Chapter 005 Income Measurement and Profitability Analysis 1 Revenue is not recognized under the realization principle unless the earnings process is complete or virtually complete and there is reasonable certainty about collectibility of the asset received TRUE 2 The first disclosure note to the financial statements is typically the summary of significant accounting policies TRUE 3 SAB 101 was issued by the FASB to clarify its guidelines on revenue recognition FALSE 4 Use of the installment sales method requires that firms track the gross profit percentage associated with a particular sale TRUE True False Questions AACSB Reflective thinking Blooms Knowledge Learning Objective 1 Level of Learning 1 AACSB Reflective thinking Blooms Knowledge Learning Objective 1 Level of Learning 1 AACSB Reflective thinking Blooms Knowledge Learning Objective 1 Level of Learning 1 AACSB Reflective thinking Blooms Knowledge Learning Objective 2 Level of Learning 1 5 1 Chapter 005 Income Measurement and Profitability Analysis 5 When collectibility of accounts receivable is difficult to estimate companies must use the cost recovery method FALSE 6 Use of the installment sales method indicates little uncertainty about collection of the receivable FALSE 7 Over the life of a particular account receivable the same total amount of gross profit is recognized under the installment method and the cost recovery method TRUE 8 When the right of return exists revenue can be recognized at the point of sale if the seller can make reliable estimates of future returns TRUE AACSB Reflective thinking Blooms Knowledge Learning Objective 2 Level of Learning 1 AACSB Reflective thinking Blooms Knowledge Learning Objective 2 Level of Learning 2 AACSB Reflective thinking Blooms Knowledge Learning Objective 2 Level of Learning 2 AACSB Reflective thinking Blooms Knowledge Learning Objective 3 Level of Learning 1 5 2 Chapter 005 Income Measurement and Profitability Analysis 9 When the right of return exists and a seller cannot make reliable estimates of future returns they can use the installment method FALSE 10 Under the percentage of completion method amounts billed and the cash actually received affect income recognition FALSE 11 Under the percentage of completion method the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete TRUE 12 Firms have free choice as to whether they use the percentage of completion method or the completed contract method to account for a long term contract FALSE AACSB Reflective thinking Blooms Knowledge Learning Objective 3 Level of Learning 2 AACSB Reflective thinking Blooms Knowledge Learning Objective 4 Level of Learning 1 AACSB Reflective thinking Blooms Knowledge Learning Objective 4 Level of Learning 1 AACSB Reflective thinking Blooms Knowledge Learning Objective 4 Level of Learning 1 5 3 Chapter 005 Income Measurement and Profitability Analysis 13 The percentage of completion and completed contract methods calculate different amounts of total profit or loss for a particular contract FALSE 14 Use of the percentage of completion method is dependent on a firm s ability to make dependable forecasts of future costs TRUE 15 Under the completed contract method gross profit or loss is never recognized until the contract is completed FALSE 16 Under the cost recovery method used to account for long term contracts under IFRS equal amounts of revenue and cost are recognized until all costs are recovered TRUE AACSB Reflective thinking Blooms Knowledge Learning Objective 4 Level of Learning 1 AACSB Reflective thinking Blooms Knowledge Learning Objective 4 Level of Learning 1 AACSB Reflective thinking Blooms Knowledge Learning Objective 4 Level of Learning 2 AACSB Reflective thinking Blooms Knowledge Learning Objective 4 Level of Learning 2 5 4 Chapter 005 Income Measurement and Profitability Analysis 17 Estimated losses on long term contracts are recognized ratably over the contract term regardless of the revenue recognition method used FALSE 18 Revenue from the sale of computer software is always recognized at the point of sale FALSE 19 Recognition of franchise fee revenue is dependent on judgments of both substantial performance and fee collectibility TRUE 20 Initial franchise fees are always recognized on the date they are received FALSE AACSB Reflective thinking Blooms Knowledge Learning Objective 4 Level of Learning 2 AACSB Reflective thinking Blooms Knowledge Learning Objective 5 Level of Learning 1 AACSB Reflective thinking Blooms Knowledge Learning Objective 5 Level of Learning 2 AACSB Reflective thinking Blooms Knowledge Learning Objective 5 Level of Learning 2 5 5 Chapter 005 Income Measurement and Profitability Analysis 21 When accounting for multiple element software arrangements the revenue for each element is based on the separate prices stated for each element in the software contract FALSE 22 When accounting for multiple deliverable arrangements EITF 00 21 indicates that sellers can separately record revenue for a part of an arrangement even if the part does not have value to the customer on a stand alone basis FALSE 23 A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection FALSE 24 The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high TRUE AACSB Reflective thinking Blooms Knowledge Learning Objective 5 Level of Learning 2 AACSB Reflective thinking Blooms Knowledge Learning Objective 5 Level of Learning 2 AACSB Analytic Blooms Comprehension Learning Objective 6 Level of Learning 2 AACSB Analytic Blooms Comprehension Learning Objective 6 Level of Learning 2 5 6 Chapter 005 Income Measurement and Profitability Analysis 25 A company could improve its return on assets by increasing its income or by increasing its total assets FALSE 26 Return on Shareholders Equity is increased if a firm can maintain its return on assets but increase its leverage TRUE AACSB Analytic Blooms Comprehension Learning Objective 6 Level of Learning 2 AACSB Analytic Blooms Comprehension Learning Objective 6 Level of Learning 2 5 7 Chapter 005 Income Measurement and Profitability Analysis Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms Match each phrase with the correct term placing the letter designating the best term in the space provided by
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