Vol. 3 LM1 Income Statement

Question 1

Describe

grouping by nature

p 9

Answer 1

grouping together expenses such as depreciation on manufacturing equipment and depreciation on administrative facilities into a single line item called “depreciation”

Question 2

Describe

grouping by function

p 9

Answer 2

grouping together expenses into a category such as cost of goods sold, which may include labour and materials costs, depreciation, some salaries, andother direct sales related expenses

Question 3

Describe

multi-step format

p 9

Answer 3

When an income statement shows a gross profit subtotal, it is said to use a multi-step formation rather than a single-step format

Question 4

Calculate

gross profit for manufacturing and merchandising companies

Answer 4

revenue - COGS

Question 5

Calculate

gross profit for service companies

Answer 5

revenue - cost of services (that were provided)

Question 6

operating profit is used synonymously with this term on the income statement

Answer 6

operating income

Question 7

This reflects a company’s profits on its business activities before deducting taxes

Answer 7

operating profit

Question 8

fill in the blank

____ is the top line in an income statement

p 10

Answer 8

revenue

Question 9

Concept

The IASB *Conceptual Framework for Financial Reporting (2010), is referred hereafter as …

p 11

Answer 9

Conceptual Framework

Question 10

How are gains and revenue different

p 11

Answer 10

Gains are similar to revenue, but they typically arise from secondary or peripheral activities rather than from a company’s primary business activities

Question 11

Complete the statement

An important aspect concerning revenue recognition is that it can occur …

p 11

Answer 11

independently of cash movements.

Question 12

fundamental principle of accrual accounting regarding revenue

Answer 12

revenue is recognized (reported on the income statement) when it is earned, so the company’s financial records reflect revenue from the sale when the risk and reward of ownership is transferred

Question 13

the company would record a liability for ____ when the cash is initially received, and ____ would be recognized as being earned over time as products and services are delivered

Answer 13

unearned revenue ; revenue

Question 15

example

unearned revenue

Answer 15

An example would be a subscription payment received for a publication that is to be delivered periodicially over time

Question 16

five steps in recognizing revenue

Answer 16

1. Identify the contract(s) with a customer
2. Identify the separate or distinct performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies a performance obligation

Question 17

The ____ within a contract represent promises to transfer distinct good(s) or service(s)

Answer 17

performance obligations

Question 18

complete the statement

The performance obligations within a contract represent

Answer 18

promises to transfer distinct good(s) or service(s)

Question 19

Describe

transaction price

Answer 19

is what theseller estimates will be received in exchange for transferring the good(s) or service(s) identified in the contract

Question 20

____ is what theseller estimates will be received in exchange for transferring the good(s) or service(s) identified in the contract

Answer 20

transaction price

Question 21

when recognized

revenue

Answer 21

revenue is recognized when a performance obligation is fulfilled

Question 22

condition

Revenue should only be recognized

Answer 22

only if it is highly probable that it will not be subsequently reversed

Question 23

Accounting for Combined Outputs

In a construction contract, if the various goods and services (like plumbing, electrical wiring) are not separately identifiable from other promises in the contract, how should they be treated for revenue recognition?

GPT

Answer 23

They should not be treated as distinct goods or services. Instead, they should be accounted for together as a single performance obligation because the customer has contracted for the combined output (e.g., the construction of a building), and the seller integrates all goods and services into this combined output.

Question 24

Revenue Recognition for Performance Obligations Satisfied Over Time

How is revenue recognized for performance obligations that are satisfied over time in a long-term contract?

GPT

Answer 24

Revenue is recognized over time by measuring progress toward satisfying the performance obligation. This can be done using input methods (e.g., costs incurred as a measure of progress) or output methods (e.g., units produced or milestones achieved). The revenue recognized corresponds to the degree of completion of the contract.

Question 25

Example of Revenue Recognition Using Cost Incurred

If a builder has incurred 60% of the total expected costs in a construction contract, how much revenue should be recognized according to the Converged Revenue Recognition Standard?

GPT

Answer 25

The builder should recognize revenue equal to 60% of the contract’s total consideration. If the contract specifies $1 million and the expected total costs are $700,000, with $420,000 incurred in costs (60% of total costs), then $600,000 in revenue should be recognized for the first year.

Question 26

Under what circumstances are multiple goods or services integrated into a single performance obligation for revenue recognition?

Answer 26

Multiple goods or services are integrated into a single performance obligation when they are not distinct within the context of the contract. This happens when:

The goods or services are highly interdependent or interrelated, meaning one cannot be fulfilled without the others or they are significantly modified or customized to achieve the contract’s objective.
The bundle of goods or services is designed to achieve a combined outcome specified by the customer.