esercizi chapter 3

Question 1

The percentage-of-completion method of accounting for long-term contracts:
A. Minimizes the present value of income tax payments.
B. Relies less on estimates of futures costs that a firm expects to incur.
C. More accurately reports the current status of uncompleted projects.

Answer 1

Ans. C.
The percentage-of-completion method recognizes revenue based on the construction activity completed for a period, the income statement thud more accurately reports the revenue/expense items of the uncompleted projects.
A is incorrect. With the percentage-of-completion method, the present value of income tax payments is maximized, not minimized, because revenue is recognized earlier and taxes are paid earlier.
B is incorrect. The percentage-of-completion method relies more, not less, on estimates of the degree of completion and the extent of future costs to be incurred.

Question 2

. A company suffered a substantial loss when its production facility was destroyed in an earthquake against which it was not insured. Geological scientists were surprised by the earthquake as there was no evidence that one had ever occurred in that area in the past. Which of the following statements is most accurate? The company should report the loss on its income statement:
A. net of taxes if it reports under U.S. GAAP.
B. as an extraordinary item if it reports under IFRS.
C. as an unusual item if it reports under U.S. GAAP.

Answer 2

Ans: A.
To qualify as an extraordinary item, an item must be both unusual in nature and infrequent in occurrence: The description of the earthquake meets these criteria (-Geological scientists were surprised by the earthquake as there was no evidence that one had ever occurred in that area in the past). Extraordinary items are only allowed under U.S. GAAP and are reported on the income statement net of tax

Question 3

According to International Financial Reporting Standards, which of the following conditions should be satisfied in order to report revenue on the income statement?
A. Payment has been received.
B. Costs can be reliably measured.
C. Goods have been delivered to the customer.

Answer 3

Ans: B.
According to the International Accounting Standards Board (IASB), revenue is recognized from the sale of goods when:
1. The risk and reward of ownership is transferred.
2. There is no continuing control or management over the goods sold.
3. Revenue can be reliably measured.
4. There is a probable flow of economic benefits.
5. The cost can be reliably measured.
The IFRS conditions that should be met include that the costs incurred can be reliably measured, and it is likely that the economic benefits will flow to the entity, not the actual receipt of any payment, and that the significant risks and rewards of ownership have been transferred, which is normally when the goods have been delivered, but not always.
C is incorrect. Receiving the payment is not a condition to report revenue under IFRS.
C is incorrect. According to the Financial Accounting Standards Board (FASB), revenue is recognized in the income statement when (a) realized or realizable and (b) earned. The Securities and Exchange Commission (SEC) provides additional guidance by listing four criteria to determine whether revenue should be recognized:
1. There is evidence of an arrangement between the buyer and seller.
2. The product has been delivered or the service has been rendered.
3. The price is determined or determinable.
4. The seller is reasonably sure of collecting money.

Question 4

7.A retailer provides credit cards only to its most
valued customers who pass a rigorous credit
check. A credit card customer ordered an item
from the retailer in May. The item was shipped and
delivered in July. The item appeared on the customer’s July credit card statement and was paid in full by the due date in August. The most appropriate month in which the retailer should recognize the revenue is:
A. May.
B. July.
C. August.

Answer 4

answer B: the appropriate time to recognise revenue would be in the month of July; the risk and rewards have been transferred to the buyer, the revenue can be reliably measured, and it is probable that the economic benefits will flow to the seller. Neither the actual payment date nor credit card statement date is relevant here

Question 5

8. An analyst gathers the following information about a company’s common stock:
   ? 1 January 2011 200,000 shares outstanding
   ? 1 June 2011 50,000 shares issued
   ? 1 August 2011 2 for 1 stock split
   ? 31 December 2011 500,000 shares outstanding
   To calculate earnings per share for 2011, the company’s weighted average number of shares outstanding is closest to:
   A. 333,333. B. 350,000. C. 458,333.

