(s) from

a.	misreporting of revenues.
b.	reporting revenues before the firm earns them.
c.	reporting nonexistent revenues.
d.	firms bundling products and services and selling them in multiple-element arrangements.
e.	all of the above.

ANS: E PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

A firm sells its headquarters building at a gain. This means that at the time of sale

a.	the cash or other assets received were greater than the building’s book value.
b.	the cash or assets received in a transaction were less than the carrying value of the assets given up.
c.	the cash or other assets received were greater than the building’ carrying value.
d.	the cash or assets received in a transaction were less than the building’s book value.
e.	both choices a and c are correct.

ANS: E PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

As a general principle, under the accrual basis of accounting, the firm recognizes revenue when the transaction meets which of the following conditions?

a.	completion of the earnings process, only
b.	receipt of assets from the customer, only
c.	completion of the earnings process and receipt of assets from the customer
d.	expiration of the warranty period, only
e.	receipt of the final payment, only

ANS: C PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following is/are true?

a.	The seller measures revenue as the amount of cash, or the cash-equivalent value of other assets, that it receives from customers.
b.	The seller measures revenue amounts as the exchange price between buyer and seller at the time of sale.
c.	If the firm has not performed all of its obligations, it may make adjustments in the form of sales discounts and allowances.
d.	If the firm has not performed all of its obligations, it may make adjustments in the form of sales returns.
e.	all of the above are true

ANS: E PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following is/are not a period expense?

a.	administrative expenditures
b.	expenditures on advertising
c.	rent on a warehouse for the current month
d.	cost of goods sold
e.	all of the above are period expenses

ANS: D PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-27-Managerial Accounting Features/Costs

KEY: Bloom’s: Comprehension

A manufacturing firm has manufacturing costs which become product costs. These manufacturing costs do not include:

a.	direct material costs (or raw material costs)
b.	direct labor costs
c.	manufacturing overhead costs (sometimes called indirect manufacturing costs)
d.	expenditures for administrative staff
e.	expenditures for supervisors’ salaries, factory utilities, property taxes, insurance, and depreciation on manufacturing plant and equipment

ANS: D PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-27-Managerial Accounting Features/Costs

KEY: Bloom’s: Comprehension

Which of the following is/are not examples of a period expense?

a.	the president’s salary
b.	accounting and information systems costs
c.	accounting and information systems costs
d.	support activity costs such as legal services, employee training, and corporate planning.
e.	the factory foreman’s salary

ANS: E PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-27-Managerial Accounting Features/Costs

KEY: Bloom’s: Comprehension

Which of the following is/are not a period expense?

a.	salaries and commissions of the sales staff
b.	costs to produce catalogs
c.	marketing costs, such as advertising
d.	costs to produce sales literature
e.	direct labor

ANS: E PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-27-Managerial Accounting Features/Costs

KEY: Bloom’s: Comprehension

Which of the following is/are not true?

a.	Net income or profit for a period is the difference between revenues from selling goods and services and the expenses incurred to generate those revenues, plus some gains or losses of the period.
b.	If the expenses plus losses exceed the revenues plus gains, the result is a net loss.
c.	U.S. GAAP and IFRS require the accrual basis of accounting, which detaches the recognition of revenue from the receipt of cash.
d.	A seller recognizes revenues when it has performed all, or nearly all, of its obligations to the customer and when it has received cash or an asset that is convertible to cash.
e.	The firm recognizes and reports expenses that have a causal link with revenues, such as cost of sales, in the next accounting period.

ANS: E PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-04-Cash vs. Accrual

KEY: Bloom’s: Comprehension

Which of the following is/are true?

a.	Interpreting the income statement involves studying the relations among revenues, expenses, and net income both over time and across firms.
b.	Comparisons are likely more valid for the same firm over time than across firms because of the difficulty in identifying truly similar firms.
c.	In evaluating over-time performance of a given firm, the user must understand both current economic conditions and how those conditions may have changed over the period of analysis.
d.	In evaluating across-firm performance, the user should control for the underlying business model by selecting peer firms that are similar, economically, to the firm being analyzed.
e.	All of the above are true.

ANS: E PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-04-Cash vs. Accrual

KEY: Bloom’s: Comprehension

Under the accrual method, the timing of revenue recognition is influenced by

a.	where the purchaser gets funds to pay the seller.
b.	whether the buyer pays with cash or a promise.
c.	when the services or product are provided.
d.	when the seller has received a form of payment in settlement of a purchaser’s promise.
e.	the nature of the services or product provided.

ANS: C PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-04-Cash vs. Accrual

KEY: Bloom’s: Comprehension

Which financial statement reports operating performance for a specific period of time?

a.	Balance sheet
b.	Income statement
c.	Statement of changes in shareholders’ equity
d.	Statement of retained earnings
e.	Statement of Cash Flows

ANS: B PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Under accrual accounting, revenues are recognized when

a.	the firm has performed all, or most of, the services it expects to provide.
b.	the firm has received cash, or some other asset such as a receivable, whose cash-equivalent value it can measure with reasonable precision.
c.	the firm has significant uncertainty about the amount and timing of the cash inflows and outflows from the sales transaction.
d.	both a and b must be present.
e.	none of the above.

ANS: D PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-04-Cash vs. Accrual

KEY: Bloom’s: Comprehension

Over sufficiently long time periods, the amount of net income equals

a.	cash inflows minus cash outflows from operating activities.
b.	cash inflows minus cash outflows from operating and investing activities.
c.	cash inflows minus cash outflows from operating, investing, and debt servicing activities.
d.	cash inflows minus cash outflows from operating and debt servicing activities.
e.	cash inflows minus cash outflows from investing and debt servicing activities.

