Exam 3 Ch 9-11 concepts
Gross Profit and Revenue Recognition Quiz
Test your knowledge on key concepts of gross profit, revenue recognition, and financial reporting with this comprehensive quiz designed for students and professionals alike.
This quiz covers a range of topics:
- Gross profit calculations
- Revenue recognition principles
- Inventory management systems
- Financial statement analysis
Net sales for the year were $325,000 and cost of goods sold was $240,500 for the company’s existing products. A new product is presently under development and has an expected selling price of $40 per unit in order to remain competitive with similar products in the marketplace. What is the maximum cost per unit that can be incurred to manufacture the new product such that the product can be priced at $40 per unit and will not result in a reduction to the company’s gross profit ratio
$20.00
$29.60
$40.00
$10.40
When the periodic inventory system is used:
Cost of goods sold can be calculated by subtracting the ending inventory amount from the sum of beginning inventory and net purchases
Operating profit from the sale of an item from inventory is known when the item is sold
The inventory account is adjusted on a daily basis throughout the year as inventory items are purchased and sold
Gross profit from the sale of an item from the inventory is known when the item is sold
The concept of matching revenue and expense refers to the fact that:
All costs incurred in the process of earning revenues during a period are deferred and expensed in a future period.
All cash disbursements during a period are subtracted from all cash receipts during the period.
Expenses incurred during a period equal the revenues earned during the period.
All costs incurred in the process of earning revenues are recorded as expenses in that period.
Which of the following statements is true regarding the reporting of discontinued operations?
The impact that the discontinued operations had on any previous year results is not shown for comparative purposes.
The income or loss, net of taxes, of the discontinued operations is reported as a separate component of income from continuing operations.
Earning per share data are not reported separately for discontinued operations.
By reporting discontinued operations as a separate item, net of taxes, all of the effects of the discontinued business segment are excluded from the revenues, expenses, gains, and losses of continuing operations.
An item that cost $120 is to be sold for a price that will yield a gross profit ratio of 20%. The selling price should be:
$600
$150
$144
$96
Which of the following accounts/captions are not included in the calculation of Gross Profit?
Net Sales
Cost of Goods Sold
All of these accounts/captions are included in the calculation of Gross Profit.
General and Selling Expenses
The term, "earned," in revenue recognition refers to which of the following?
The product or service has been exchanged for cash, claims to cash, or an asset that is readily convertible to a known amount of cash or claims to cash.
The entity has completed, or substantially completed, the activities it must perform to be entitled to the revenue benefits.
Cash has been received with an irrevocable order for goods or services.
The entity has received an irrevocable order for goods or services.
Which of the following is not a principal category of "Other operating expenses" frequently reported on the income statement?
General and administrative expenses
Selling expenses
Cost of goods sold
Research and development expenses
The major difference between the indirect and the direct method of a statement of cash flows appears in which of the following activities section(s)?
The investing activities section only.
The operating activities section only.
The investing activities and financing activities sections.
The operating activities and financing activities sections.
The gross profit ratio is useful to the manager for each of the following purposes except that:
It can be used to estimate the amount of operating expenses for a period.
It can be used to determine the selling price to set for an item.
It can be used to estimate the amount of inventory lost in a fire.
It can be used to determine the amount available from a given amount of revenue to cover operating expenses.
Gains differ from revenues because gains:
Are reported as income from operating activities.
Do not have to be realized.
Are not a result of the entity's ongoing, central operations.
Do not involve any offsetting costs or expenses.
Which of the following is an accurate statement regarding a statement of cash flows?
Immaterial financing activities that affect cash do not need to be included.
All material operating, investing, and financing activities are included.
Only cash items that affect the income statement are included.
Only material cash items that affect the income statement are included.
An item that cost $270 is sold for $360. The gross profit ratio for this item is:
60%
25%
33.3%
20%
In the statement of cash flows, an increase in the accounts receivable balance from the beginning of the period to the end of the period would be:
Added to net income because this represents revenues that have been earned but not yet collected.
Subtracted from net income because this represents revenues that have not yet been earned or provided by investing activities.
Subtracted from net income because this means that revenues earned and included within net income were more than the cash collected.
Added to net income because this means that revenues earned and included within net income were less than the cash collected.
In the statement of cash flows, depreciation and amortization expense is added back to net income because:
These expenses are recognized for accounting purposes, but they do not represent economic costs.
The cash disbursements for these accrued expenses will be made in a future period.
These expenses do not affect cash, but were subtracted in the determination of net income.