Answer 5

answer C

Question 6

gross profit formula

Answer 6

revenue - cogs

Question 7

company uses the percentage-of-completion method to recognize revenue from its long term construction contracts and estimates percent completion based on expenditures incurred as a percentage of total estimated expenditures. A three-year contract for €10 million was undertaken with a 30% gross profit anticipated. The project is now at the end of its second year, and the following end-of-year information is available:
year 1 : cost incurred during year 3,117,500; estimated total cost: 7,250,000
year 2: cost incurred during year 2,582,500 estimated total cost: 7,600,00
the gross profit recognized in year 2 is closet to:
a= 617,500
b: 880,000
c= 960,000

Answer 7

A
percent completed = cost incurred /total cost anticipated * 100

gross profit = % complete * anticipated profit - profit already recognized

Question 8

you have 12000 preferred stocks that are non convertible, cumulative, pays a dividend of 4$ per share and you have 30000 stocks convertible, that pays a dividend of .7.50$ per share. each share is convertible into 2.5 common shares what you do for th computation of the dilutive eps

Answer 8

for the numerator I will count the net income - the stocks non convertible (number of shares outstanding * price per share) / #common shares outstanding + stocks convertible ( shares outstanding * price per share)
NB: I’m not going to use the second type of preferred stock in the numerators because they are convertibile so dilutive and would be 0 at the numerator

Question 9

During 2010, Company A sold a piece of land with a cost of $6 million to Company B for $10 million. Company B made a $2 million down payment with the remaining balance to be paid over the next 5 years. It has been determined that there is significant doubt about the ability and commitment of the buyer to complete all payments. Company A would most likely report a profit in 2010 of:
A. $4 million using the accrual method.
B. $0.8 million using the installment method. C. $2 million using the cost recovery method.

Answer 9

Ans: B.
An installment sale occurs when a firm finances a sale and payments are expected to be received over an extended period. If collectability is certain, revenue is recognized at the time of sale using the normal revenue recognition criteria. If collectability cannot be reasonably estimated, the installment method is used.
Under installment method, profit is recognized as cash is collected.
Profit reported in 2010 is:
10-6/10
x2=0.8million
A is incorrect. It has been determined that there is significant doubt about the ability and commitment of the buyer to complete all payments. Normal revenue recognition method cannot be used here.
C is incorrect.Cost recovery method could be used in this case, but the reported profit would be $0. Because under the cost recovery method, profit is recognized only when cash collected exceeds costs incurred.

Question 10

A company, with a tax rate of 40%, sold a capital asset with a net book value of $500,000 for $570,000 during the year. Which of the following amounts (in $) will most likely be reported on its income statement for the year related to the asset sale?
A. 42,000 B. 70,000 C. 570,000

Answer 10

Ans: B.
The disposition of a capital asset is reported as a net gain or loss ($570,000 – $500,000 = $70,000) on the income statement before tax affects.

Question 11

formula comprehensive income

Answer 11

Net income + OCI

Question 12

A company reported net income of $400,000 for the year. At the end of the year, the company had an unrealized gain of $50,000 on its available- for-sale securities, an unrealized gain of $40,000 on held-to-maturity securities and an unrealized loss of $100,000 on its portfolio of held-for-trading securities. The company’s comprehensive income (in $) for the year is closest to:
A. 350,000. B. 390,000. C. 450,000.

Answer 12

Comprehensive Income = Net Income + Other Comprehensive Income = NI + OCI
Other Comprehensive Income will include unrealized gains or losses on available for sale securities. Net Income includes unrealized gains or losses in trading securities, while securities classified as held to maturity are maintained at historical cost and therefore the unrealized gains won’t impact comprehensive income.
OCI = $50,000; Comprehensive Income = NI + OCI = $400,000 + $50,000=$450,000

Question 13

Stock dividend and stock spilts are traded at the same way?

Answer 13

Yes, for purpose of deterring weighted average number of shares outstanding

Question 14

A company has just completed the sale of a
tract of land for €3.5 million which was originally
acquired at a cost of €2.0 million. The purchaser
made a down-payment of €200,000 with the
remainder to be paid in equal installments over thedetermined by the percentage of the total sales price for which
next 10 years. A short time after the sale, significant doubt arose about the purchaser’s ability to meet the future obligations for the land purchase. When compared to the cost recovery method of revenue recognition, the profit (in €) that the company will recognize in the year of the sale under the installment method is most likely to be higher by:
A. 85,714. B. 114,286. C. 150,000.

Answer 14

under the instalment method the portion of the total profit of the sale (3.5 - 2 = 1.5) that is recognized in each period is determined by the percentage of total sales price for which the seller has received cash, which is €1.5/€3.5 x €200,000 = €85,714; under the cost recovery method, no profit is recognized until the cash amounts received have exceed the seller’s cost of the property.

Question 15

interest expense is financing, investing or operating?

