Chapter 4

Question 1

What is income?

Answer 1

the amount that an entity could return to its investors and still be well off

return over and above the investment

Question 2

financial capital maintenance

Answer 2

a company has income if owners equity is greater than the net assets

the dollar amount of an enterprises net assets at the end of the period exceeds the dollar amount of net assets at the beginning of the period

Question 3

physical capital maintenance

Answer 3

only if the physical production capacity at the end of the period exceeds the physical production capacity at the beginning of the period.

Question 4

How are revenues recognized?

Answer 4

1) they are realized or realizable

2) they have been earned through substantial completion of the activities involved in the earning process

Question 5

transaction approach

Answer 5

• direct computation of revenue and expenses
• focuses on business events that affect certain elements of the financial statements such as revenue, expenses, gains and losses

Question 6

component elements of income

Answer 6

revenues
expenses
gains
losses

Question 7

revenues

Answer 7

inflows or other enhancements of assets of an entity from delivering goods and services, or other business ops.

Question 8

expenses

Answer 8

outflows or using up of assets of an entity or incurrances of liabilities from business ops

Question 9

gains

Answer 9

an increase in equity (net assets) from peripheral or incidental transactions and other events affecting the entity EXCEPT those that result from REVENUES or investments by owners

Question 10

losses

Answer 10

decreases in equity from business transactions that DO NOT result from expenses and distribution to owners

Question 11

Revenue Recognition

Answer 11

1) they are realized or realizable (promise to pay)

2) have been earned through substantial completion of the activities involved in the earning process

Question 12

Earlier recognition of revenues

Answer 12

when a market exists for a product is practically ENSURED with out significant effort.

EX: Metals

Question 13

Later Recognition

Answer 13

if collectiblity of assets received from G & s is considered doubtful revenues and gains may be recognized when cash is received

Question 14

Direct Matching

Answer 14

Relating expenses to specific revenues:

Cost of goods sold-rev produced by sales

shipping costs
sales commisions
warranty costs
bad debt losses

Question 15

systematic and rational allocation

Answer 15

assets that benefit more than one accounting period. The costs of buildings, equipment, patent and prepaid insurance

exp: depreciation, amortization

Question 16

Immediate recognition

Answer 16

expenses incurred to obtain goods

exp; office salaries, utilities, selling exp, advertising

Question 17

Multiple Step Form

Answer 17

the income statement is divided into separate sections and various subtotals reflect different levels of profitability

Question 18

comparative financial statements

Answer 18

enable users to analyze performance over multiple periods and identify significant trends that might impact future performance

Question 19

consolidated financial statements

Answer 19

combine the financial results of a patent company

Question 20

income from continuing operations

Answer 20

all revenues and expenses and gains and losses from the ongoing operations of the firm

revenue
CGS
operating exp
other rev and gains
other exp and losses
income tax on continuing ops