Chapter 6

Question 1

net income attributable to non-controlling interests

Answer 1

company consolidates a subsidiary that it controls, but it holds less than 100% ownership

Question 2

revenue recognition

Answer 2

timing and amount of revenue reported by the company

entity should recognize revenue to depict transfer of goods or services to customers in amount that reflects consideration to which entity expects to be entitled in exchange for goods and services

Question 3

revenue recognition process

Answer 3

1) identify contract with customer
2) identify performance obligations in contract
3) determine transaction price
4) allocate transaction price
5) recognize revenue when or as entity satisfies a performance obligation

Question 4

performance obligation

Answer 4

entity must determine how many distinct goods and services it has agreed to provide the customer

Question 5

variable consideration

Answer 5

price concessions, volume discounts, rebates, refunds, credits, incentives, performance bonuses, royalties; can require significant estimation by entity’s management

Question 6

consignment

Answer 6

consignor delivers product to consignee but retains ownership until consignee sells product to ultimate customer

Question 7

contract liability

Answer 7

settings where company’s customers pay for product or service prior to delivery; entity’s obligation to transfer goods or services for which entity has received consideration

**aka unearned revenue or deferred revenue

Question 8

contract asset

Answer 8

amount that company expects to receive from the customer for performance to date but for which it is not yet entitled to payment

Question 9

credit sales

Answer 9

companies sell to other companies and do not receive cash upon delivery- they offer credit terms

Question 10

net realizable value

Answer 10

net amount that the seller expects to collect

Question 11

allowance for doubtful (uncollectible) accounts

Answer 11

estimate dollar amount of uncollectible accounts each time it issues financial statements- total receivable less allowance for doubtful accounts

Question 12

aging analysis

Answer 12

amount of expected uncollectible accounts usually based on analysis of receivables based on experience

Question 13

percentage of sales- doubtful accounts

Answer 13

means fo estimating uncollectible accounts; for example, could use 3% of total sales

Question 14

bad debts expense

Answer 14

adjusting entry at year-end, uncollectible accounts estimated and recorded; contra-asset account offsetting (reducing) accounts receivable

Question 15

cookie jar reserve

Answer 15

build up a reserve during good years that can be drawn down in subsequent periods

Question 16

net operating profit after taxes (NOPAT)

Answer 16

net income- { (non-operating revenues-nonoperating expenses) x (1- statutotry tax rate)}

measures opearting profitability

Question 17

return on net operating assets (RNOA)

Answer 17

NOPAT/average net opearting assetes

similar to return on asset except it excludes all non-operating components of income and investment

Question 18

return on capital employed

Answer 18

variation on RNOA; examines the return on net operating assets before income tax; measures performance of business units and divisions within a larger organization

Question 19

accounts receivable turnover (ART)

Answer 19

sales revenue/average accounts receivable

number of times each year that accounts receivable is converted into cash

Question 20

average collection period (ACP)

Answer 20

average accounts receivable/average daily sales= 365/accounts receivable turnover

how many days of sales revenue are invested in accounts receivable; how long on average it takes the company to collect cash after the sale

Question 21

channel stuffing

Answer 21

company uses market power over customers or distributors to induce them to purchase more goods than necessary to meet their needs

Question 22

income smoothing

Answer 22

choose when to sell an asset to recognize a gain and maintain steady improvements in net income

Question 23

big bath

Answer 23

recording nonrecurring loss in a period of already depressed income

Question 24

arm’s length

Answer 24

transfer inventories or other assets to related entitles not recorded until later

Question 25

quality of earnings

Answer 25

term that analysts often use to describe the extent to which reported income reflects underlying economic performance