Answer 15

The interest expense is the result of financing activities and would be classified as a nonoperating expense by nonfinancial service companies.

Question 16

realised gain on sale is financing, operating or investing?

Answer 16

The realized gain on sale of available for sale securities is an investing activity and would also be classified as a nonoperating gain by a manufacturing company.

Question 17

if a share option has a price of 50 and another share for warrants has a price of 30 and the market price of a share is 40, which one I should use for the computation of the dilutive EPS?

Answer 17

Only options or warrants that are in-the- money are included, as out-of-the-money options would not be exercised. Therefore only the warrants are dilutive: their exercise price is below the average market price of the stock

Question 18

gross profit margin formula

Answer 18

gross profit/revenue

Question 19

gross profit formula

Answer 19

Revenue - cogs

Question 20

operating cost

Answer 20

operating expenses/revenue

Question 21

The unrealized gains and losses arising from changes in the market value of available-for-sale securities are reported under U.S. GAAP and International Financial Reporting Standards (IFRS) in the:
A. equity section for both.
B. equity section for U.S. GAAP and the income statement for IFRS.
C. income statement for U.S. GAAP and the equity section for IFRS.

Answer 21

Ans: A.
Under both U.S. GAAP and IFRS the unrealized gains and losses arising from carrying available-for-sale securities at market value are reported in equity as part of accumulated other comprehensive income.

Question 22

OCI components

Answer 22

• Unrealized Gains and Losses from Financial Instruments, e.g. Bonds, Derivatives, Hedges
• Foreign Exchange (FX) Currency
• Adjustments Unrealized Gains and Losses on Pension Plans, i.e. Post-
  Retirement Plans

Question 23

interest rates is a function of sales?

Answer 23

The interest rate is not a function of sales and cannot be analyzed on a common sized income statement.

Question 24

tax rates

Answer 24

Tax rates are determined based on taxes ÷ pretax earnings, not as a percentage of sales (as shown in common sized analysis).

Question 25

35. Which of the following transactions would typically be included as part of a company’s income from discontinued operations reported on the income statement?
    A. A gain from the sale of an investment.
    B. A loss incurred from the settlement of a lawsuit.
    C. A loss from the operations of a business component classified as “held for sale.”

Answer 25

Ans: C.
A loss from the operations of “held for sale” business components that have separately identifiable operations, assets and cash flows would typically be reported under discontinued operations.
A and B are incorrect. Although each item is considered an unusual or infrequent item, it would be reported as part of income from continuing operations. If significant, the item may be reported as a separate line item as long as it is presented on a pretax basis, appears “above the line”, and is not presented as an extraordinary item.

Question 26

cash collected from customer formula

Answer 26

revenue - increase in A/R

Question 27

Under U.S.GAAP, foreign currency translation adjustments are most likely reported in the company’s:
A. income statement.
B. statement of cash flows.
C. statement of stockholders’ equity.

Answer 27

Ans: C.
The statement of stockholders’ equity includes accumulated other comprehensive income that contains the foreign currency translation adjustment.
Note: other comprehensive income includes transactions that are not included in net income, such as:
· Foreign currency translation gains and losses.
· Adjustments for minimum pension liability.
· Unrealized gains and losses from cash flow hedging derivatives.
· Unrealized gains and losses from available-for-sale securities.

Question 28

39.Is the reporting of an extraordinary item, net of tax, allowed under U.S.GAAP and IFRS?
A. Yes, under both.
B. Yes under IFRS, but not under U.S.GAAP. C. Yes under U.S.GAAP, but not under IFRS.

Answer 28

Ans: C.
Under U.S.GAAP, an extraordinary item is a material transaction or event that is both unusual and infrequent in occurrence.
IFRS does not allow extraordinary items to be separated from operating results in the income statement.

Question 29

40. under U.S.GAAP, disclosures related to the valuation allowance for changes in the carrying amount of a company’s noncurrent investment securities will most likely be included in the company’s:
    A. income statement.
    B. statement of cash flows.
    C. statement of stockholders’ equity.

Answer 29

Ans: C.
The statement of stockholders’ equity includes accumulated other comprehensive income that contains the unrealized gains and losses on available-for-sale securities

Question 30

41. Under U.S.GAAP, compared to the completed contract method of revenue recognition, the percentage-of-completion method most likely result in higher:
    A. total asset.
    B. total liabilities.
    C. both total asset and total liabilities.