ANS: C PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-04-Cash vs. Accrual

KEY: Bloom’s: Comprehension

Recognition of revenue usually occurs when

a.	the firm pays for the related expenses.
b.	the revenue is earned, such as at the time of the sale or delivery of the goods.
c.	a signed, legally binding contract is received.
d.	an advance payment for the goods is received.
e.	none of the above.

ANS: B PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-04-Cash vs. Accrual

KEY: Bloom’s: Comprehension

Shareholders of Forest Glen Corporation have received $35,000 in dividends in the current year. At year end the corporation has total assets of $500,000, total liabilities equal to $300,000, and contributed capital totaling $100,000. If retained earnings at the beginning of the year was $80,000, what was Forest Glen’s net income for the current year?

a.	$80,000
b.	$215,000
c.	$55,000
d.	$10,000
e.	$45,000

ANS: C PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

The income statement provides information for assessing the operating profitability of a firm. One tool used for analysis is the common-size income statement that expresses

a.	each expense and net income as a percentage of revenues.
b.	each revenue and net income as a percentage of expenses.
c.	each expense and net income as a percentage of total assets.
d.	each expense and net income as a percentage of shareholders’ equity.
e.	each revenue and net income as a percentage of shareholders’ equity.

ANS: A PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Income from continuing operations includes

a.	gain on the sales of used equipment that is replaced in the current year.
b.	loss from a discontinued operation.
c.	loss from an earthquake.
d.	gain on a change in accounting principle.
e.	loss resulting from prohibitions under new regulations.

ANS: A PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following is/are correct?

a.	Discontinued operations are shown as the last category after income from continuing operations.
b.	The discontinued operations section of the income statement consists only of the gain or loss on disposal of the discontinued component net of the tax effect.
c.	The discontinued operations section of the income statement consists only of the income or loss from operating the discontinued component net of the tax effect.
d.	The discontinued operations section of the income statement consists of the income or loss from operating the discontinued component net of the tax effect as well as the gain or loss on disposal of the discontinued component net of the tax effect.
e.	None of these answer choices is correct.

ANS: D PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following most likely would be considered a discontinued operation?

a.	Production or marketing functions are shifted from one location to another.
b.	A sporting goods manufacturer has a bicycle division that meets FASB’s definition of a component of the entity and decides to outsource the manufacture of its bicycles.
c.	The unprofitable brands of a beauty products component of an entity that manufactures and sells consumer products are discontinued.
d.	An entity that is a franchiser in the quick-service restaurant business also operates company-owned restaurants that are unprofitable in a certain region and, as a result, the entity decides to exit both the quick-service business as well as the company-owned restaurants in that region.
e.	None of these answer choices is correct.

ANS: D PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following statements regarding discontinued operations is true?

a.	The assets and liabilities of a disposal group classified as held for sale by an entity may be offset and shown as a single item on the balance sheet of the entity.
b.	The assets and liabilities of a disposal group of an entity must be shown separately in the asset and liabilities sections of the balance sheet of the entity and cannot be offset.
c.	An adjustment in a subsequent period to the selling price of a component of an entity sold must be reported as a retroactive adjustment in the prior-period financial statements of the entity in which the discontinued operation was reported.
d.	The gain or loss on disposal of a component of an entity classified as a discontinued operation need not be disclosed separately from the loss from operations of the discontinued segment.
e.	None of these answers is correct.

ANS: B PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

The _____ uses only sales revenues and net income and an analyst nearly always can calculate, regardless of format and display differences in income statement presentations.

a.	acid test or quick ratio
b.	current ratio
c.	asset turnover ratio
d.	profit margin percentage
e.	revenue turnover ratio

ANS: D PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Revenue recognition is among the most complex issues in financial reporting. The quantity and complexity of the authoritative guidance for recognizing revenues result(s) from

a.	misreporting of revenues,
b.	reporting revenues before the firm earns them,
c.	reporting nonexistent revenues,
d.	firms bundling products and services and selling them in multiple-element arrangements,
e.	all of the above

ANS: E PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

The sum of net income and other comprehensive income is/are:

a.	Comprehensive Net Income
b.	Comprehensive Income
c.	Comprehensive Retained Earnings
d.	Net Income after comprehensive income items
e.	none of the above

ANS: B PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Both U.S. GAAP and IFRS require firms to report the cumulative effect of other comprehensive income in a balance sheet account called Accumulated

a.	Comprehensive Income.
b.	Net Comprehensive Income.
c.	Other Comprehensive Income.
d.	Comprehensive Net Income.
e.	None of the above.

ANS: C PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Both U.S. GAAP and IFRS require the presentation of an income statement and the presentation of the items of Other Comprehensive Income. U.S. GAAP permits the following reporting format(s) except for:

a.	a single statement of comprehensive income that shows all the changes in net assets except from transactions with owners.
b.	a two-statement presentation that includes an income statement and a separate statement of comprehensive income.
c.	a separate display of the items comprising Other Comprehensive Income within a statement of changes in shareholders’ equity.
d.	a separate display of the items comprising Other Comprehensive Income within a statement of retained earnings.
e.	All of the above are acceptable reporting formats.

ANS: D PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

While no general principle describes the nature of items excluded from net income and included in Other Comprehensive Income, they tend to arise from remeasurements of assets and liabilities (often, remeasurements at fair value) and not from transactions. For example, IFRS permits but does not require firms to revalue certain noncurrent assets upward to reflect increases in fair value in excess of acquisition cost. Under IFRS, such a revaluation remeasurement increases assets (because the firm now records an existing asset on the balance sheet at a larger number) and increases Other Comprehensive Income. These increases are accumulated in a(n) _____ account, Revaluation Surplus.

a.	liability
b.	shareholders’ equity
c.	revenue
d.	asset
e.	expense

ANS: B PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Firms have considerable flexibility as to how they report other comprehensive income each period. Under U.S. GAAP, they can include

a.	it with net income in a single statement of comprehensive income.
b.	it in a separate statement of other comprehensive income that is one of the notes to the financial statements.
c.	it in a statement of changes in shareholders’ equity.
d.	all of the above.
e.	none of the above.

