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True/False Questions
1. Companies recognize revenue when goods or services are transferred to customers for the
amount the company expects to be entitled to receive in exchange for those goods or
services.
2. Companies always recognize revenue when goods or services are transferred to
customers for the amount the company expects to receive in exchange for those goods or
services.
3. “Determine whether it is probable the seller will collect the consideration it is entitled to
receive” is one of the five steps to applying the core revenue recognition principle.
4. Staff Accounting Bulletin No. 101 was issued by the FASB to clarify its guidelines on
revenue recognition.
5. A transfer of goods or services is complete when the customer has control over the goods
or services.
6. Revenue always is recognized once the buyer has physical possession of goods.
7. Sellers should recognize revenue over time for a long term contract in which the seller is
receiving periodic payments for progress to date but may need to refund those payments
in the event the contract is cancelled.
8. A common output method used to measure progress towards completion is to compare
cost incurred to date to total costs estimated to complete the job.
9. Revenue should be recognized over time for the construction of an annex to a building
that the customer owns, even if the seller will not receive payment until the annex is
completed.
10. A common output method used to measure progress towards completion is to determine
the proportion of promised goods and services that have been transferred to date.
11. No allocation of contract price is required if the transaction involves a performance
obligation to be satisfied over time.
12. The transaction price should be allocated to the contract’s performance obligations in
proportion to the stand-alone selling prices of the performance obligations.
13. No allocation of contract price is required if the transaction involves multiple
performance obligations that are satisfied at different points in time.
14. If the contract contains multiple performance obligations, revenue must be recognized in
an amount equal to the fair value of each of the separate performance obligations.
15. The transaction price is only allocated to goods and services that are both capable of
being distinct and that are separately identifiable.
16. Goods and services are distinct if they are either capable of being distinct or are
separately identifiable.
17. A contract between a seller and a buyer need not be in writing to be enforceable.
18. If the contract is not in writing, revenue cannot be recognized, even though goods have
been transferred and payment is expected to be received in exchange.
19. The probability that the customer will pay the seller does not affect whether a contract
exists for purposes of revenue recognition.
20. A contract exists for purposes of revenue recognition if either the seller or customer has
performed an obligation specified by the contract.
21. An option for a customer to purchase additional goods at a discount from list price is only
a performance obligation if the discount is a material right that the customer would not
receive otherwise.
22. A warranty that the customer can purchase separately and that covers a long period of
time after the purchase date is likely to be a quality-assurance warranty.
23. If an option to purchase an extended warranty at a special discount is included with a
product when the product is purchased, a portion of the contract price needs to be
allocated to the option.
24. A fee for recording a new customer in the seller’s information system should be treated
as a separate performance obligation and should be recognized upon payment.
25. An option for a customer to purchase additional goods at a discount from list price is
always a performance obligation, because it confers a material right.
26. Accounting for quality-assurance warranties includes a credit to warranty expense and a
debit to contingent liability.
27. When a contract includes variable consideration, the probability-weighted amount must
be used when there are different probabilities of occurrence.
28. To account for variable consideration using the most likely amount, the probability of
each possible amount is multiplied by the possible amount to get an expected contract
price.
29. If the estimate of a transaction price is revised, the price change is allocated entirely to
the remaining performance obligations that are yet to be satisfied.
30. The amount of variable consideration that can be recognized is limited to the amount for
which it is probable that there won’t be a significant reversal of revenue recognized to
date when uncertainty resolves in the future.
31. The right of return is a separate performance obligation, and a portion of the transaction
price needs to be allocated to it for revenue recognition.
32. When the right of return exists, revenue can be recognized at the point of sale if the seller
can make reliable estimates of future returns.
33. If the seller is a principal, the seller has primary responsibility for delivering a product or
service.
34. If the seller is a principal, the seller typically is not vulnerable to risks associated with
delivering the product or service.
35. If the seller is a principal, the seller typically is vulnerable to risks associated with
collecting payment from the customer.
36. If the seller is a principal, the seller should recognize gross revenue and cost of sales
associated with the transaction.
37. If the seller is an agent, the seller typically is vulnerable to risk associated with delivering
the product or service.