Answer 30

Ans: A.
Compared to the completed-contract method, the percentage- of-completion method will most likely result in higher total assets, reflecting the accrual of gross profit during the contract period and lower liabilities, as the higher level of construction- in-progress provides a larger offset to advance billings.

Question 31

Which of the following items affects owners’ equity but is not included as a component of net income?
A. Depreciation.
B. Dividends received on shares of another company classified as available for sale.
C. Foreign currency translation gains and losses.

Answer 31

Ans: C.
Foreign currency translation gains and losses are nor reported on the income statement as a component of net income, but affect owners’ equity because they are included as other comprehensive income. The other items are included on the income statement so they affect both net income and owners’ equity.

Question 32

IFRS and U.S.GAAP are most similar in their requirements for:
A. extraordinary items.
B. discontinued operations. C. valuation of fixed assets.

Answer 32

Ans: B.
IFRS and U.S.GAAP both require discontinued operations to be reported on the income statement separately from continuing operations and net of tax.
A is incorrect. U.S.GAAP permits unusual and infrequent items to be treated as extraordinary items. But IFRS does not permit extraordinary items.
C is incorrect. Fixed assets can be revalued upward under IFRS but not under U.S.GAAP.

Question 33

Which of the following statements about the approaches for calculating EPS in simple versus complex capital structure is least accurate?
A. If convertible bonds are dilutive, the numerator in the diluted EPS calculation is increased by the interest expense on the bonds.
B. If convertible preferred stock is dilutive, the convertible preferred dividends must be added back to the numerator to calculate diluted EPS.
C. The denominator in the basic EPS equation contains the number of shares of common stock issued, weighed by the days that the shares have been outstanding.

Answer 33

Ans: A.
If convertible bonds are dilutive, interest expense multiplied by (1- tax rate) must be added back to the numerator to calculate diluted EPS.

Question 34

Bao Corp. has a permanently impaired asset. The difference between its carrying value and the present value of its expected cash flows should be written down immediately and:
A. reported as an operating loss.
B. charged directly against retained earnings.
C. reported as a non-operating loss in other comprehensive income.

Answer 34

Ans: A.
Impairment writedowns are reported losses “above the line” and are included in income from continuing operations.

Question 35

At the end of its last fiscal year, Bao Corp. reported retained earnings of $215,000. This year, Bao reported year-end retained earnings of $250,000 and net income of $20,000, paid received dividends of $5,000, paid interest expense of $5,000, and received dividends of $5,000. Bao’s other comprehensive income for this year is closest to:
A. $15,000. B. $20,000. C. $25,000.

Answer 35

: B.
Since retained earnings increased by 250,000 – 215,000 = 35,000 and net income less dividends paid was 20,000 – 5,000 = 15,000, the difference, 35,000 – 15,000 = 20,000, must have been other comprehensive income. Dividends received and interest paid are both included in net income.

Question 36

In actual accounting, the matching principle states that:
A. an entity should recognize revenue only when received and expenses only when they are paid.
B. transactions and events producing cash flows are allocated only to time periods in which the cash flows occur.
C. expenses incurred to generate revenue are recognized in the same time period as the revenue.

Answer 36

: C.
The matching principle holds that expenses should be accounted for in the same performance measurement period as the revenue they generate.

Question 37

Which of the following statements about Ans: B. revenue recognition methods is most accurate?
A. The completed contract method under U.S.GAAP. The completed contract method under U.S.GAAP
recognizes long-term contract revenue only as each phase of production is complete.
B. The percentage of completion method recognizes profit corresponding to the costs incurred as a proportion of estimated total costs.
C. The installment method recognizes sales when cash is received, but no profit is recognized until cash collected exceeds cost.

Answer 37

B
the description of the percentage-of-completion method is accurate. the completed contract method under U.S. GAAP recognises revenue only when the entire project is complete. The instalment method recognises profit to cash collected

Question 38

50. A company changes from an incorrect method of accounting to an acceptable one. Which of the following statements about his change is most accurate?
    A. It is treated retrospectively and requires restatement of all prior period results that are presented in the current financial statements.
    B. If the change is voluntary, it is a change in accounting principle and is reported below the line net of taxes.
    C. If the change is mandated by a new accounting standard, it is an unusual or infrequent item and is reported as a separate line item in net income for continuing operating.

Answer 38

Ans: A.
This is the correct treatment of this change. The company must disclosure the nature of the error and its effect on net income and restate any prior period results that are presented in the current financial statements.