ANS: D PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Other comprehensive income for a reporting period include(s)

a.	changes in the fair value of marketable equity securities available for sale.
b.	changes in the fair value of derivatives used as cash flow hedges.
c.	gains and losses related to retirement plans not yet recognized in measuring retirement benefits expense.
d.	all of the above
e.	none of the above

ANS: D PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following is/are true concerning accumulated other comprehensive income?

a.	Firms measure marketable equity securities classified as available for sale at fair value and record the unrealized changes in fair value as an element of other comprehensive income.
b.	Firms remeasure derivatives designated as cash flow hedges to fair value at the end of each period and report the unrealized gain or loss in other comprehensive income.
c.	Firms translate the reported results of their foreign operations from local currencies into U.S. dollars in order to prepare consolidated financial statements.
d.	Firms must include gains and losses from changes in actuarial assumptions, actuarial performance, and prior service cost in other comprehensive income prior to their amortization as an adjustment to pension expense.
e.	all of the above

ANS: E PTS: 1 DIF: 2 REF: pp. 146-150

OBJ: LO: 5-02 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following is/are not true concerning accumulated other comprehensive income?

a.	Firms measure marketable equity securities classified as available for sale at fair value and record the unrealized changes in fair value as an element of other comprehensive income.
b.	Firms remeasure derivatives designated as cash flow hedges to fair value at the end of each period and report the unrealized gain or loss in other comprehensive income.
c.	Firms translate the reported results of their foreign operations from local currencies into U.S. dollars in order to prepare consolidated financial statements.
d.	Firms must include gains and losses from changes in actuarial assumptions, actuarial performance, and prior service cost in other comprehensive income prior to their amortization as an adjustment to pension expense.
e.	none of the above

ANS: E PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following is/are true concerning accumulated other comprehensive income?

a.	Firms measure marketable equity securities classified as available for sale at fair value and record the unrealized changes in fair value as an element of other comprehensive income.
b.	Firms remeasure derivatives designated as cash flow hedges to fair value at the end of each period and report the unrealized gain or loss in other comprehensive income.
c.	Firms translate the reported results of their foreign operations from local currencies into U.S. dollars in order to prepare consolidated financial statements.
d.	Firms must include gains and losses from changes in actuarial assumptions, actuarial performance, and prior service cost in other comprehensive income prior to their amortization as an adjustment to pension expense.
e.	all of the above

ANS: E PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Both U.S. GAAP and IFRS require the presentation of an income statement and the presentation of the items of Other Comprehensive Income. U.S. GAAP permits the following reporting format(s) except for:

a.	a single statement of comprehensive income that shows all the changes in net assets except from transactions with owners.
b.	a two-statement presentation that includes an income statement and a separate statement of comprehensive income.
c.	a separate display of the items comprising Other Comprehensive Income within a statement of changes in shareholders’ equity.
d.	a separate display of the items comprising Other Comprehensive Income within a statement of retained earnings.
e.	All of the above are acceptable reporting formats.

ANS: D PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Accumulated Other Comprehensive Income

a.	is a shareholders’ equity account on the balance sheet.
b.	reports the cumulative amounts of other comprehensive income as of the date of the balance sheet.
c.	equals net income on the traditional income statement plus other comprehensive income for the period.
d.	is both choices a and b.
e.	is all choices a, b, and c.

ANS: D PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

U.S. GAAP and IFRS require firms to disclose unrealized gains and losses that historically have bypassed the income statement in a category called _____.

a.	net income
b.	gross income
c.	other comprehensive income
d.	accumulated other comprehensive income
e.	cash flows from operations

ANS: C PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following elements of financial statements is not a component of comprehensive income?

a.	Revenues
b.	Expenses
c.	Losses
d.	Distributions to owners
e.	All of these are components of comprehensive income.

ANS: D PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Assume that U.S. GAAP and IFRS require firms to remeasure the amount of a particular asset from $12 million to $8 million because of economic events. Which of the following journal entries should the company make?

a.	Miscellaneous Expense 4,000,000 Asset 4,000,000
b.	Other Comprehensive Income 4,000,000 Miscellaneous Revenue 4,000,000
c.	Other Comprehensive Income 4,000,000 Asset 4,000,000
d.	Asset 4,000,000 Other Comprehensive Income 4,000,000
e.	None of these answer choices is correct.

ANS: E PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

The formats used to present the items that are included in Other Comprehensive Income include which of the following?

a.	A two-statement presentation that includes a balance sheet and a separate statement of comprehensive income.
b.	A single statement that reconciles changes between the balance sheet and the statement of retained earnings.
c.	A single statement of comprehensive income that shows all the changes in net assets. This statement includes both Net Income and Other Comprehensive Income.
d.	A two-statement presentation that includes a statement of cash flows and a separate statement of comprehensive income.
e.	None of these answer choices is correct.

ANS: C PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

According to the FASB’s conceptual framework, comprehensive income includes which of the following?

Gross Profit Operating Income

a.	No No
b.	No Yes
c.	Yes Yes
d.	Yes No
e.	None of these answer choices is correct.

ANS: C PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Comprehensive income as defined by the FASB

a.	must be reported on the face of the income statement.
b.	includes all changes in equity during a period except those resulting from investments by and distributions to owners.
c.	is the net change in owners’ equity for the period.
d.	means the same as net income.
e.	None of these answer choices is correct.

ANS: B PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

All of the following is/are components of comprehensive income except

a.	foreign currency translation adjustment.
b.	unrealized gains and losses on trading securities.
c.	deferred gains and losses on derivative financial instruments.
d.	change in the minimum pension liability.
e.	All of these answer choices are components of comprehensive income.

