Least Likely To Overstate The Amount of Gross Profit Reported?

Under the installment-sales method,
a. revenue, costs, and gross profit are recognized proportionate to the cash that is
received from the sale of the product.
b. gross profit is deferred proportionate to cash uncollected from sale of the product,
but total revenues and costs are recognized at the point of sale.
c. gross profit is not recognized until the amount of cash received exceeds the cost of
the item sold.
d. revenues and costs are recognized proportionate to the cash received from the sale
of the product, but gross profit is deferred until all cash is received.
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51. The realization of income on installment sales transactions involves
a. recognition of the difference between the cash collected on installment sales and the
cash expenses incurred.
b. deferring the net income related to installment sales and recognizing the income as
cash is collected.
c. deferring gross profit while recognizing operating or financial expenses in the period
incurred.
d. deferring gross profit and all additional expenses related to installment sales until
cash is ultimately collected.
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52. A manufacturer of large equipment sells on an installment basis to customers with
questionable credit ratings. Which of the following methods of revenue recognition is
least likely to overstate the amount of gross profit reported?
a. At the time of completion of the equipment (completion of production method)
b. At the date of delivery (sales method)
c. The installment-sales method
d. The cost–recovery method
53. A seller is properly using the cost-recovery method for a sale. Interest will be earned on
the future payments. Which of the following statements is not correct?
a. After all costs have been recovered, any additional cash collections are included in
income.
b. Interest revenue may be recognized before all costs have been recovered.
c. The deferred gross profit is offset against the related receivable on the balance
sheet.
d. Subsequent income statements report the gross profit as a separate item of revenue
when it is recognized as earned.
54. Under the cost-recovery method of revenue recognition,
a. income is recognized on a proportionate basis as the cash is received on the sale of
the product.
b. income is recognized when the cash received from the sale of the product is greater
than the cost of the product.
c. income is recognized immediately.
d. none of these.
55. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of
water, Winser does not recognize any revenue from water sales until the sales exceed
the costs of exploration, the basis of revenue recognition being employed is the
a. production basis.
b. cash (or collection) basis.
c. sales (or accrual) basis.
d. cost recovery basis.
56. The deposit method of revenue recognition is used when

a. the product can be marketed at quoted prices and units are interchangeable.
b. cash is received before the sales transaction is complete.
c. the contract is short-term or the percentage-of-completion method can’t be used.
d. there are no significant costs of distribution.
57. The cost-recovery method

a. is prohibited under current GAAP due to its conservative nature.
b. requires a company to defer profit recognition until all cash payments are received
from the buyer.
c. is used by sellers when there is a reasonable basis for estimating collectibility.
d. recognizes total revenue and total cost of goods sold in the period of sale.
*58. Types of franchising arrangements include all of the following except

a. service sponsor-retailer.
b. wholesaler-service sponsor.
c. manufacturer-wholesaler.
d. wholesaler-retailer.
*59. In consignment sales, the consignee

a. records the merchandise as an asset on its books.
b. records a liability for the merchandise held on consignment.
c. recognizes revenue when it ships merchandise to the consignor.
d. prepares an “account report” for the consignor which shows sales, expenses, and
cash receipts.
*60. Some of the initial franchise fee may be allocated to

a. continuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. All of these may reduce the amount of the initial franchise fee that is recognized as
revenue.
*61. Continuing franchise fees should be recorded by the franchisor
a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.
*62. Occasionally a franchise agreement grants the franchisee the right to make future
bargain purchases of equipment or supplies. When recording the initial franchise fee, the
franchisor should
a. increase revenue recognized from the initial franchise fee by the amount of the
expected future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase
the selling price when the franchisee subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made.
d. None of these.
*63. A franchise agreement grants the franchisor an option to purchase the franchisee's
business. It is probable that the option will be exercised. When recording the initial
franchise fee, the franchisor should
a. record the entire initial franchise fee as a deferred credit which will reduce the
franchisor's investment in the purchased outlet when the option is exercised.
b. record the entire initial franchise fee as unearned revenue which will reduce the
amount of cash paid when the option is exercised.
c. record the portion of the initial franchise fee which is attributable to the bargain
purchase option as a reduction of the future amounts receivable from the franchisee.
d. None of these.
*64. Revenue is recognized by the consignor when the

a. goods are shipped to the consignee.
b. consignee receives the goods.
c. consignor receives an advance from the consignee.
d. consignor receives an account sales from the consignee.
Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. c 28. d 35. b 42. c 49. b 56. b *63. a
22. b 29. c 36. a 43. d 50. b 57. d *64. d
23. a 30. d 37. b 44. a 51. c *58. b
24. b 31. b 38. d 45. d 52. d *59. d
25. d 32. c 39. a 46. b 53. b *60. d
26. b 33. b 40. c 47. c 54. b *61. a
27. d 34. c 41. a 48. c 55. d *62. b

Least Likely To Overstate The Amount of Gross Profit Reported?

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Under the installment-sales method,

56. The deposit method of revenue recognition is used when

57. The cost-recovery method

*58. Types of franchising arrangements include all of the following except

*59. In consignment sales, the consignee

*60. Some of the initial franchise fee may be allocated to

*64. Revenue is recognized by the consignor when the

Multiple Choice Answers—Conceptual

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