ACG 5026 FSU EXAM 2 QUESTION AND ANSWERS
The period of time over which the asset is expected to provide economic benefits to the
company - Answers - Useful life method
Primary transactions and events of a company - Answers - Operating activities
Examples of operating activities - Answers - Purchase of goods from suppliers,
employment of personnel, conversion of materials into finished products, promotion and
distribution of goods, sale of goods and services, and post sale customer support
Reflects the profitability from business operations - Answers - operating income
What does operating income exclude? - Answers - non operating revenues and
expenses
The financial (borrowing) and securities investment activities - Answers - Nonoperating
revenues and expenses
Operating income equation - Answers - Total revenue - COGS = OI
OR
gross profit - operating expenses - depreciation = OI
4 components of operating income - Answers - - Revenue - income from sales of goods
or services
- COGS - direct costs from producing the goods or services
- Operating expenses - rent, salaries, utilities, etc.
- Depreciation & amortization - allocation of long term asset costs over time
Two reasons that nonrecurring items are useful to separate recurring from nonrecurring
on the income statement - Answers - 1. To evaluate company performance or
management quality, current performance is compared with prior year's recurring
income
2. Estimation of company value involves forecasts of income and cash flows in which
only recurring amounts should be expected to recur in the future
Two common nonrecurring items - Answers - - Restructuring charges - expenses and
losses related to significant reorganization of a company's operations
,- Discontinued operations - income related to business units that the company has
discontinued and sold or plans to sell
expenses and losses related to significant reorganization of a company's operations -
Answers - Restructuring charges
income related to business units that the company has - Answers - Discontinued
operations
Two revenue recognition criteria - Answers - 1. Revenue must be realized or realizable
· The company has the cash (or a good promise to get it)
2. Revenue must be earned
· The seller has executed its duties under the terms of the sales agreement and or title
has passed to the buyer
· Can cause some issues - is it earned or not?
5 steps of revenue recognition - Answers - 1. Identify the contract with the customer
2. Identify the performance obligation in the contract
3. Determine the transaction price
4. Allocate the transaction price
5. Recognize revenue when or as the entity satisfies a performance obligation
Step 1 of revenue recognition - Answers - 1. Identify the contract with the customer
- Does it have substance to change the future cash flows?
- Can be written or oral, but must create enforceable rights and obligations for both
parties
Step 2 of revenue recognition - Answers - 2. Identify the performance obligation in the
contract
- Determine how many distinct goods and services has been agreed to provide to the
customer
- Customer can benefit from each on its own or together
- Each performance obligation must be evaluated separately
Step 3 of revenue recognition - Answers - 3. Determine the transaction price
- Establish the amount a company expects to receive in exchange for fulfilling
obligations
- Factor in Variable consideration - concessions, discounts, rebates, credits, incentives,
bonuses, and royalties
Step 4 of revenue recognition - Answers - 4. Allocate the transaction price
, - Estimate the stand alone selling price - should reflect the relative value of each
obligation
- If a contract has multiple obligations, allocate the transaction price to each based on
standalone selling prices
Step 5 of revenue recognition - Answers - 5. Recognize revenue when or as the entity
satisfies a performance obligation
- Performance obligation is satisfied when the customer has control of the product
- This can be over time or at a point in time
Arise from selling goods and services to customers on account - Answers - Accounts
receivable
how are accounts receivable recorded - Answers - as a current asset on the balance
sheet and as an amount to be collected (credited)
What is the qagin method of accounts receivable? - Answers - different percentages to
each category where older receivables have higher uncollectable percentages
accounts receivable is reported as "_____" on the balance sheet - Answers - Net
receivable value
- how much do we think we will collect?