Question 39

Which of the following statements about dilutive securities is least accurate?
A. A simple capital structure is one that contains only common stick and antidilutive securities.
B. A dilutive security is one that will case EPS to decrease if it is converted into common stock.
C. Warrants with exercise prices less than the current stock price can be antidilutive.

Answer 39

Ans: A.
A simple capital structure has only common stock or only common stock and nonconvertible stock. It contains no securities that could ever become or create common stock, even antidilutive ones. Whether warrants are antidilutive depends on the average stock price over the reporting period, not the value at the reporting date.

Question 40

Which of the following statements about the appropriate revenue recognition method to use under U.S.GAAP, given the status of completion of the earning process and assurance of payment, is least accurate? Use the:
A. completed contract method when the firm cannot reliably estimate the outcome of the project.
B. percentage-of-completion method when ultimate payment is reasonably assured and revenue and costs can be reliably estimated.
C. installment method when collectability of payments for a sale can be reasonably estimated

Answer 40

Ans: C.
The installment method should be used when future cash collection cannot be reasonably estimated.

Question 41

An analyst gathers the following data about a company:
· The company had 1 million shares of common stock outstanding for the entire year.
· The company’s beginning stock price was $50, its ending price was $70, and its average price was $60.
· The company had 100,000 warrants outstanding for the entire year. Each warrant allows the holder to buy one share of common stock at $50 per share.
How many shares of common stock should the company use in computing its diluted EPS?
A. 1,100,000. B. 1,083,333. C. 1,016,667.

Answer 41

Ans: C.
Use the Treasury stock method:
Step 1: determine the number of common shares created if the warrants are exercised = 100,000.
Step 2: calculate the cash inflow if the warrants are exercised: (100,000)($50 per share)=$5,000,000.
Step 3: Calculate the number of shares that can be purchased with these funds using the average market price ($60 per share):
5,000,000/60=83,333 shares.
Step 4: Calculate the net increase in common shares outstanding from the exercise of the warrants:
100,000-83,333=16,667.
Step 5: Add the net increase in common shares from the exercise of the warrants to the number of common shares outstanding for the entire year:
1,000,000+16,667=1,016,667

Question 42

A company reports a gain of €100,000 on the sale of an asset and a loss of €100,000 due to foreign currency translation adjustment. Which of these items will be included in the company’s comprehensive income?
A. Both of these items are include in comprehensive income.
B. Neither of these items is include in comprehensive income.
C. Only one of these items is include in comprehensive income.

Answer 42

Ans: A.
Both items are included in comprehensive income. Comprehensive income includes all items that are included in net income are also included in comprehensive income. The gain on sale is reported in net income. The foreign currency translation loss is taken directly to owners’ equity.

Question 43

Which of the following items for a financial services company is least likely to be considered an operating item on the income statement?
A. Interest income.
B. Financing expenses. C. Income tax expense.

Answer 43

Ans: C.
For a financial services company, interest income, interest expense, and financing expense are likely considered operating activities. For both financial and nonfinancial companies, income tax expense is a non-operating item that is reported within “income from continuing operating” as opposed to “operating profit” as with the other answer considered an operating item.

Question 44

Which of the following statements about Ans: C. nonrecurring items is most accurate?
These are examples of items that are typically treated as A. The correction of an accounting error is reportedextraordinary under U.S.GAAP. There is no provision for
net of taxes below extraordinary items on the income statement.
B. Discontinued operations are classified as unusual or infrequent and are reported as a component of net income from continuing operations.
C. Uninsured losses from earthquakes and expropriations by foreign governments can be classified as extraordinary items under U.S.GAAP but not under IFRS.

Answer 44

A is incorrect. Accounting errors are corrected with prior-period adjustments, which are made by restating results for any prior periods that are presented in the current financial statements.
B is incorrect. Discontinued operations are not classified as unusual or infrequent items and are reported (net of taxes) after net income from continuing operations but before net income.

Question 45

When a used delivery truck is sold, the gain or loss on disposal is most accurately stated as:
A. fair market value – book value.
B. selling price – original cost – accumulated depreciation.
C. selling price – original cost + accumulated depreciation.

Answer 45

Ans: C.
The gain (loss) on disposal is the amount by which the selling price exceeds (is less than) book value.
Book value= original price-accumulated depreciation.
Thus, gain or loss=selling price-(original price- accumulated depreciation), or selling price – original costs+ accumulated depreciation.

