BURNLEY 1e: Chapter 4 Review

Question 1

Basic earnings per share

Answer 1

A measure of a company’s performance, calculated by dividing the net income for the period, less preferred dividends, by the weighted average number of common shares that were outstanding during the period. Determines the profit earned on each common share.

Question 2

Bundling

Answer 2

The total change in the shareholders’ equity (net assets) of the entity from non-owner sources. Includes net income as well as other components, which generally represent unrealized gains and losses.

Question 3

Comprehensive income

Answer 3

The total change in the shareholders’ equity (net assets) of the entity from non-owner sources. Includes net income as well as other components, which generally represent unrealized gains and losses.

Question 4

Contra revenue account

Answer 4

An account that is offset against (reduces) a revenue account on the statement of income. Examples include sales returns and allowances and sales discounts.

Question 5

Earnings per share (EPS)

Answer 5

A ratio calculated by dividing the earnings for the period by the average number of shares outstanding during the period.

Question 6

Fair value

Answer 6

The proportion that an asset’s fair value represents of the total fair value of a group of assets purchased in a single transaction (that is, a basket purchase), which is used to allocate the purchase price.

Question 7

Function

Answer 7

A method of organizing expenses on the statement of income by way of the activity (business function) for which they were incurred (such as cost of goods sold, administrative, and selling).

Question 8

General revenue recognition criteria

Answer 8

Criteria established by accounting standard setters to help management and other financial statement users determine when revenue is earned.

Question 9

Multi-step statement of income

Answer 9

A statement of income in which revenues and expenses from different sources are shown in separate sections.

Question 10

Nature

Answer 10

A method of organizing expenses on the statement of income by way of their natural classification (such as salaries, transportation, depreciation, and advertising).

Question 11

Net sales

Answer 11

Gross sales less sales returns and allowances and sales discounts.

Question 12

Operating activities

Answer 12

The activities of a company that are related to selling goods and services to customers, and other basic day-to-day activities related to operating the business.

Question 13

Other comprehensive income

Answer 13

Changes in net asset values representing unrealized gains and losses, which are not included in net earnings but are included in comprehensive income.

Question 14

Percentage of completion method

Answer 14

A method of revenue recognition used in the construction industry in which a percentage of the profits that are expected to be realized from a given project are recognized in a given period, based on the percentage of the project’s completion. The percentage completed is typically measured as the fraction of costs incurred to date relative to the total estimated costs to complete the project.

Question 15

Quantity discount

Answer 15

A price reduction that reduces the purchase price and is given to the buyer for volume purchases.

Question 16

Sales discounts

Answer 16

A price reduction that is based on the invoice price less any returns and allowances and is given by a seller for early payment of a credit sale (for example, 2/10; n/30).

Question 17

Sales returns

Answer 17

Returns of goods.

Question 18

Sales returns and allowances

Answer 18

A statement of income in which all revenues are listed in one section and all expenses (except income tax, perhaps) are listed in a second section.

Question 19

Single-step statement of income

Answer 19

A statement of income in which all revenues are listed in one section and all expenses (except income tax, perhaps) are listed in a second section.

Question 20

Specific revenue recognition criteria

Answer 20

Criteria developed that specify the conditions under which revenue should be recognized for the sale of goods, the provision of services, and the receipt of interest, royalties, and dividends.

Question 21

Statement of comprehensive income

Answer 21

Financial statement showing net income plus other components of other comprehensive income, combined to produce the total comprehensive income.

Question 22

Trade discount

Answer 22

A negotiated or posted reduction to the selling price of a good or service.