Exam 3

Question 1

What is the difference between the EPS calculation for continued operations vs discontinued ops?

Answer 1

In discontinued operations, we do not back out preferred dividends. (If the company isn’t doing well, its not going to be paying out dividends)

Question 2

What principle was used before GAAP to recognize revenue?

Answer 2

the realization principle

Question 3

Why was the realization standard updated?

Answer 3

Poorly tied to conceptual framework

Led to similar transactions being treated differently

Difficult to apply to complex arrangements

Question 4

What is the core principle of revenue recognition?

Answer 4

Recognize revenue when goods or service is transferred to customer for the amount they are entitled to receive.

Question 5

We can recognize revenue when a ______________ obligation has been satisfied and the control of goods/service has been transferred.

Answer 5

performance

Question 6

When is revenue recognized over a period of time? (3 answers)

Answer 6

1. customer consumes benefit
2. customer controls the asset as it is created (constructing building extension)
3. Seller creates a customized asset that has no alternative use and has legal right to receive payment

Question 7

How is progress towards completion of an asset determined over time?

Answer 7

Output based estimate (proportion of goods transferred)

Input based estimate (proportion of effort expended relative to total effort)

Question 8

When does a contract not exist?

Answer 8

If neither the seller or customer haven’t performed obligations.

The contract can be terminated by either party w/o penalty.

Question 9

List some possible scenarios that don’t represent a performance obligation.

Answer 9

1. Nonrefundable prepayments initially recorded as deferred revenue.
2. Quality-assurance warranties
3. Right of return

Question 10

T or F: Extended warranties are performance obligations.

Answer 10

True

Question 11

What internal control is critical in the cash receipts process?

Answer 11

separation of duties

Question 12

What are the two objectives internal controls for cash payments?

Answer 12

(1) to prevent unauthorized payments

(2) to ensure that disbursements are recorded properly

Question 13

How is cash handled to reduce the risk of fraud?

Answer 13

• disbursements made by check

-expenditures should be authorized

• checks signed by authorized individuals

-separation of duties

Question 14

What does it mean if cash is restricted?

Answer 14

It is an amount of cash not available for use - probably being saved for future use.

Question 15

____________ balances happen when a borrow is asked to maintain a specified balance in a low-interest account.

Answer 15

compensating

Question 16

A __________ discount is a percentage reduction from the list price - happens for large customers.

Answer 16

trade

Question 17

What is the purpose of a trade discount?

Answer 17

To incentivize large customers to return to you for business.

Question 18

A ________ discount is intended to provide incentive for quick payment.

Answer 18

cash

Question 19

What are the two methods for accounting for cash discounts?

Answer 19

• Gross Method
• Net Method

Question 20

An _________ is an incentive for the customer to keep merchandise rather than returning it.

Answer 20

allowance

Question 21

Both __________ and __________ are reduced when accounting for sales returns.

Answer 21

A/R

Revenue

Question 22

Notes receivable can be both _______ and _______ term assets. Long term is ____ a year and short term is _____ a year.

Answer 22

short; long

> ; <

Question 23

Interest bearing is when…..

Answer 23

a specified face amount, called principal is required to be paid in addition to a percentage of the face amount.

Question 24

Secured borrowing is when you pledge your ________ balance as collateral for a loan.

Answer 24

A/R

Question 25

__________ is selling your A/R to a financial institution.

Answer 25

Factoring

Question 26

If your A/R is factored it can be done with or without ___________.

Answer 26

Recourse

Question 27

If your A/R is factored with recourse, then the seller can pay _____ money back for uncollectible debts.

Answer 27

more

Question 28

This is one of the most important controls related to cash.

Answer 28

bank reconciliation

Question 29

What is the “deposits in transit” process?

Answer 29

Cash is received by one individual. Cash is given to another individual who deposits into bank.

Final individual makes accounting changes. This causes a timing delay between when we receive cash and when we account for it.