A contra asset account that reduces accounts receivable to reflect expected
uncontrollable amounts - Answers - Allowance for doubtful accounts
allowance for doubtful accounts ensure financial statements present a ____ estimate of
____ - Answers - realistic , uncontrollable amounts
Putting our best estimate of what we are not going to be paid backin the same period to
fulfill the matching principle - Answers - Allowance for doubtful accounts
How ia allowance for doubtful accounts shown? - Answers - Has a credit balance, but
lives with accounts receivable which is a debit
Two methods of allowance for doubtful accounts are - Answers - 1. percentage of sales
method - fixed percentage to total credit sales to estimated bad debts
2. estimates doubtful accounts based on the ending balance of accounts receivable
which allowance for doubtful accounts is the balance sheet approach? - Answers -
percentage of accounts receivable
which allowance for doubtful accounts is the income statement approach? - Answers -
percentage of sales method
The period of time over which the asset is expected to provide economic benefits to the
company - Answers - Useful life method
Primary transactions and events of a company - Answers - Operating activities
Examples of operating activities - Answers - Purchase of goods from suppliers,
employment of personnel, conversion of materials into finished products, promotion and
distribution of goods, sale of goods and services, and post sale customer support
Reflects the profitability from business operations - Answers - operating income
What does operating income exclude? - Answers - non operating revenues and
expenses
The financial (borrowing) and securities investment activities - Answers - Nonoperating
revenues and expenses
Operating income equation - Answers - Total revenue - COGS = OI
OR
gross profit - operating expenses - depreciation = OI
4 components of operating income - Answers - - Revenue - income from sales of goods
or services
- COGS - direct costs from producing the goods or services
- Operating expenses - rent, salaries, utilities, etc.
- Depreciation & amortization - allocation of long term asset costs over time
Two reasons that nonrecurring items are useful to separate recurring from nonrecurring
on the income statement - Answers - 1. To evaluate company performance or
management quality, current performance is compared with prior year's recurring
income
2. Estimation of company value involves forecasts of income and cash flows in which
only recurring amounts should be expected to recur in the future
Two common nonrecurring items - Answers - - Restructuring charges - expenses and
losses related to significant reorganization of a company's operations
,- Discontinued operations - income related to business units that the company has
discontinued and sold or plans to sell
expenses and losses related to significant reorganization of a company's operations -
Answers - Restructuring charges
income related to business units that the company has - Answers - Discontinued
operations
Two revenue recognition criteria - Answers - 1. Revenue must be realized or realizable
· The company has the cash (or a good promise to get it)
2. Revenue must be earned
· The seller has executed its duties under the terms of the sales agreement and or title
has passed to the buyer
· Can cause some issues - is it earned or not?
5 steps of revenue recognition - Answers - 1. Identify the contract with the customer
2. Identify the performance obligation in the contract
3. Determine the transaction price
4. Allocate the transaction price
5. Recognize revenue when or as the entity satisfies a performance obligation
Step 1 of revenue recognition - Answers - 1. Identify the contract with the customer
- Does it have substance to change the future cash flows?
- Can be written or oral, but must create enforceable rights and obligations for both
parties
Step 2 of revenue recognition - Answers - 2. Identify the performance obligation in the
contract
- Determine how many distinct goods and services has been agreed to provide to the
customer
- Customer can benefit from each on its own or together
- Each performance obligation must be evaluated separately
Step 3 of revenue recognition - Answers - 3. Determine the transaction price
- Establish the amount a company expects to receive in exchange for fulfilling
obligations
- Factor in Variable consideration - concessions, discounts, rebates, credits, incentives,
bonuses, and royalties
Step 4 of revenue recognition - Answers - 4. Allocate the transaction price
, - Estimate the stand alone selling price - should reflect the relative value of each
obligation
- If a contract has multiple obligations, allocate the transaction price to each based on
standalone selling prices
Step 5 of revenue recognition - Answers - 5. Recognize revenue when or as the entity
satisfies a performance obligation
- Performance obligation is satisfied when the customer has control of the product
- This can be over time or at a point in time
Arise from selling goods and services to customers on account - Answers - Accounts
receivable
how are accounts receivable recorded - Answers - as a current asset on the balance
sheet and as an amount to be collected (credited)
What is the qagin method of accounts receivable? - Answers - different percentages to
each category where older receivables have higher uncollectable percentages
accounts receivable is reported as "_____" on the balance sheet - Answers - Net
receivable value
- how much do we think we will collect?
A contra asset account that reduces accounts receivable to reflect expected
uncontrollable amounts - Answers - Allowance for doubtful accounts
allowance for doubtful accounts ensure financial statements present a ____ estimate of
____ - Answers - realistic , uncontrollable amounts
Putting our best estimate of what we are not going to be paid backin the same period to
fulfill the matching principle - Answers - Allowance for doubtful accounts
How ia allowance for doubtful accounts shown? - Answers - Has a credit balance, but
lives with accounts receivable which is a debit
Two methods of allowance for doubtful accounts are - Answers - 1. percentage of sales
method - fixed percentage to total credit sales to estimated bad debts
2. estimates doubtful accounts based on the ending balance of accounts receivable
which allowance for doubtful accounts is the balance sheet approach? - Answers -
percentage of accounts receivable
which allowance for doubtful accounts is the income statement approach? - Answers -
percentage of sales method