ANS: B PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following is/are true?

a.	Comprehensive income equals the net amount of revenues, expenses, gains, and losses during an accounting period.
b.	Authoritative guidance classifies revenues and expenses arising from a firm’s core business as components of net income.
c.	Net income includes gains and losses from sales or exchanges of assets or settlements of liabilities related incidentally or peripherally to the firm’s core business.
d.	Authoritative guidance classifies gains and losses from the remeasurement of certain assets and liabilities as either net income or other comprehensive income.
e.	All of the above answer choices are true.

ANS: E PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Accumulated Other Comprehensive Income

a.	is a shareholders’ equity account that acts for other comprehensive income the way retained earnings acts for net income.
b.	equals net income plus other comprehensive income.
c.	includes gains and losses from sales or exchanges of assets or settlements of liabilities related incidentally or peripherally to the firm’s core business.
d.	Firms close amounts in net income for a period to Accumulated Other Comprehensive Income at the end of the period.
e.	All of the above answer choices are correct.

ANS: A PTS: 1 DIF: 2 REF: pp. 151-152

OBJ: LO: 5-03 NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Which of the following is/are not a component of comprehensive income?

a.	Asset revaluation reserve
b.	Net income
c.	Foreign currency translation adjustment
d.	Minimum pension liability adjustment
e.	All of these are components of comprehensive income.

ANS: A PTS: 1 DIF: 2 REF: pp. 141-145

OBJ: LO: 5-01 NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

PROBLEM

Assume that a firm uses the accrual basis of accounting. Indicate the amount of expense the firm recognizes during the month of November for each independent transaction.

a.	Rent of $3,600 is paid on November 1 for the months November through January.
b.	Inventory costing $2,500 is ordered on account. The invoice is received on November 25 and the goods are received on December 5.
c.	Insurance premium of $900 is paid for a full year of coverage starting November 1.
d.	On December 3, an invoice for November utilities of $325 is received.
e.	On November 1, supplies costing $2,200 are purchased. At November 30, $500 of supplies remained on hand.

ANS:

a.$1,200

b.$0

c.$75

d.$325

e.$1,700

PTS: 5 DIF: 2 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Certain merchandise that a firm may acquire may be inventory or supplies. Accounting treats them differently as to the matching criteria used.

Required:

a.	Describe the situation where merchandise would be considered inventory. How would the firm account for the costs of the merchandise?
b.	Describe the situation where merchandise would be considered supplies. How would the firm account for the costs of the merchandise?

ANS:

A firm that is an office supply store may purchase merchandise for resale to its customers. When the merchandise is purchased, it may be accounted for by debiting Inventory and crediting Cash (or Accounts Payable). When the merchandise is sold, the cost of the merchandise may be accounted for (or matched) to the sales by debiting Cost of Goods Sold and crediting Inventory.
A firm that is an office supply store (per a. above) may also purchase merchandise to use in its own offices to run its business. When the merchandise is purchased, it may be accounted for by debiting Supplies and crediting Cash (or Accounts Payable). At the end of the year when an inventory is taken of the supplies and some were used up during the course of business, the supplies used may be accounted for by debiting Supplies Expense and crediting Supplies.

PTS: 4 DIF: 2 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Solve for the unknown item for each of the following independent situations.

	CASE A	CASE B	CASE C
Total assets	A	400	600
Contributed capital	100	150	C
Total revenues	400	300	400
Total liabilities	600	B	250
Beginning retained earnings	(50)	100	100
Total expenses	250	350	200
Dividends	0	50	0

ANS:

A.$800

B.$250

C.$50

PTS: 3 DIF: 2 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

Flair and Glory incorporate as FG Designs, Inc. on January 1, Year 1. FG Designs creates custom wall finishes and sells painting products. The following transactions occur during January.

a.	Glory contributes cash of $85,000 and receives 15,000 shares of $1 par value stock.
b.	Flair contributes $45,000 cash, office furniture with a value of $5,000, and computer equipment with a value of $10,000 and receives 15,000 shares of $1 par value stock. The furniture and equipment is expected to last 5 years and has no salvage value.
c.	On January 2, $12,000 of painting products were purchased. FG paid $8,000 cash with the remaining amount on account.
d.	During January, painting products are sold for $10,000 cash. The cost of the products is $3,000.
e.	Additional painting products with a value of $6,500 are sold, with a cost of $2,500, but the cash is not collected as of January 31st. It is expected that the $6,500 will be collected in full by February 15th.
f.	Glory is paid a salary of $3,300.
g.	FG paid $1,800 for January and February rent.

Required:

Prepare appropriate accrual basis journal entries.

ANS:

Cash 85,000

Common Stock 15,000

Additional Paid-in Capital 70,000

Cash 45,000

Furniture 5,000

Computer Equipment 10,000

Common Stock 15,000

Additional Paid-in Capital 45,000

Inventory 12,000

Cash 8,000

Accounts Payable 4,000

Cash 10,000

Sales Revenue 10,000

Cost of Goods Sold 3,000

Inventory 3,000

Accounts Receivable 6,500

Sales Revenue 6,500

Cost of Goods Sold 2,500

Inventory 2,500

Salary Expense 3,300

Cash 3,300

Rent Expense (Jan) 900

Prepaid Rent (Feb) 900

Cash 1,800

PTS: 7 DIF: 2 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

The following cash-basis income statement has been prepared for the first year of business.

Kitchen Mart, Inc. Statement of Cash Receipts and Expenditures For the Year Ending December 31, Year 1
Cash Receipts from Sales of Merchandise				$26,000
Less:	Cash Expenditures for Merchandise and Services
		Merchandise	$12,000
		Salaries	5,000
		Rent	7,000
		Total Cash Expenditures		22,000
Excess of Cash Receipts over Cash Expenditures				$ 4,000

At year-end, the firm had inventory with a cost of $3,000 remaining. Also, customers owed $2,500 for goods that had already been delivered. The utilities for December were $500 and were billed to but not yet paid by the company. The rent of $3,500 for January, Year 2, was paid in December, Year 1.