38. If the seller is an agent, the seller typically recognizes cost associated with the sale on its
own line in the income statement.
39. The transaction price should be adjusted to reflect the time value of money for interest
payable, but not for interest receivable.
40. Sellers are only required to adjust the transaction price to reflect the time value of money
when the contract has a significant financing component.
41. If a seller makes payments to a customer to purchase goods and services, and those
payments are equal to the stand-alone selling prices of those goods and services, part of
those payments are a refund to the customer.
42. The adjusted market assessment approach can be used to estimate the stand-alone selling
price of a good or service.
43. The residual approach to estimate stand-alone selling prices is often used for goods or
services that are sold separately and that have stable prices.
44. Revenue typically should not be recognized when payment is received but the goods are
warehoused at the seller’s facility.
45. In a bill-and-hold arrangement, revenue only can be recognized after the sale of the goods
to the end user.
46. In franchise arrangements, the franchisor’s performance obligations are not separately
identifiable, so revenue must be recognized over time.
47. The same revenue recognition requirements always apply to franchise arrangements that
apply to other selling arrangements.
48. In a consignment arrangement, revenue typically should not be recognized until sale to a
third party occurs, even though there has been a physical transfer of goods to the
consignee, because the consignor still retains legal title to the goods.
49. Sellers recognize revenue for gift cards at the point in time control of the gift card is
transferred to the customer.
50. If a license is acquired to use intellectual property for a 5-year period, revenue always is
recognized at the point in time the customer begins to benefit from the license.
51. If a licensee benefits from the seller’s activity over the license period with respect to the
licensed intellectual property, revenue should be recognized over time.
52. Contract liability, deferred revenue and unearned revenue are all ways to describe a
liability that the seller recognizes with respect to unsatisfied performance obligations for
which the seller has already been paid.
53. An account receivable is recognized if the seller has a conditional right to receive
payment.
54. Disclosure notes to the financial statements regarding significant revenue recognition
policies are only required when they will not reveal important information to competitors,
suppliers or customers.
55. When recognizing revenue over time on a long-term contract, amounts billed and the
cash actually received affect income recognition.
56. When recognizing revenue over time on a long-term contract, the percent complete is
often estimated by comparing the cost incurred to date with the total estimated cost to
complete.
57. Firms have free choice as to whether to recognize revenue over time or at a point in time
to account for a long-term contract.
58. When revenue is recognized over time versus upon completion of the contract, different
amounts of total profit or loss are recognized for a particular contract.
59. Estimated losses on long-term contracts are recognized as ratable over the contract term
regardless of whether revenue is recognized over time or upon contract completion.
60. When a long-term contract does not qualify for revenue recognition over time, all gross
profit and loss recognition occurs when the contract is completed.
61. A decrease in the receivables turnover ratio indicates a decrease in the time between
credit sales and cash collection.
62. The decomposition of return on assets illustrates why some companies with low profit
margins can be very profitable if their asset turnover is high.
63. A company could improve its return on assets by increasing its income or by increasing
its total assets.
64. Return on shareholders’ equity is increased if a firm can maintain its return on assets but
increase its leverage.
65. Revenue is not recognized under the realization principle unless the earnings process is
complete or virtually complete and there is reasonable certainty about the expected
collection of the asset received.
66. Under IFRS, one of the conditions for revenue from product sales to be recognized is
when the risks and rewards of ownership have been transferred to the customer.
67. Use of the installment sales method requires that firms track the gross profit percentage
associated with a particular sale.
68. When the expected collection of accounts receivable is difficult to estimate, companies
must use the cost recovery method.
69. Use of the installment sales method indicates little uncertainty about collection of the
receivable.
70. Over the life of a particular account receivable, the same total amount of gross profit is
recognized under the installment sales method and the cost recovery method.
71. When the right of return exists and a seller cannot make reliable estimates of future
returns, the installment sales method can be used.
72. Under IFRS, firms have free choice as to whether they use the percentage-of-completion
method or the cost recovery method to account for a long-term construction contract.
73. For long-term construction contracts, the cost recovery method under IFRS requires
recognizing equal amounts of revenue and cost until all costs are recovered.
