Reading 32: Understanding the Income Statement-LOS b 习题精选 2011, accounting, principles, including, specific

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Session 8: Financial Reporting and Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement
Reading 32: Understanding the Income Statement

LOS b: Explain the general principles of revenue recognition and accrual accounting, demonstrate specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, and gross and net reporting of revenue), and discuss the implications of revenue recognition principles for financial analysis.

 

 

Which of the following is NOT a requirement for revenue recognition to occur?

A) Earning activities are substantially completed.

B) Transactions giving rise to revenue should be arms-length.

C) Cash must have been received.

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Revenue from credit sales may be recognized when sales are on account.

Other conditions when revenues are also considered earned include when: revenue can be measured with reasonable accuracy, transactions are not subject to revocation, it is possible to measure the cost of provided goods (no significant contingent obligation), and there is assurance of payment (cash) or collectability.

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Guidance from the U.S. Securities and Exchange Commission regarding the criteria for revenue recognition least likely specifies that there must be:

A) evidence of an arrangement between the buyer and the seller.

B) reasonable assurance that the product will be delivered or the service will be rendered.

C) a determined or determinable price.

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One of the SEC’s criteria for revenue recognition is that the product has been delivered or the service has been rendered. The other criteria are evidence of an arrangement between the buyer and seller; the price has been determined or is determinable; and the seller is reasonably assured of collecting money.

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Under the general principles of accrual accounting, revenue is recognized when:

A) cash is received, and expenses are recognized when cash is paid.

B) earned, and expenses are recognized when incurred.

C) the good or service is delivered or cash is received, whichever is earlier.

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The principle of accrual accounting is that revenue is recognized when earned, and expenses are recognized when incurred.

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If a reliable estimate of total costs of the contract does not exist, which of the following revenue recognition methods should be used?

A) Cost recovery method.

B) Completed contract method.

C) Percentage-of-completion method.

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The cost recovery method is used when future cash collections are not assured even after receipt of partial payments. Gross profit is not recognized until all of the cost of goods sold is collected.

The percentage-of-completion method is used when ultimate payment is assured and revenue is earned as costs are incurred. Profit is recognized corresponding to the percentage of costs incurred to the total estimated.

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In accounting for long-term construction contracts, the percentage-of-completion method is preferable to the completed contract method when:

A) the contracts are of a relatively short duration (less than one year).

B) lack of dependable cost estimates cause forecasts to be doubtful.

C) estimates of the costs to complete and the extent of progress toward completion are reasonably dependable.

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In accounting for long-term construction contracts, the percentage-of-completion method is preferable to the completed contract method when estimates of the costs to complete and the extent of progress toward completion are reasonably dependable.

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The Kammel Building Company has a contract to build a building for $100 million. The estimate of the cost of the project is $75 million. In the first year of the project, Kammel had costs of $30 million. Kammel’s reported profit for the first year of the contract, using the completed contract method, is:

A) $0.

B) $15 million.

C) $10 million.

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Under the completed contract method, profit is only reported upon completion of the contract.

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Under the cost recovery method, profit is recognized:

A) at time of delivery.

B) after the amount of cost has been collected.

C) as collection occurs.

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The cost recovery method is used when the costs to provide goods or services are not known. Under this method, sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

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Walker Company received a letter in November 2003 indicating that Johnson, Inc. would purchase a specialty machine priced at $4,000,000. In February 2004, a binding contract was executed for the machine’s construction. Materials costing $2,000,000 were ordered in December 2003, arrived with an invoice in August 2004, and were used in the manufacturing process in the first quarter of 2005. Walker completed and delivered the machine in December 2006. Johnson received the first invoice in 2007 and paid the $4,000,000 purchase price in 2007. Walker Company uses the accrual method of accounting. Walker should record the materials used to construct the machine as expenses in the year:

A) 2007.

B) 2004.

C) 2006.

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Under the accrual concept, income is recognized when the earning activities are substantially completed, risk of ownership has transferred from buyer to seller, and payment is realizable and collectible. Under the matching principle, expenses incurred that directly relate to the sold item are expensed in the same period as the revenue is recognized.

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The JME Jumpers, a professional volleyball team, sells season tickets to all home games. The cost of a season ticket is $1,000 and the team plays 20 home games, which run from April through August. For the year ended June 30, 2005, JME sold 1,200 tickets, collected 80 percent of the amount owed, and played 12 home games. How much revenue should JME recognize?

A) $960,000.

B) $720,000.

C) $1,200,000.

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(1,200 × $1,000 × 12/20) = $720,000

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JME Construction always uses the percentage of completion method of recognizing revenue. During 2004 JME signs a contract in the amount of $10 million with the following data available:

Costs incurred to date	$2,200,000
Billings to date	$2,000,000
Cash collected	$1,750,000
Total cost of project	$8,800,000

How much gross profit should JME recognize for 2004?

A) $300,000.

B) -$200,000.

C) -$450,000.

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stage of completion = 25%(2.2 / 8.8)

revenue to be recognized = 0.25 × 10 million = 2.5 million

gross profit = 2.5 million ? 2.2 million = 300,000