Given the following data for Scurry Company, what is the cost of goods sold?
Beginning inventory of finished goods.. $100,000
Cost of goods manufactured..................700,000
Ending inventory of finished goods........ 200,000
Beginning work-in-process inventory .....300,000
Ending work-in-process inventory .........50,000
Answer (B) is correct.
Scurry’s cost of goods sold can be calculated as follows:
Beginning inventory of finished goods..... $ 100,000
Add: cost of goods manufactured.............. 700,000
Less: ending inventory of finished goods. ..(200,000)
Cost of goods sold ...............................$ 600,000
The financial statement that provides a summary of the firm’s operations for a period of time is the
Answer (A) is correct. The results of operations for a period of time are reported in the income statement (statement of earnings) on the accrual basis using an approach oriented to historical transactions.
Unless the shares are specifically restricted, a holder of common stock with a preemptive right may share proportionately in all of the following except
Answer (C) is correct. Common stock does not have the right to accumulate unpaid dividends. This right is often attached to preferred stock.
Which one of the following statements is correct regarding the effect preferred stock has on a company?
Answer (C) is correct. Preferred stockholders have preference over common stockholders with respect to dividend and liquidation rights, but payment of preferred dividends, unlike bond interest is not mandatory. In exchange for these preferences, the preferred stockholders give up the right to vote. Consequently, preferred stock is a hybrid of debt and equity.
On February 1, Year 1, a computer software firm agrees to program a software package. Twelve payments of $10,000 on the first of each month are to be made, with the first payment March 1, Year 1. The software is accepted by the client June 1, Year 2. How much Year 1 revenue should be recognized?
Answer (A) is correct. Revenues should be recognized when (1) realized or realizable and (2) earned. Because the software firm has not substantially fulfilled its obligation, the earning process has not been substantially completed in Year 1. Accordingly, a liability should be recognized because the entity has a current obligation arising from a past event that will require an outflow of economic benefits, that is, to deliver the software or to refund the customer’s money. Thus, a liability for $100,000 and revenue of $0 should be recognized for Year 1.
An airline should recognize revenue from airline tickets in the period when
Answer (D) is correct. Revenues should be recognized when (1) realized or realizable and (2) earned. Although the benefits of the service rendered are reliably measurable on the date the reservations are booked, the earning process is not substantially completed until the airline has fulfilled its obligation, that is, when the related flights occur.
A department store sells gift certificates that may be redeemed for merchandise. Each certificate expires 3 years after issuance. The revenue from the gift certificates should be recognized
Answer (D) is correct. Revenues should be recognized when (1) realized or realizable and (2) earned. These criteria are met when the certificates are redeemed or expire.
To comply with the matching principle, the cost of labor services of an employee who participates in the manufacturing of a product normally should be charged to the income statement in the period in which the
Answer (D) is correct. The matching principle states that expenses should be recognized in the same period as the revenues that those expenses helped produce. Revenues related to the employee’s labor are not recognized until the goods are sold.
Revenues of an entity are usually measured by the exchange values of the assets or liabilities involved. Recognition of revenue does not occur until
Answer (B) is correct. According to the FASB’s conceptual framework, revenues should be recognized when they are realized or realizable and earned. Revenues are realized when products, merchandise, or other assets are exchanged for cash or claims to cash. Revenues are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.
Robin Gavaskar, who recently founded a company that produces baseball bats and balls, wants to determine her company’s policy for revenue recognition. According to the revenue recognition principle, the mostappropriate time to recognize revenue would be when
Answer (A) is correct. Revenues are normally recognized when they are realized or realizable and earned. Revenues are realized (or realizable) when goods or services have been exchanged for cash or claims to cash (assets readily convertible to cash). Revenues are earned when the earning process is substantially complete, and the entity is entitled to the resulting benefits or revenues. The revenue recognition criteria are ordinarily met at the point of sale (time of delivery of goods or services).