Required:

Prepare an accrual-basis income statement for the year.

ANS:

Kitchen Mart, Inc. Income Statement For the Year Ending December 31, Year 1
Sales Revenue			$28,500
Less:	Expenses
	Cost of Goods Sold	$9,000
	Salaries Expense	5,000
	Rent Expense	3,500
	Utilities Expense	500
Total Expenses			18,000
Net Income			$ 10,500

Sales = $26,000 + $2,500 AR

Cost of Goods Sold = $12,000 – $3,000 Inventory

Rent = $7,000 – $3,500 Prepaid

Utilities = $0 + 500 Accrued

PTS: 5 DIF: 2 REF: pp. 151-152 OBJ: LO: 5-03

NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

The accounting records for Magic Chocolate Castle contained the following data for the current year:

Sales	$517,500
Cost of goods sold	213,800
Interest revenue	6,500
Rent revenue	3,600
Administrative expense	131,300
Selling expense	133,600
Interest expense	15,400
Income tax expense	8,100
Loss on sale of warehouse	6,500

Required:

Prepare both a single-step and a multi-step income statement for Magic for the current year.

ANS:

Single-step income statement: Magic Chocolate Castle Income Statement For the Year Ending December 31, Year X
Sales revenue	$517,500
Interest revenue	6,500
Rent revenue	3,600
Total revenues and gains		$527,600
Cost of goods sold	213,800
Administrative expense	131,300
Selling expense	133,600
Interest expense	15,400
Loss on sale of warehouse	6,500
Income taxes	8,100
Total expenses and losses		508,700
Net Income		$ 18,900

Multi-step income statement:

Magic Chocolate Castle Income Statement For the Year Ending December 31, Year X
Sales revenue		$517,500
Less: Cost of Goods Sold		213,800
Gross Profit		$303,700
Less: Administrative expense	131,300
Selling expense	133,600	264,900
Operating income		38,800
Other income and gain and losses
Interest revenue	6,500
Rent revenue	3,600
Interest expense	(15,400)
Loss on sale of warehouse	(6,500)	(11,800)
Income before income taxes		27,000
Income taxes		(8,100)
Net income after income taxes		$ 18,900

PTS: 10 DIF: 2 REF: pp. 151-152 OBJ: LO: 5-03

NAT: BUSPROG: Analytic

STA: AICPA: FN-Reporting | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Comprehension

(CMA adapted, Dec 95 #5) The conceptual framework of accounting theory governs the recognition of revenue and expenses. Revenue is generally recognized at the point of sale; however, under special circumstances, bases other than the point of sale are used for the recognition of revenue. Costs are generally recognized as expenses at the time of product sale; however, there are guidelines for recognizing expenses by other criteria. Accountants must be familiar with these concepts when determining the earnings of a company.

Required:

a.	Explain why the point of sale is generally used as the basis for revenue recognition.
b.	Two other acceptable bases for the recognition of revenue are: (a) recognizing revenue when cash is received; and (b) recognizing revenue periodically during production. For each of these two alternatives,
	1.	Discuss the accounting methods used and the rationale for their use.
	2.	Give an example of the circumstances when each method should be used.
c.	For each of the following circumstances, explain the rationale for expense recognition.
	1.	Recognizing costs as expenses at the time of sale.
	2.	Treating costs as expenses of a period rather than assigning the costs to an asset.
	3.	Assigning expenses to specific accounting periods on the basis of the systematic and rational allocation of asset costs.

ANS:

The point of sale, when goods or services are delivered, is generally used as the basis for revenue recognition because at this point most of the uncertainties concerning the earning process have been removed and the exchange price is known.

b.1.(a) The method of recognizing revenue when cash is received is used in cases where collectibility is uncertain. This method is in accordance with the principle of conservatism.

(b) The method of recognizing revenue periodically during production is usually used for long-term construction contracts or service contracts: revenue is recognized periodically during the contract life to better depict economic reality. This method allocates revenues of each contract to each period based on an estimate of the percentage completed during the period.

2.(a) An example of revenue recognition based on receipt of cash is the installment method used in land development transactions, e.g., sales of farm equipment, home furnishings, heavy equipment, franchises, and license operations.

(b) An example of recognizing revenue periodically during production is the percentage-of-completion method for long-term construction projects; e.g., planes, ships, buildings, and roads.

c.1. In accordance with the matching principle, the costs to produce the products sold should be recognized in the same period as the revenue is realized from the sale. The intent is to match the sacrifices or efforts against the benefits or accomplishments in the appropriate accounting period.

Some costs are more readily associated with the “cost of doing business” rather than the production of certain services and products. Costs, such as administrative salaries, are not traceable to specific assets and should be immediately recognized in the period incurred. Such costs are referred to as period costs
The going-concern assumption indicates that a company will operate long enough to fulfill its existing commitments. On the basis of this assumption, expenses such as the depreciation of fixed assets and amortization of a patent’s purchase price are systematically spread over the periods that benefit from the use of the assets.

PTS: 6 DIF: 3 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

Ralston Company has two divisions, X and Y. The operations and cash flows of these two divisions are clearly distinguishable. On July 1, 2014, the company decided to dispose of the assets and liabilities of Division Y. It is probable that the disposal will be completed early next year. The revenues and expenses of Ralston Company for 2014 and for the preceding two years are as follows:

	2014	2013	2012
Sales-Division X	20,000	18,400	17,000
Sales-Division Y	15,000	16,200	18,000
Total non tax expenses-X	14,000	16,200	15,000
Total non tax expenses-Y	15,900	15,000	15,400

During the latter part of 2014, Ralston disposed of a portion of Division Y and recognized a pretax loss of $8,000 on the disposal. The income tax rate for Ralston Company is 40%.