These expenses affect investing activities, not operating activities.
Under most circumstances, in order to recognize revenue:
The revenue must be realized or realizable, and earned.
Cash must have been received.
The entity must have paid for all expenses incurred in generating the revenue.
The entity must expect to receive cash in the future.
Income from operations is:
Sometimes used instead of net income in the ROI calculation.
Usually used instead of net income in the ROE calculation.
Usually calculated after income tax expense.
The same thing as net income and sometimes called the "bottom line."
Revenue may be recognized:
In 2019 from the sale of subscriptions of a magazine to be published in 2020.
From the sale of a company's own common stock.
If a company trades inventory at its usual selling price for newspaper advertising.
If management believes the market value of land held for future development has increased during the year.
Which of the following captions would not be reported on a single step income statement?
Income from operations
Net sales
Income before taxes
Net income
The first caption in most income statements in annual reports is:
Gross sales
Net sales
Earned Revenue
Sales, less sales returns and allowances
Most entities satisfy the accounting criteria for recognizing revenue when:
A product is delivered or a service is provided.
An order is received from a customer
Cash is received from the customer
An unearned revenue account is credited
The earnings per share of common stock calculation:
Is complicated by the declaration of cash dividends during the year
Includes gains or losses from treasury stock transactions
Is complicated by the presence of preferred stock in the capital structure
Is made by dividing net income by the number shares of common stock outstanding at the end of the year
The term, "realization," in revenue recognition refers to which of the following?
The entity has received an irrevocable order for goods or services
Cash has been received with a n irrevocable order for goods or services
The entity has completed or substantially completed the activities it must perform to be entitled to the revenue benefits
The product or service has been exchanged for cash, claims to cash, or an asset that is readily convertible to a known amount of cash or claims to cash.
Recognition of revenue in accrual accounting requires:
The cash be received
Only that the amount of cash to be received from the sale of a product or service be known
That the revenue be realized or reliable and earned
Only that a product be delivered or a service be performed
The impact of changing price levels on amount reported in financial statement
Encouraged, but not required to be described in the notes to be financial statement
Accomplished by reporting assets at their replacement cost
Required to be described in the notes to the financial statements
Reported as a separate items on balance sheet
Most entities satisfy the accounting criteria for recognizing expense when:
A dividend is paid to stockholders
A cost is incurred in the revenue generating process
A commitment is made to purchase a product or service
Cash is paid to suppliers
A firm's cash dividends were $1.98 per share of common stock for calendar 2019. In 2020, the stock was split 3-for-1, and in 2021 a 10% stock dividend was issued. Dividends per share for 2019, to be reported in the firm's annual report for 2021
$0.60
$0.66
$0.73
$1.98
Management's statement of responsibility:
Explains that the entity's financial statements are the responsibility of the entity's auditors.
Guarantees that the firm has operated in a highly ethical manner.
Affirms that management is responsible for assuring adherence to internal control policies and procedures.
States that the financial statements are free of significant error.
Management’s statement of responsibility:
Includes a disclaimer of responsibility for the levels of the P/E ratio of the company’s common stock
Refers to the company’s system of internal controls
Emphasizes that the auditors are responsible for the financial statements
Allows the president of the company to explain why profits changed
Which of the following circumstances requires an explanatory paragraph in the independent auditors' report?
An explanatory paragraph in the independent auditors’ report is required in each of these circumstances.
Substantial doubt about the entity's ability to continue as a going concern.
Uncertainties about the outcome of a significant event that would have affected the presentation of the financial statements if the outcome could have been estimated.
A material change from a prior accounting period in the application of an accounting principle.
Corporate governance includes concerns about:
Business ethics and social responsibility.
The responsibilities of the board of directors.
Equitable treatment of all stakeholders.
Disclosures and transparency.
All of these answers are correct.
Which of the following is not a topic that is likely to be discussed as a significant accounting policy?
Depreciation method.
Method of estimating uncollectible accounts receivable.
Earnings per share of common stock calculation details.
Inventory valuation method.
An audit conducted in accordance with generally accepted auditing standards includes each of the following except:
Examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements.
Planning and performance of the audit to obtain reasonable assurance that the financial statements are free of material misstatements.
Assessment of the accounting principles used and significant estimates made by management.
Evaluation of the efficiency and effectiveness of management.
When an entity changes its accounting from one generally accepted method to another generally accepted method:
The dollar effect of the change on both the balance sheet and income statement must be disclosed.