Question 46

A firm that reports under IFRS is producing under a long-term contract for which it cannot measure the outcome reliably. In the first of the contract, the firm has spent €300,000 and collected €200,000 in cash. What amounts related to this contract should the firm recognize on its income statement for the year?
A. Revenue of €300,000, expenses of €300,000, and no profit.
B. No revenue, expenses, or profit until the contract is completed.
C. Revenue of €200,000, expenses of €300,000, and a loss of €100,000.

Answer 46

Ans: A.
Under IFRS, if the outcome of a long-term contract cannot be estimated reliably, the firm should expense costs when incurred, recognize revenue to the extent of the costs, and recognize profit only when the contract is complete.

Question 47

During 2012, Bao Inc. reported net income of $15,000 and had 2,000 shares of common stock outstanding for the entire year. Bao also had 2,000 shares of 10%, $50 par value preferred stock outstanding during 2012. During 2009, Bao issued 100, $1,000 par, 6% bonds for $100,000. Each of these is convertible to 50 shares of common stock. Bao’s tax rate is 40%. Assuming these bonds are dilutive, 2012 diluted EPS for Bao is closest to:
A. $0.71. B. $1.23. C. $2.50.

Answer 47

Ans: B. Diluted EPS=
100(1,000)(6%)(1-0.4)=$3,600; Convertible debt shares=50(100)=5,000
=$1.23

Question 48

Which of the following statements about the calculation of earnings per share (EPS) is least accurate:
A. Shares issued after a stock split must be adjusted for the split.
B. Options outstanding may have no effect on diluted EPS.
C. Reacquired shares are excluded from the computation from the date of reacquisition

Answer 48

Ans: A.
Shares issued post-split need not be adjusted for the split as they are already “new” shares. Options with an exercise price greater than the average share price do not affect diluted EPS

Question 49

65. A software company holds a number of marketable securities as investments. For the most recent period, the company reports that the market value of its securities held for trading decreased by $2 million and the market value of its securities available for sale increased in value by $3 million. Together, these changes in value will:
    A. reduce net income and shareholders’ equity by $2 million.
    B. increase shareholders’ equity by $1 million and have no effect on net income.
    C. reduce net income by $2 million and increase shareholders’ equity by $1 million.

Answer 49

Ans: C.
Unrealized gains and losses on securities held for trading are included in net income. Unrealized gains and losses on securities available for sale are not reported in net income but are included in comprehensive income. Net income will show a $2 million loss from the securities held for trading. Shareholders’ equity will reflect this loss as well as the $3 million unrealized gain from securities available for sale, for a net increase of $1 millions.

Question 50

Which of the following items would affect owners’ equity and also appear on the income statement?
A. Dividends paid to shareholders.
B. Unrealized gains and losses on trading securities.
C. Unrealized gains and losses on available-for-sale securities.

Answer 50

Ans: B.
Unrealized gains and losses from trading securities are reflected in the income statement and affect owners’ equity.
A is incorrect. Dividends paid to shareholders reduce owners’ equity but not net income.
C is incorrect. Unrealized gains and losses from available-for- sale securities are included in other comprehensive income. Transactions included in other comprehensive income affect but not net income.

Question 51

During the fourth quarter of the current year subject retail company reported the following:
· $5,450,000 in credit sales, with $2,000,000 of cash collected during the quarter in connection with these credit sales. All sales were final with no uncertainties remaining.
· The shipment of $750,000 in merchandise on consignment to a local specialty retailer. This merchandise can be returned within 60 days for a full refund is not sold.
· $1,100,000 in cash sales during the quarter.remain. All sales were final with no expense uncertainties
remaining.
Under the accrual method, the amount of revenue to be recognized for the specific transactions listed during the quarter would be closest to:
A. $5,300,000. B. $6,550,000. C. $7,300,000

Answer 51

Ans: B.
Under accrual method, all credit sales in the first transaction would be recognized as revenue earned (earnings process complete and no uncertainties remaining), despite only $2,000,000 in cash being collected from these sales. In the second transaction, no revenue would be recognized under the accrual method given that the consignment and the right of a return of all merchandise within 60 days means the revenue and earnings recognition process hasn’t been completed (a consignment is not really a sale). In the last transaction, the cash sales would all be recognized as revenue since the earnings process has been completed and no uncertainties remain.
Revenue = $5,450,000 + $1,100,000 = $6,550,000