Chapter 5. Income Measurement and Profitability Analysis

Question 1

What is the formula for the profit margin ratio
A) Gross profit divided by sales
B) Net income divided by average shareholders equity
C) Net income divided by average total assets
D) Net income divided by net sales

Answer 1

D) Net income divided by net sales

Question 2

Which of following are indicators that a company is a principal
A) It sets the sales price
B) It contracts with the buyer
C) It owns the inventory prior to delivery
D) It has primary responsibility for providing the product or service

Answer 2

A) It sets the sales price
C) It owns the inventory prior to delivery
D) It has primary responsibility for providing the product or service

Question 3

The formula for average collection period is
A) 365 divided by the receivable turnover ratio
B) net credit sales divided by average accounts receivable
C) 365 divided by average accounts receivables
D) 365 divided by net credit sales

Answer 3

A) 365 divided by the receivable turnover ratio

Question 4

The percentage-of-completion method of revenue recognition for long-term construction projects recognizes revenues
A) Each period by estimated expected revenues and expenses
B) at the beginning of the contract by estimating gross profit over the life of the contract
C) each period by calculating the amount of progress billings collected
D) by matching construction-in-process to accounts receivable for each period

Answer 4

A) Each period by estimated expected revenues and expenses

Question 5

The completed contract method recognizes revenue at a point in time when the earnings process is ___________

Answer 5

finished

Question 6

The formula for return on equity is _______ ________ divided by average total shareholders equity

Answer 6

Net Income

Question 7

If Company A physically transfer goods to another company to sell on its behalf but Company A retains title to the goods this is referred to as a ___________________

Answer 7

consignment

Question 8

The _______ ________ method defers all gross profit until cash equal to the cost of the item sold has been received

Answer 8

Cost Recovery

Question 9

Megan Corp uses the percentage-of-completion method to account for long-term contracts. at the date the contact is signed, the price is $600,000 and the expected costs to complete the contract are $400,000. What is the amount of gross profit or loss that is recognized in year 2? The following is given
Year 1 = Costs incurred to date = $200,000, Estimated costs to complete = $200,000, and Progress billing = $200,000.
Year 2 = Costs incurred to date = $350,000, Estimated costs to complete = $150,000, and Progress billing = $200,000.
Year 3 = Costs incurred to date = $500,000, Estimated costs to complete = $0, and Progress billing = $200,000.

Answer 9

$30,000 Loss
The cost-to-cost ratio for year 2 is $350,000/$500,000 = 70%. The gross profit recognized is calculated as expected gross profit. 70% x $100,000 = 70,000 - previously recognized gross profit of $100,000 = loss of $30,000. The gross profit recognized in year 1 is based on a cost-to-cost ratio of $200,000/$400,000 = 50% x expected gross profit of $200,000 = $100,000

Question 10

When the precentage-of-completion method is used, the journal entry to record the periodic billings to customers will include which of the following
A) debit accounts receivable
B) credit billigs on construction contract
C) credit construction in progress
D) Debit billings on construction contract
E) Credit accounts receivable
F) Debit construction in progress

Answer 10

A) debit accounts receivable

B) credit billigs on construction contract

Question 11

Kline corp uses the percentage-of-completion method to account for long-term contracts. The contract price is $5,000,000, Total construction costs are $3,750,000, and actual cost incurred during the first year are $1,500,000. Calculate the gross profit recognized during year 1

Answer 11

500,000

Question 12

ABC Company, a real estate developer, sold a tract of land for $1,000,000. The sales agreement requires the buyer to make five equal annual payments of $200,000. The land cost $400,000 to develop. ABC uses the cost recovery method to recognize revenue. What is the journal entry when the customer makes the first payment.

Answer 12

DR Cash $200,000 and CR installment receivables $200,000

Question 13

________ recognition criteria help ensure that a proper cutoff is made each period and that no more than one year’s activities are recorded in the income statement

Answer 13

Revenue

Question 14

Jackson Corp uses the percentage-of-completion method to account for long-term construction contracts. In year 3, Jackson anticipates a loss on the contract for $50,000. In year 3, Jackson recognizes revenues of $800,000 and has $850,000 in construction costs. Indicate which of the following are included in the journal entry at year-end to recognize revenues and profit/loss on the contract
A) credit progress billings $850,000
B) credit construction in progress $50,000
C) credit construction in progress $850,000
D) Debit cost of construction $850,000
E) Credit revenue from long-term contracts $800,000

Answer 14

B) credit construction in progress $50,000
D) Debit cost of construction $850,000
E) Credit revenue from long-term contracts $800,000

Question 15

Jason uses the installment sales method for recognizing revenues. Jason sold goods to customers for $100,000 on a 3-year installment note. The cost of goods sold was $70,000. Which of the following will be included in the journal entry to record the sales
A) credit inventory $70,000
B) debit installment receivables $100,000
C) credit deferred gross profit $30,000
D) debit sales $100,000
E) credit gross profit $30,000

Answer 15

A) credit inventory $70,000
B) debit installment receivables $100,000
C) credit deferred gross profit $30,000

Question 16

Linx Corp, uses the percentage-of-completion to account for long term construction contracts. The contract price is $1,000,000 and the estimated costs to complete the project are $500,000 on the date the contract was signed. Linx subsequently has the following information
Year 1 = Costs incurred to date = $200,000, Estimated costs to complete = $300,000, and Progress billing = $250,000.
Year 2 = Costs incurred to date = $315,000, Estimated costs to complete = $385,000, and Progress billing = $250,000.
Year 3 = Costs incurred to date = $800,000, Estimated costs to complete = $0, and Progress billing = $500,000.
Linx recognized $200,000 of gross profit during year 1. What is the gross profit or loss recognized in year 2?

Answer 16

The cost to cost ratio in year 2 is $315,000/$700,000 = 45%. The estimated gross profit at the end of year 2 is $1,000,000 - $700,000 = $300,000. To calculate the amount recognized in year 2, multipy the 45% x $300,000 expected profit and subtract the $200,000 gross profit recognized in year 1 (45% x $300,000 = $135,000 - $200,000 = $65,000 loss in year 2)

Question 17

Garland uses the percentage-of-complete method to account for long-term consturction contracts. at the end of year 2 of the contract Garland calculates a loss of $20,000 on the contract. The revenues recognized during year 2 on the contract are $80,000 and the costs of construction are $100,000. The journal entry to record the loss will include a
A) debit to cost of construction for $20,000
B) debit to revenue from long-term construction contracts for $20,000
C) credit to construction in progress for $20,000
D) a credit to progress billings for $20,000

Answer 17

C) credit to construction in progress for $20,000

Question 18

Any time a company recognizes revenue at a point in time other than the point of deliver, the revenue recognition method used ins disclosed in the summary of significant _________ __________

Answer 18

Accounting Policies

Question 19

Malone Corp uses the completed contract method to account for long-term contracts. Malone has the following information for a 3-year contract
Year 1 = billings on contracts = 10,000, construction costs = 8,000
Year 2 = billings on contracts = 10,000, construction costs = 8,000
Year 3 = billings on contracts = 30,000, construction costs = 8,000
The journal entry required at the end of the contract to recognize revenue and expenses will include
A) credit revenue from contracts $50,000
B) debit billings on contracts $26,000
C) debit cost of construction $24,000
D) credit billings on contracts $50,000
E) Debit construction in progress $26,000

Answer 19

A) credit revenue from contracts $50,000
C) debit cost of construction $24,000
E) Debit construction in progress $26,000