Accounting changes like this are not permitted
Financial statements of all prior years must be restated to maintain comparability.
An explanatory note stating that the change was approved by the Financial Accounting Standards Board is required
A firm's independent auditors have the responsibility to:
Ascertain the firm's general profit
Uncover all fraudulent activities
Assess management's discussion and analysis
Assess the firm's accounting policies
For 2019, Skresso Co. reported $1.82 of earnings per share of common stock. During 2020, the firm had a 4% common stock dividend. The 2019 earnings per share to be reported in the annual report for 2020 are:
$1.70
$1.75
$1.82
$1.90
The notes to the financial statements:
Describe management's product development plans for the coming year.
Are not an integral part of the financial statements
Explain the significant accounting policies of the company.
Usually disclose the amount of the company's bad debts expense.
The independent auditors' report usually:
Includes an opinion that the financial statements are correct.
Refers to the quality of the company's products or services.
Presents a "clean bill of health" for the company.
Includes a opinion that the financial statements present fairly, in all material respects
Financial information about the company
The Sarbanes-Oxley Act (SOX) of 2002 does not specifically prohibit an independent auditor from performing the following non-audit function(s) for an audit client:
Financial information systems design and implementation.
Internal audit outsourcing services.
Tax services
"expert" services.
SOX specifically prohibits an independent auditor from performing all of these non-audit services for an audit client.
Significant accounting policies are described in the notes to the financial statements because:
There isn't enough space for them to be included in the captions of the financial statements.
If the accrual basis of accounting is used, "matching" of revenues and expenses may not take place.
The reader must be aware of which of the alternative generally accepted accounting practices have been used.
Details concerning the reporting entity’s accounting information system and data processing methods must be disclosed.
Firms that issue registered securities are required to file, with the SEC on an annual basis, which of the following?
An annual report
A form 10-K
A set of financial statements
All of these are mandatory annual SEC filings for firms that have issued registered securities.
Business segment information is included in the notes to financial statements because:
The amount shown on the Financial Statement is too large to comprehend
Current and potential investors can make more informed judgments about the company.
Net income from various geographic areas can be clearly determined
The notes to the financial statements:
Are not an integral part of the financial statements.
Include a great deal of detailed information that is potentially useful only to a financial analyst making a detailed appraisal of the future prospects of the entity.
Should be referred to if more than a cursory, and perhaps misleading impression of a firm's financial position and its results of operations is to be achieved.
Are used by many entities to hide information from the reader of the financial statements by including in the notes information that should be shown in detail on the financial statements themselves.
Management’s Discussion and Analysis (MD&A):
All of these answers are correct.
Is designed to enhance public disclosure of information about the corporation.
Often includes disclosures concerning non-GAAP financial measures and key performance +indicators that are used to assess the company’s financial and operating results.
Is a part of the annual report that should be read by current and potential
Which of the following is a proper paragraph sequence for an independent auditor’s report?
Opinion, scope, summary
Introduction, opinion, scope
Introduction, scope, opinion
Scope, introduction, opinion
Which of the following descriptions is NOT one of the “thirteen financial shenanigans” identified by Schilit and Perler, listed in Exhibit 10-1
Shifting future expense to current period as a special charge
Failing to record intangible assets which the company has ownership rights to
Boosting income with one-time gains
Failing to record or improperly reducing liabilities
Recording revenue to soon or that is of a questionable quality
The impact of changing price levels on amounts reported in financial statements is
Required to be described in the notes to the financial statements.
Accomplished by reporting assets at their replacement cost.
Encouraged, but not required to be described in the notes to the financial statements.
Reported as a separate item on the balance sheet.
The most powerful corporate governance legislation to date has been:
The creation of the American Institute Certified0 of Public Accountants
Corporate Ethics Code of 2007
The Sarbanes-Oxley Act (SOX) of 2002.
The regulation of inventory management practices by SEC
The nature and content of note disclosures relate to all of the following except:
Accounting changes
Segment Changes
Management’s plans for the future.
Contingencies and commitments
Events subsequent to the Balance Sheet date
A leveraged buyout refers to:
One firm trades its stock for the stock of another firm.
One firm pays cash for the shares of a takeover firm's shares.
A firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders and thus take the firm private.
An individual interested in making a judgment about the profitability of a company should:
Compare the company's ROI for the most recent year with the industry average ROI for the most recent year.
Review the trend of the company's ROI for several years.
Review the trend of working capital for several years.
Calculate the company's ROI for the most recent year.
