Chapter 17

Question 1

What is the primary principle of revenue recognition?

Answer 1

Revenue should be recognized when it is earned and realizable.

Question 2

True or False: Revenue can be recognized before the delivery of goods or services.

Answer 2

False

Question 3

Fill in the blank: The _______ approach to revenue recognition involves recognizing revenue as the entity satisfies performance obligations.

Answer 3

performance obligation

Question 4

What are the five steps in the revenue recognition process?

Answer 4

1. Identify the contract with a customer, 2. Identify the performance obligations, 3. Determine the transaction price, 4. Allocate the transaction price to the performance obligations, 5. Recognize revenue when the entity satisfies a performance obligation.

Question 5

What is a performance obligation?

Answer 5

A promise in a contract to transfer a distinct good or service to the customer.

Question 6

Which standard outlines the revenue recognition principles?

Answer 6

ASC 606, Revenue from Contracts with Customers.

Question 7

True or False: ASC 606 applies to all entities, including non-profits.

Answer 7

True

Question 8

Multiple choice: Which of the following is NOT a criterion for recognizing revenue? A) Delivery has occurred, B) Payment is received, C) The amount is collectible, D) The contract is enforceable.

Answer 8

B) Payment is received

Question 9

What is meant by ‘transaction price’?

Answer 9

The amount of consideration an entity expects to receive in exchange for transferring goods or services.

Question 10

Fill in the blank: Revenue is recognized when a company _____ its performance obligations.

Answer 10

satisfies

Question 11

What is the significance of ‘distinct’ in performance obligations?

Answer 11

A good or service is distinct if the customer can benefit from it on its own or together with other resources that are readily available.

Question 12

What does ‘variable consideration’ refer to?

Answer 12

An amount that may vary due to discounts, rebates, refunds, or performance bonuses.

Question 13

True or False: Contract modifications do not affect revenue recognition.

Answer 13

False

Question 14

What is the principal-agent relationship in revenue recognition?

Answer 14

A situation where one party (the agent) arranges for another party (the principal) to provide goods or services to a customer.

Question 15

Multiple choice: Which of the following factors does NOT affect the transaction price? A) Discounts, B) Performance bonuses, C) Payment terms, D) Market conditions.

Answer 15

D) Market conditions

Question 16

What must be done to allocate the transaction price to performance obligations?

Answer 16

The transaction price must be allocated based on the standalone selling prices of each distinct good or service.

Question 17

Fill in the blank: The _______ method is used when revenue is recognized over time.

Answer 17

percentage of completion

Question 18

What is the ‘completed contract method’?

Answer 18

A method of revenue recognition that defers all revenue and expenses until the contract is completed.

Question 19

True or False: Revenue recognition can be affected by the timing of cash receipts.

Answer 19

False

Question 20

What is ‘collectibility’ in the context of revenue recognition?

Answer 20

The likelihood that an entity will collect the consideration to which it is entitled.

Question 21

Multiple choice: When should revenue be recognized for a long-term contract? A) At the completion of the contract, B) At the completion of significant milestones, C) As work is performed, D) When the customer pays.

Answer 21

C) As work is performed

Question 22

Fill in the blank: A contract must have _____ to be considered valid for revenue recognition.

Answer 22

commercial substance

Question 23

What is the role of ‘disclosures’ in revenue recognition?

Answer 23

To provide information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

Question 24

True or False: Revenue recognition principles apply equally to all industries.

Answer 24

True

Question 25

What is 'principal' in the context of revenue recognition?

Answer 25

The entity that controls the goods or services before they are transferred to the customer.

Question 26

Multiple choice: Which of the following is NOT a condition for recognizing revenue over time? A) The customer consumes the benefits as the entity performs, B) The creation of an asset that has no alternative use, C) The entity has a right to payment for performance completed to date, D) The contract is short-term.

Answer 26

D) The contract is short-term.

Question 27

Fill in the blank: In revenue recognition, the 'right of return' allows customers to ______ goods after purchase.

Answer 27

return

Question 28

What does 'significant financing component' mean?

Answer 28

A situation where the timing of payments provides a benefit of financing to either the buyer or seller.

Question 29

True or False: Revenue from the sale of goods is recognized at the point of sale.

Answer 29

True

Question 30

What is 'contract liability'?

Answer 30

An obligation to transfer goods or services to a customer for which the entity has received consideration from the customer.

Question 31

Multiple choice: Which of the following is an example of a contract modification? A) Changing the delivery date, B) Offering a discount, C) Allowing a return, D) All of the above.

Answer 31

A) Changing the delivery date

Question 32

Fill in the blank: The _______ approach to revenue recognition involves recognizing revenue as goods are delivered.

Answer 32

delivery

Question 33

What is a 'bill-and-hold' arrangement?

Answer 33

An agreement where the seller bills the customer for goods but retains physical possession until a later date.

Question 34

True or False: A refund liability is recognized when a customer has the right to return a product.

Answer 34

True

Question 35

What is the impact of a 'nonrefundable upfront fee'?

Answer 35

It is recognized as revenue when the related performance obligation is satisfied.

Question 36

Multiple choice: Which of the following is true regarding warranties? A) Warranties are always sold separately, B) Warranties are considered a separate performance obligation only if they provide a service beyond the assurance that the product complies with agreed-upon specifications, C) Warranties cannot affect revenue recognition, D) All warranties are recognized at the point of sale.

Answer 36

B) Warranties are considered a separate performance obligation only if they provide a service beyond the assurance that the product complies with agreed-upon specifications.

Question 37

Fill in the blank: Revenue from the sale of _______ is generally recognized at the point of sale.

Answer 37

inventory

Question 38

What is 'disaggregation' in revenue reporting?

Answer 38

The process of separating revenue into categories that provide useful information to users of financial statements.

Question 39

True or False: Revenue recognition can be influenced by the entity's business model.

Answer 39

True

Question 40

What is the purpose of the 'contract asset'?

Answer 40

To recognize the entity's right to consideration for goods or services transferred to the customer when that right is conditional on something other than the passage of time.

Question 41

Multiple choice: Which of the following is a characteristic of a contract? A) Must be written, B) Must be enforceable, C) Must have a specified duration, D) Must involve a payment.

Answer 41

B) Must be enforceable

Question 42

Fill in the blank: Revenue recognition is critical for _______ reporting.

Answer 42

financial

Question 43

What does 'substantial completion' refer to in revenue recognition?

Answer 43

A point where the entity has performed enough work to be entitled to payment.