Prepare the comparative income statements for Ralston Company for the years 2012, 2013, and 2014.

ANS:

	2014	2013	2012
Sales	20,000	18,400	17,000
Expenses	14,000	16,200	15,000
Income before taxes	6,000	2,200	2,000
Income tax expense (40%)	2,400	880	800
Income from continuing operations	3,600	1,320	1,200
Discontinued operations:
Income (loss) from operations (including loss on disposal in 2014 of $8,000)	(8,900)	1,200	2,600
Income tax expense (benefit)-40%	3,560	(480)	(1,040)
Income (loss) on discontinued operations	(5,340)	720	1,560
Net income (loss)	(1,740)	2,040	2,760

PTS: 1 DIF: 3 REF: pp. 141-145 OBJ: LO: 5-01

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

Chicago Company has two divisions, A and B. The operations and cash flows of these two divisions are clearly distinguishable. On July 1, 2014, the company decided to dispose of the assets and liabilities of Division B. It is probable that the disposal will be completed early next year. The revenues and expenses of Chicago Company for 2014 and for the preceding two years are as follows:

	2014	2013	2012
Sales-Division A	40,000	36,800	34,000
Sales-Division B	30,000	32,400	36,000
Total non tax expenses-A	28,000	32,400	30,000
Total non tax expenses-B	31,800	30,000	30,800

During the latter part of 2014, Chicago disposed of a portion of Division B and recognized a pretax loss of $10,000 on the disposal. The income tax rate for Chicago Company is 40%.

Prepare the comparative income statements for Chicago Company for the years 2012, 2013, and 2014.

ANS:

Chicago Company Income Statements For the Years Ending December 31, 2012, 2013, 2014
	2014	2013	2012
Sales	40,000	36,800	34,000
Expenses	28,000	32,400	30,000
Income before taxes	12,000	4,400	4,000
Income tax expense (40%)	4,800	1,760	1,600
Income from continuing operations	7,200	2,640	2,400
Discontinued operations:
Income (loss) from operations (including loss on disposal in 2014 of $10,000)	(11,800)	2,400	5,200
Income tax expense (benefit)-40%	4,720	(960)	(2,080)
Income (loss) on discontinued operations	(7,080)	1,440	3,120
Net income (loss)	120	4,080	5,520

PTS: 1 DIF: 3 REF: pp. 141-145 OBJ: LO: 5-01

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

The changes in the account balances and the following additional information are taken from the accounts of the Crush Co.

	Increase
	(Decrease)
Cash ………………………………………….	$142,500
Accounts Receivable …………………………….	(30,000)
Inventory ……………………………………..	202,500
Buildings and Equipment (net) ……………………	630,000
Accounts Payable ……………………………….	(172,500)
Bonds Payable ………………………………….	375,000
Capital Stock ………………………………….	300,000
Additional Paid-In Capital ………………………	45,000

Dividends for 2014 were $82,500. There were no transactions in 2014 affecting retained earnings other than the dividends and net income. Calculate the 2014 net income.

ANS:

Debit changes in accounts during 2014, other than Retained Earnings:

Cash ………………………………….	$ 142,500
Inventory ……………………………..	202,500
Buildings and Equipment …………………	630,000
Accounts Payable ……………………….	172,500
		$1,147,500

Credit changes in accounts during 2014, other than Retained Earnings:

Accounts Receivable …………………….	$ 30,000
Bonds Payable ………………………….	375,000
Capital Stock ………………………….	300,000
Additional Paid-In Capital ………………	45,000	(750,000)

2014 change in Retained Earnings …………		$ 397,500
Add dividends ………………………….		82,500
Net Income …………………………..		$ 480,000

PTS: 1 DIF: 3 REF: pp. 141-145 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

Selected information based on the comparative balance sheets for Neptune Company, a U.S. defense manufacturer, appears in the following display for the years ended December 31, Years 5, 6, and 7.

Neptune applies U.S. GAAP and reports its results in millions of dollars.

Neptune Company Balance Sheet Data December 31
	Year 7	Year 6	Year 5
Common Stock	$5	$5	$5
Accumulated Other Comprehensive Income	?	?	(1,920)
Retained Earnings	?	?	2,998
Treasury Stock	(816)	(543)	(73)
Additional Paid-In Capital	10,097	9,722	9,540
Total Shareholders’ Equity	?	?	?

Neptune’s other comprehensive income for Year 7 was $774, compared to ($31) in Year

6 and $275 in Year 5. In addition, in Year 7 Neptune made a one-time adjustment of

($1,338) to accumulated other comprehensive income. Comprehensive income for Year 7

was $2,057, compared to $840 in Year 6 and $692 in Year 5. Dividends declared and

paid increased from $356 in Year 5, to $394 in Year 6, to $429 in Year 7.

Required: Compute the missing amounts for each of the three years.

ANS:

(amounts in millions of US$)

The missing items appear in boldface below with calculations below:

NEPTUNE COMPANY Comparative Balance Sheets December 31
	Year 7	Year 6	Year 5
Common Stock	$5	$5	$5
Accumulated Other Comprehensive Income	(2,515) (e)	(1,951) (b)	(1,920)
Retained Earnings	4,329 (f)	3,475 (c)	2,998
Treasury Stock	(816)	(543)	(73)
Additional Paid-In Capital	10,097	9,722	9,540
Total Shareholders’ Equity	$11,100 (g)	$10,708 (d)	$10,550 (a)

Calculations:

(a) Total Shareholders’ Equity, End of Year 5 = $5 – $1,920 + $2,998 – $73 +

$9,540 = $10,550.

(b) Accumulated Other Comprehensive Income, End of Year 6 =

Accumulated Other Comprehensive Income, End of Year 5 + Other

Comprehensive Income, Year 6 = $(1,920) + $(31) = $(1,951).