When a corporation has both common stock and preferred stock outstanding:
Dividends on preferred stock are paid only if dividends are to be paid on the common stock.
Dividends on preferred stock are paid only if the company has current earnings.
Preferred stockholders receive the same dividend per share as common stockholders
Dividends on preferred stock must be paid before dividends on common stock can be paid.
Which of the following is not a category of financial statement ratios?
Marketability.
Profitability.
Financial leverage
Liquidity
The dividend payout ratio describes:
The proportion of earnings paid as dividends.
The percentage change in dividends this year compared to last year
The relationship of dividends per share to market price per share
Dividends as a percentage of the price/earnings ratio.
The comparison of activity measures of different companies is complicated by the fact that:
Different inventory cost flow assumptions may be used.
Only one of the companies may have preferred stock outstanding
The number of shares of common stock issued may be significantly different.
Dollar amounts of assets may be significantly different
A higher P/E ratio means that:
Investors are wary of the stock.
Earnings are expected to decrease
The stock is more reasonably priced.
The stock is relatively expensive.
The price/earnings ratio:
Is calculated by dividing the earnings multiple by net income
Can be used to determine the cash dividend to be received during the year
Is a measure of the relative expensiveness of a firm's common stock.
Does not usually change by more than 1.0 (e.g., 8.2 to 9.2) during the year.
When a firm has financial leverage
Risk is greater than if there wasn't any leverage.
ROI will usually be less than it would be without leverage
The firm will always have a higher ROE than it would without leverage
ROI will be greater than ROE.
A common size income statement:
Uses the same dollar amount of revenues for each year
Expresses items as a percentage of net sales
Makes comparisons between years more difficult
Is useful in estimating the impact of inflation
Book value per share of common stock of a manufacturing company:
Reflects that fair value of the company’s stock
Is calculated by dividing market value per share by earnings per share
Is not a very useful measure most of the time
Is the same as the total balance sheet value per share of common stock
For the year ended December 31, 2019, a company reported earnings per share of $1.95 and cash dividends per share of $0.30. During 2020, the company had a 3-for-2 stock split. In the annual report for the year ended December 31, 2020, earnings per share and cash dividends for 2019 would be reported, respectively, as:
$1.95 and $0.30
$2.91 and $0.45
$1.30 and $0.20
$0.65 and $0.10
Financial Leverage
Arises because most borrowed fund have fixed interest rates
Usually has no bearing on the risk associated with a company
Arises because most borrowed funds have a variable interest rate
Is a concept that does not apply to individuals
Management's use of resources can be best evaluated by focusing on measures of:
Leverage
Book Value
Activity
Liquidity
If the P/E ratio of a company's common stock were 12, and its earnings were $2.50 per Common share
The market value of the common stock would be $20.83 per share
The market value of the common stock would be $25.00 per share
An increase in earnings of $0.20 per share, with no changes in the multiple, would result in a market price increase of $2.40 per share
An increase in earnings of $0.20 per share, with no changes in the multiple, would result in a market price increase of $1.67 per share
Another term for the Price/Earnings ratio is:
Earning multiple
Cost ratio
Profit Ratio
Sales multiple
If a firm's debt ratio was 25%, its debt/equity ratio would be:
25%
50%
33.33%
75%
Asset Turnover Calculations
Are made by dividing sales for the year by the asset balance at the end of the year
Communicated information about how promptly the entity pays the bill
Should be evaluated by observing the turnover trend over a period of time
Are made by dividing the average asset balance during the year by the sales for the year
If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts receivable would be expected to be
Less than 10
Over 40
Between 25 and 40
Between 10 and 25
The inventory turnover calculation
Is wrong unless cost of goods sold is used in the numerator
Is an alternative way of expressing the number of days' sales in inventory
Is wrong unless sales is used in the numerator
Requires knowledge of the inventory cost flow assumption being used
A management that wanted to increase the financial leverage of its firm would:
Concentrate on improving the firm's working capital management
Use excess cash to build up its productive capacity to achieve better utilization of its buildings and equipment
Raise additional capital by selling fixed interest rate long-term bonds.
try to increase its ROI by increasing asset turnover. e. Raise additional capital by selling common stock.
Which of the following is(are) an example of a measure of leverage
Debt yield
Preferred dividend coverage ratio
Earning per share
Debt/equity ratio
The dividend payout ratio describes
The percentage change in dividends this year compared to last year.
The proportion of earning paid as dividends
Dividends as a percentage of the price/earnings ratio.
The relationship of dividends per share to market price per share
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