Financial 2 - Matching of Revenues and Expenses, Correcting and Adjusting Accounts

Question 1

What are assets?

Answer 1

Probable future economic benefits that are obtained or controlled by a particular entity as a result of past events or transactions.

Question 2

What is an event?

Answer 2

Something that happens to an entity, and it can occur either externally or internally.

Question 3

What is a transaction?

Answer 3

An event that occurs external to the entity and typically involves a transfer of value from one entity (or entities) to another.

Question 4

What are liabilities?

Answer 4

Probable future sacrifices of economic benefits that an entity faces for obligations to provide services or transfer assets due to past events or transactions.

Question 5

What are revenues?

Answer 5

Increases of assets or reductions of liabilities (and possibly both) during a period of time. They stem from the rendering of services, delivering of goods, or any other activities that may constitute the major ongoing or central operations of an entity.

Question 6

Revenue should be recognized when it is ________ (or __________) and when it is ______.

Answer 6

realized (or realizable); earned

Question 7

What four criteria must be met before revenue can be recognized for a contract?

Answer 7

1. Persuasive evidence of an arrangement exists
2. Delivery has occurred or services have been rendered
3. The price is fixed and determinable
4. Collection is reasonably assured

Question 8

What are the criteria that apply for a sale (exchange) to take place?

Answer 8

1. Delivery of goods or setting aside goods ordered (which would result in a simultaneous recognition of revenue and expense), and/or
2. Transfer of legal title
3. Revenue that stems from allowing others the use of the entity’s assets (e.g., interest revenue, royalty revenue, and rental revenue) is recognized when the assets are used (i.e., as the time passes)
4. Revenue from the performance of services is recognized in the period the services have been rendered and are able to be billed by the entity

Question 9

Under IFRS, revenue transactions are divided into what four categories?

Answer 9

1. Sale of Goods
2. Rendering Serivices
3. Revenue from Interest Royalties, and Dividends
4. Construction Contracts

Question 10

Revenue from the sale of goods (IFRS) is recognized when what four conditions have been met?

Answer 10

1. Revenue and costs incurred fror the transaction can be measured reliably
2. It is probable that economic benefits from the transaction will flow to the entity
3. The entity has transferred to the buyer the significant risk and rewards of ownership
4. The entity does not retain managerial involvement to the degree associated with ownership or control over the goods sold

Question 11

Revenue from the rendering of services is recognized (IFRS) using the percentage of completion method when the outcome of the transaction can be estimated reliably. The outcome of the transaction can be estimated reliably when what three conditions have been met?

Answer 11

1. Revenue and costs incurred fror the transaction can be measured reliably
2. It is probable that economic benefits from the transaction will flow to the entity
3. The stage of completion of the transaction at the end of the reporting period can be measured reliably

Question 12

Revenue from interest, royalties and dividends that arise from the use by others of the entity’s assets is recognized (IFRS) when what two conditions have been met?

Answer 12

1. Revenue can be measured reliably
2. It is probable economic benefits from the transaction will flow to the entity

Question 13

Contract revenue and contract costs are recognized (IFRS) as revenue and expenses using the percentage of completion method when the outcome of the construction contract can be estimated reliably. The outcome of the construction contract can be estimated reliably when what three conditions have been met?

Answer 13

1. The contract revenue and contracts costs attributable to the transaction can be measured reliably
2. It is probably that economic benefits from the transaction will flow to the entity
3. Both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably

Question 14

How is an expected loss on a construction contract to be recognized?

Answer 14

Recognize immediately as an expense.

Question 15

When a sales contract (GAAP) includes multiple products or services, how is revenue recognized?

Answer 15

The fair value of the contract must be allocated to the separate contract elements. Revenue is then recognized separately for each element based on the revenue recognition criteria appropriate for each element.