Comprehensive Income, Year 6. $840 = Net Income, Year 6 + $(31). Net

Income, Year 6 = $871.

Retained Earnings, End of Year 6 = Retained Earnings, End of Year 5 +

Net Income, Year 6 – Dividends Declared, Year 6 = $2,998 + Net Income,

Year 6 – $394.

Retained Earnings, End of Year 6 = $2,998 + $871 – $394 = $3,475.

(d) Total Shareholders’ Equity, End of Year 6 = $5 – $1,951 + $3,475 – $543

+ $9,722 = $10,708.

(e) Accumulated Other Comprehensive Income, End of Year 7 = Accumulated

Other Comprehensive Income, End of Year 6 + Other Comprehensive

Income, Year 7 + Adjustment, Year 7 = $(1,951) + $774 – $1,338 =

$(2,515).

(f) Comprehensive Income, Year 7 = Net Income, Year 7 + Other

Comprehensive Income, Year 7. $2,057 = Net Income, Year 12 + $774.

Net Income, Year 7 = $1,283.

Retained Earnings, End of Year 7 = Retained Earnings, End of Year 11 +

Net Income, Year 7 – Dividends Declared, Year 12 = $3,475 + $1,283 –

$429.

Therefore, Retained Earnings, End of Year 7 = $3,475 + $1,283 – $429 =

$4,329.

(g) Total Shareholders’ Equity, End of Year 7 = $5 – $2,515 + $4,329 – $816

+ $10,097 = $11,100.

PTS: 1 DIF: 3 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Application

ESSAY

How are expenses recognized and measured?

ANS:

EXPENSE RECOGNITION AND MEASUREMENT

TIMING OF EXPENSE RECOGNITION

Assets provide future benefits, and expenses measure the consumption of those benefits. Timing of expense recognition focuses on when the firm consumes the benefits. The critical question is, “When does the firm consume the benefits of an asset?” That is, when does the asset leave the balance sheet and become an expense on the income statement?

CRITERIA FOR EXPENSE RECOGNITION

The firm recognizes an expense when either of the following conditions holds.

The consumption of the asset results from a transaction that leads to the recognition of revenue. The consumption of the benefit embodied in the asset is an expense in the period when the firm recognizes revenue. For example, a sale of merchandise that results in the seller’s recognizing revenue consumes the benefits of the inventory asset and results in an increase in the expense called Cost of Goods Sold. The amount of this expense is determined by the product costs associated with the inventory. This treatment, the matching convention, matches the timing of some expenses with revenue recognition.

The consumption of the asset results from the passage of time. When the firm consumes the benefits of an asset over time, that cost becomes an expense of the period when the firm consumes the benefits. For example, the firm consumes benefits of this month’s rent on the warehouse during the current month. Therefore, the firm reports the cost as part of this month’s expenses (that is, period expenses). Most administrative expenditures are period expenses. Another period expense, results from the expenditures on advertising and research, which the firm must recognize as expense in the period of expenditure, regardless of the firm’s expectation of future benefits.

PTS: 10 DIF: 3 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

What is revenue recognition?

ANS:

REVENUE RECOGNITION

Revenue recognition refers to the timing and measurement of revenues. Management applies the revenue recognition criteria of authoritative guidance to decide whether a given transaction meets the criteria and so results in recording revenues (and the related expenses). Revenue recognition is among the most complex issues in financial reporting. Currently, U.S. GAAP contains over 200 pieces of authoritative guidance for recognizing revenues. The quantity and complexity of this guidance result from several factors. First, misreporting of revenues (either reporting revenues before the firm earns them or reporting nonexistent revenues) is the most common form of discovered accounting fraud. Second, firms often bundle products and services and sell them in multiple-element arrangements, and each element of the arrangement has the potential to result in revenue recognition.

PTS: 5 DIF: 3 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

What are common-size income statements?

ANS:

COMMON-SIZE INCOME STATEMENT

One tool for analysis of the income statement, a common-size income statement, expresses each expense and net income as a percentage of revenues. An analyst can use a common-size income statement to study over-time changes or among firm differences in the relations among revenues, expenses, and net income and to identify relations that the analyst should explore further.

PTS: 2 DIF: 3 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

What are the criteria for revenue recognition?

ANS:

CRITERIA FOR REVENUE RECOGNITION

As a general principle, under the accrual basis of accounting, the firm recognizes revenue when the transaction meets both of the following conditions:

Completion of the earnings process. The seller has done all (or nearly all) that it has promised to do for the customer. That is, the seller has delivered all (or nearly all) of the goods and services it has agreed to provide.

Receipt of assets from the customer. The seller has received cash or some other asset that it can convert to cash, for example, by collecting an account receivable.

The first criterion focuses on the seller’s performance. Firms recognize revenues from many sales of goods and services at the time of sale (delivery) because that is often the point of completion of the earnings process, in the sense that the seller has transferred the promised goods to the customer or has performed the promised services. Even if some items remain unperformed (for example, promises to provide warranty services and promises to accept customer returns), the seller can recognize revenues as long as the unperformed items are not too great a portion of the total arrangement with the customer, and the seller can reasonably measure the cost of the unperformed items.

The second criterion for revenue recognition focuses on measuring the amount of cash the seller will ultimately receive. The exchange price between the customer (buyer) and seller represents the assets exchanged by the customer for goods and services, and provides the initial measure of revenue.

PTS: 5 DIF: 3 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

How are period expenses recognized and measured?

ANS:

RECOGNITION OF PERIOD EXPENSES

Many expenditures benefit specific accounting periods and do not benefit specific revenue transactions. The firm therefore cannot link the timing of recognition of the expenses associated with these expenditures to revenue recognition from specific sales. A common example of a period expense is the cost of management, including the president’s salary, accounting and information systems costs, and support activity costs such as legal services, employee training, and corporate planning. These administrative costs do not relate directly to products produced or sold, and the firm recognizes them as expenses when it consumes their benefits in the accounting period. The firm treats them, therefore, as period expenses.

Another example of a period expense is the cost of marketing or selling products, for example, salaries and commissions of the sales staff and costs to produce catalogs and other sales literature. The firm recognizes those costs as expenses in the accounting period when it consumes them. The firm incurs some marketing costs, such as advertising, with the intent of providing future benefits. U.S. GAAP and IFRS preclude the recognition of these costs as assets. The reasoning for this treatment results from the asset recognition criterion that the firm be able to measure the future benefits with sufficient reliability.

EXPENSE MEASUREMENT

Expenses measure the consumption of assets during an accounting period, so the basis for

expense measurement is the same as the measurement of the consumed asset. If the firm

measures an asset at acquisition cost on the balance sheet, it also measures expenses based

on the acquisition cost of the asset consumed.

PTS: 5 DIF: 3 REF: pp. 146-150 OBJ: LO: 5-02

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

What is comprehensive income?

ANS:

COMPREHENSIVE INCOME

Net income under U.S. GAAP, or profit under IFRS, reports increases in net assets from certain transactions with nonowners such as customers. Net income, or profit, does not include all transactions with nonowners. Both U.S. GAAP and IFRS define net income, or profit, for the current period to exclude certain events and transactions with nonowners that change net assets. Both U.S. GAAP and IFRS use the term Other Comprehensive Income (OCI) to refer to changes in net assets that are not transactions with owners and that do not appear on the income statement. Both U.S. GAAP and IFRS specify the items that do not appear in the income statement and that are included in other comprehensive income

The sum of net income and other comprehensive income is Comprehensive Income, which

includes all changes in net assets for a period except for changes arising from transactions

with owners. (Typical transactions with owners include dividends, share issuances, and share

repurchases).

The items reported in other comprehensive income relate to changes in the amount of

assets and liabilities resulting from transactions with nonowners—transactions whose effects

authoritative guidance has chosen to exclude from net income. Both U.S. GAAP and IFRS

require firms to report the cumulative effect of other comprehensive income in a balance

sheet account called Accumulated Other Comprehensive Income (AOCI). Accumulated Other Comprehensive Income relates to Other Comprehensive Income just as Retained Earnings relates to Net Income, when the firm declares no dividends.

While no general principle describes the nature of items excluded from net income and included in Other Comprehensive Income, they tend to arise from remeasurements of assets and liabilities (often, remeasurements at fair value) and not from transactions. For example, IFRS permits but does not require firms to revalue certain noncurrent assets upward to reflect increases in fair value in excess of acquisition cost. Under IFRS, such a revaluation remeasurement increases assets (because the firm now records an existing asset on the balance sheet at a larger number) and increases Other Comprehensive Income. These increases are accumulated in a shareholders’ equity account, Revaluation Surplus. OCI stands for Other Comprehensive Income, and the revaluations accumulate in shareholders’ equity, in the Revaluation Surplus account.

Both U.S. GAAP and IFRS require the presentation of an income statement and the presentation of the items of Other Comprehensive Income. U.S. GAAP permits three reporting formats. Starting January 1, 2009, IFRS permits free choice between the first two reporting formats.

A single statement of comprehensive income that shows all the changes in net assets except from transactions with owners;

A two-statement presentation that includes an income statement and a separate statement of comprehensive income.

A separate display of the items comprising Other Comprehensive Income within a statement of changes in shareholders’ equity. Firms applying U.S. GAAP use this alternative more often than the other two.

PTS: 10 DIF: 3 REF: pp. 151-152 OBJ: LO: 5-03

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

Describe items appearing in accumulated other comprehensive income. What is comprehensive income and what does the shareholders’ equity section of the balance sheet report?

ANS:

ACCUMULATED OTHER COMPREHENSIVE INCOME

Unrealized Gains and Losses on Marketable Securities

Firms measure marketable equity securities classified as available for sale at fair value

and record the unrealized changes in fair value as an element of other comprehensive income.

Cash Flow Hedges

Firms remeasure derivatives designated as cash flow hedges to fair value at the end of each period and report the unrealized gain or loss in other comprehensive income.

Foreign Currency Translation

Firms translate the reported results of their foreign operations from local currencies into U.S. dollars in order to prepare consolidated financial statements.

Pension Liability

Firms must include gains and losses from changes in actuarial assumptions, actuarial performance, and prior service cost in other comprehensive income prior to their amortization as an adjustment to pension expense.

COMPREHENSIVE INCOME

Comprehensive income equals net income as reported on the income statement plus (minus)

the increase (decrease) in other comprehensive income for the year.

The shareholders’ equity section of the balance sheet reports the sources of financing provided by preferred and common shareholders and their claims on the net assets of the firm.The equity of the preferred shareholders usually approximates the liquidation value of the preferred shares. The remaining shareholders’ equity accounts relate to the equity of the common shareholders. The equity of the common shareholders equals the sum of the amounts appearing in the Common Stock, Additional Paid-In Capital, Retained Earnings, Accumulated Other Comprehensive Income, Treasury Stock, and other common-share equity accounts. The user of the financial statements gains insight into capital contributions, net income, other comprehensive income, dividends, and treasury stock transactions only by studying changes in the individual accounts.

PTS: 10 DIF: 3 REF: pp. 151-152 OBJ: LO: 5-03

NAT: BUSPROG: Analytic

STA: AICPA: FN-Measurement | ACBSP: APC-09-Financial Statements

KEY: Bloom’s: Analysis

Financial Accounting An Introduction to Concepts Methods and Uses 14e Roman L Weil Katherine Schipper Jennifer Francis - Test Bank

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